In RSR’s August 16^th Retail Paradox Weekly, partner Paula Rosenblum asked our retail readers a rhetorical question:

“We have heard anecdotal stories of ‘procurement types’ as gatekeepers (to the software acquisition process). It was bad enough when retailers started using ‘procurement types’ to source merchandise (I have a story about ‘the un-installable towel rack’ that dates to my AMR days), but to select technology? Seriously? Are any of you really doing this? “

“We have heard anecdotal stories of ‘procurement types’ as gatekeepers (to the software acquisition process). It was bad enough when retailers started using ‘procurement types’ to source merchandise (I have a story about ‘the un-installable towel rack’ that dates to my AMR days), but to select technology? Seriously? Are any of you really doing this? “

Well, apparently the answer is, “Yes we are, seriously “, especially when it comes to enterprise software solutions.

It could be argued, “why not? ” After all, isn’t buying a procurement function? What retailers do better than anything else is negotiate aggressively on cost- it’s in the blood. But it ain’t a truckload of Sudsy Soap we’re talking about here — it’s software. And although it’s true that today’s commercial software (1) works better than ever before, and (2) has significant functional overlaps between competing products, it’s still not a commodity. No two implementations of anything are ever the same, and software breaks — frequently. So the quality of the people in the organization who both develop and support the software is a really important issue. In other words, when a company acquires a software solution, it’s not merely acquiring a thing, it’s acquiring a relationship.

On the selling side of the process, software salespeople are taught that it’s the relationship that counts. In the 1995 book entitled Solution Selling by Michael T. Bosworth (considered by many in the technology industry to be the bible for effective selling), the author states,

“People buy from people. Superior sellers have intuitive relationship building skills; they emphatically listen, they establish sincerity early in the sales call, competent, and trustworthy. The additional factor… is that people buy from people who empower them…. ” [1]

Some might think that the relationship between a software company and a customer is more akin to a hostage-for-ransom situation. For example, a recent Dilbert cartoon featured a character who introduces himself to a puzzled Dilbert this way: “I’m your new software vendor. I’m here to form a relationship with you. That way it will be easy to take half of your money. “ [2] While that’s funny it also points out that there’s a serious expectation gap between those who have solutions and those who need them. And that gap isn’t about what retailers need vs. what technology companies have to sell, it’s about the nature of the relationship between the buyers and the sellers. To get to the bottom of this, we decided to reach out to three sales executives from enterprise software solutions companies. All agreed — in fact were anxious — to talk to us (in separate phone calls) about what they see in the marketplace, what’s wrong with the process, and what could be better. For obvious reasons, their comments are anonymized.

The Process Today

Sales Exec #1 described the process this way:

“Procurement is involved more and more. We’ve gone from an environment from where you’re presenting the best solution for a client based on your understanding of their business challenges, to one where you’re more worried about being procurement compliant. The entire process is very regimented and there are many rules that were designed to prevent an emotional decision. But companies have taken it so far that they’ve impaired their company’s ability to make a good business decision. “

 Sales Execs #2 and #3 agreed.

What’s the Problem?

Sales Exec #2 complained that the RFI/RFP (request-for-information/request-for-proposal) process has become so rigid that it prevents companies from seeing the possibilities that new solutions create. In other words, retailers don’t know what they don’t know, and tend to use the current-state as the basis for future-state capabilities. #1 agreed: “it starts with the selection process. It’s very hands-off. It’s not designed for you to learn the strategic goals and priorities of the company. It’s a 400-page spreadsheet, with 1500 ‘yes/no’ questions. The process is so closed that you only get one hour to ask questions for clarification “. He equated it to the old communication game, where each of several people are asked to pass on a little tidbit of info. By the time the last person hears it, it bears little resemblance to what the first person conveyed. “Retailers create the same situation in the RFP process. You and I can read the same question and come up with a completely different interpretation of what it means. “ According to #3, “many companies therefore respond with a yes to everything, figuring that they’ll work it out in the demo. “

Assuming that a solution provider gets through that gauntlet, they receive a written notification about the next step, which often states something like this: “you will demonstrate your product 2 weeks from this date, strictly following the attached (40 page) script. Questions will not be allowed. ” #2 clarified: “the rules of this are that if you contact anyone within the company, other than your single point of contact (who is often the procurement person), you’re dead. ” The solution is then demo’ed and if selected for the next phase, the solution provider is then presented with a set of rules for how and when to present the best and final offer, often through a secure procurement portal. Alternatively, the solution provider may be instructed to meet with the procurement team in a series of sessions intended to negotiate that best and final offer, often in a back-and-forth competition between two solutions providers.

The concern that the sales execs all expressed is that because of the process, retailers get away from the art of the possible, and instead focus more on today’s processes, whether they’re right or wrong. Said #1, “they (the current processes) get projected onto a future vision that typically, if the retailer has developed the RFP themselves, is very closed- a collection of company veterans’ ideas. “

Solutions Providers Are Not Powerless

One of the built-in assumptions that retailers have about the software acquisition process is that solutions providers will not walk away from a deal. But that’s not true anymore. One sales executive pointed out that every expense associated with a sale is tracked, and at the moment those expenses exceed 10% of the projected top line revenue of the deal, “it goes from ‘green’ to ‘yellow’. ” In prior times, sales execs would think in terms of the aggregate revenue vs. cost of all of their wins. Explained Sales Exec #3, “we had one $400,000 deal that cost us $1.2M to land, and another $20M deal that cost us $250,000. The aggregate cost of sale that was less than 10% and we were happy. “

But that is no longer the case for many providers: they now look at the per-deal cost of sales. Although all the sales execs that we talked to were unwilling to reveal at which point a deal goes from yellow to red, they all agreed that they will walk away from a bad deal.

