Here’s a new twist on the old “sense of urgency” ploy that a vendor used in a recently completed deal. The procurement manager of a global consumer goods company was talking to a potential vendor about a deal for some technology services. He had a short list of prospective vendors, but because of unique requirements imposed by his company’s biggest customer, he was talking with the only prospective vendor that could provide the services. But it appeared that the vendor didn’t know that it was the sole contender in this deal, so the company maintained a strong negotiating stance. As the two sides discussed plans for negotiating sessions, the vendor announced that the customer must sign the vendor’s letter of intent to enter a contract before the two sides could negotiate. The vendor’s representative claimed that he couldn’t reserve the corporate jet for his negotiating team to come to the customer’s location if there was no letter of intent. Clever. But wait—it gets worse. The letter of intent had some ugly “gotchas,” such as:
- The customer had to complete its legal review of the contract by a certain date.
- Both parties were to meet on that date to sign the contract.
The date specified in the letter of intent was the same date that negotiations were scheduled to start, so the vendor was effectively preempting any meaningful negotiations. Basically, the vendor’s negotiating stance was that it couldn’t reserve the corporate jet to visit if there was no letter of intent, so it wouldn’t negotiate until the customer gave away its negotiating power. Let’s look at the customer’s side. There are good reasons for never signing a letter of intent. First, the intent can be construed as part of a contract, especially if there’s evidence of other contract components between the parties. Ask your lawyer about offer and acceptance, reliance and consideration. If activities have taken place in the relationship that could constitute the occurrence of these legal theories of contract law, and they are combined with intent (another legal theory of what constitutes a contract) in the letter, you could, in effect, have a contract.
Given this set of circumstances, the customer could be guilty of breach of contract if it backed out of a letter of intent. Even without all the components of a contract at hand, most customers feel that reneging on a letter of intent would be less than good-faith dealings or convey a lack of integrity.
Of course, a letter of intent also immediately removes your leverage with the vendor because it eliminates competition. It locks you in before you negotiate, and that’s called begging, not negotiating.
But in this deal, is the big issue the letter of intent? Or is it the lack of vendor transportation? Neither. It was about the vendor producing a sense of urgency and eliminating customer options to gain control of the terms and conditions of the relationship.
Luckily, the corporate-jet ploy didn’t fly with this customer.
Having faith in his negotiation process and knowing that competition—real or imagined—was a very effective bargaining tool, the customer issued a simple response to the vendor. “We don’t do letters of intent, so don’t bother to come. We will be happy to negotiate via conference call. However, your competition will be here in person.”
Remember that the vendor’s representative probably didn’t know for sure if he was the sole source in the deal. He may have suspected he was and used the corporate-jet ploy as a way to test his suspicion. The customer’s terse response probably created uncertainty in the vendor’s mind and could have eliminated any overconfidence. Shortly thereafter, the vendor’s representative announced that he was able to get the corporate jet after all and would be available to negotiate on the date the customer specified.
This vendor ploy was designed to stampede the customer into signing a contract that was highly favorable to the vendor. The customer’s firm response was a very effective tactic. Best of all, the customer was able to gain the high ground during negotiations, saving money and gaining significant contractual protection.
JOE AUER is president of International Computer Negotiations Inc. (www.dobetterdeals.com), a Winter Park, Fla., consultancy that educates users on high-tech procurement. ICN sponsors CAUCUS: The Association of High Tech Acquisition Professionals. Contact him at email@example.com.
Copyright by Computerworld, Inc., 500 Old Connecticut Path, Framingham, MA 01701. Reprinted by permission of Computerworld.