Even if they don’t walk away, solutions providers may overbid the variable parts of a deal (typically, services associated with integration, change management, and quality control) if the negotiations about the price of the solution itself are contentious and expensive.

How Did it Get to This?

Philosopher George Santayana once famously said, “those who cannot remember history are condemned to repeat it “, and so in that spirit, I asked the sales execs interviewed, “how did it get this way? ” The answer seems to be twofold. First: Sarbanes Oxley. Said one of the interviewees, “any sales cycle has an emotional and a logical side. SOX had the effect of getting the people out of the process who abused relationships. And lets face it, there were abuses. “ The other part of the answer seems to be a reaction to the exuberant spending that characterized the first dot com bubble. In the 2000’s, many companies were compelled to write down technology assets that were ill-conceived or oversold to begin with.

Well, as another great philosopher, Ian Hunter of ‘70’s rock band Mott The Hoople, crooned, “once bitten, twice shy. “ If there’s a behavior that characterizes retail decision makers, it’s their long memories. To a great extent, technology vendors only have themselves to blame for creating a situation where procurement types would end up controlling the process.

The buying process was further ratcheted down in 2008 when capital borrowing became difficult.

Give the Provider a Reason to Pick Up the Phone

If a negotiation is highly transactional, the retailer shouldn’t expect the solution provider to be very sympathetic if and when there is trouble during an implementation. One sales exec elaborated: “once the procurement guy is done, he turns the project over to IT and the LOB’s (line of business executives). You know as well as I do that all of these projects all get into a ditch somewhere along the line. When a project gets into trouble, IT and the LOB’s need to be able pick up the phone, and if there’s no relationship, there’s no reason for the vendor to give them any help gratis. But if the retailer has established a personal relationship, he can pick up the phone and say, ‘we’re in this thing together and I’ve got this budget constraint, but we need some help’, and I’m going to see if I can figure out a way to do something free or highly discounted, or whatever to help the retailer get out of the ditch. “

A Better Way

According to all three sales execs who talked to us, risk avoidance in the software acquisition process has gone too far, and now companies risk missing opportunities that new software solutions could open up. What’s the best way to fix that? Between the three sales execs we spoke to, these recommendations emerge:

• Explain the opportunity. Retailers should have a kickoff meeting with prospective solutions providers to explain what they are trying to accomplish and why they are trying to accomplish it. Allow time for give-and-take, so that the solution providers walk away with a better understanding of the opportunity.
• Get outside help. Whether it’s a Big Four consulting firm or subject matter experts, outsiders often see what other businesses do to address business challenges that your company faces, and can help you to import new ideas. Another resource is standardized RPF templates, such as those that NRF’s ARTS group has developed.
• Own the relationship. The LOB and IT department will live with a software acquisition decision for a long time, and so the LOB and IT leadership need to be accountable for the negotiation as well. While procurement types can certainly help, relinquishing control to them creates plausible deniability – which is organizational poison.
• Binary yes/no questions are too limiting. When asking providers about their solution’s capabilities, more info should be requested, such as, “if not today, when? “ or “is it available as a customization? Have you made that customization before? “ While this may make ranking the vendors’ competitive offerings harder, it’s worth the effort.
• Give some indication of the importance of feature/function. Even a must have/nice to have ranking is more information than some companies give to potential software providers.
• Test the possibilities. During demonstrations or conference room pilots, test what if scenarios. That outside help you brought on to help you should be a valuable assist.
• Give yourself AND the software provider time to do a good job. Arbitrary and aggressive RFP response timelines create the likelihood of boilerplate responses.
• Get to know your software provider. Set up interviews with key stakeholders, to understand the technology company’s vision, commitment to R&D, the quality of their people, and their ability to help you protect your investment over a long period.
• Insist on a single point of accountability. To paraphrase something my mentor told me when I was just coming up, “after you’ve explored all the logical considerations, try to imagine relaxing over lunch with this person. “
• Expect trouble. This sounds like a contradiction, but as has been pointed out, software implementation projects always experience problems. The question is, is there enough flexibility in the relationship with the software provider to enable a quick response? Or have you cut so close to the bone in the price negotiations that every unexpected to-do requires a change order?

It all boils down to something that RSR talks a lot about: relationships are worth more than transactions. Whether its retailers establishing relationships with customers, or technology companies establishing relationships with retail companies, the lifetime value of each relationship is worth far more than the sum total of transactions between two parties. That of course is why retailers work so hard to develop trust with their customers. The same should be true in the case of relationships between retailers and technology suppliers, especially when that which is being supplied is expected to empower the retailer to create differentiating value for its customers for years to come.

[2] Dilbert, by Scott Adams, August 22, 2011