Buying and procuring

Critical buying decision for a buyer

Buying equipment is no small job. Just organizing a management search team, analyzing a company’s needs, assessing the available equipment options in the market place, and reviewing various vendors may take months. But no task has more potential pitfalls than negotiating a contract with the vendor governing the long term maintenance and operation of the equipment- and then monitoring the vendor’s adherence to it. The executive in charge of these negotiations will be held accountable for his decisions, and he must constantly bear in mind that the equipment he chooses will be expected to have a long, useful life.

 

The worst of it is, just at the point when a company is about to purchase equipment, its executives may let their emotions take over. They can’t want to get their hands on the new equipment. So they sign the vendor’s standard contract and hope for the best – failing to make sure that the contract’s provisions will meet their operational needs.

We can avoid this trap. We don’t have to sing such a contract. And we’ll invariably be better off if we don’t.

 

A case in point- some years ago, the state of Florida wanted to place a multimillion dollar order for computers and settled on the models it wanted – only to find that the uptime and maintenance requirements were higher than the well known manufacturer was accustomed to guaranteeing.

 

Furthermore, up to that time, the manufacturer had never had a customer refuse to sign its standard contract, and it didn’t want to set a precedent. But Florida officials did refuse to sign. Subsequently, they made a tentative decision to buy from a rival company. That brought the first manufacturer into line. It amended its standard contract, giving Florida most of what it wanted. The moral? Florida remembered that it had leverage, which can make all the difference in ensuring the successful purchase and use of business equipment.

 

Money Talks

How can we make leverage work for our company? Basically, leverage is money, but it depends upon several things. One is the size of our order and the vendor’s profit. Another is our method of payment- in a lump sum or by installment. A third is the potential for further orders. Yet another if ours is a big company is the vendor’s ability to claim us as a customer. Vendors like to sell to companies, large or small, that are known to be leaders in their industry or in certain segments of it. And they are always developing new equipment and looking for real work sites in which to try it out. In short, they are eager to sell.

Once we sign a contract and pay for the equipment, we will lose virtually all our leverage. So ‘spend’ this leverage wisely- obtain everything we can from the vendor before concluding our order.

 

First, select the equipment we want and settle on an alternate vendor. Then pick a negotiating team. It should consist of a manager, perhaps yourself, who will make the business decisions- a technical expert, who will advise us- a lawyer, who will also advise us and who may have to play the ‘heavy’ and a comptroller, who will analyze the proposed expenditures and provide counsel regarding the financial and tax considerations, such as whether to buy or to lease.

 

This group should make sure that the contract covers all the necessary points. These include a description of the equipment, the terms of delivery, the criteria we will use to determine the equipment’s acceptability, preventive maintenance, the need for emergency response, the agreed on response time, the type of service to be provided, the minimum uptime, the right to substitute alternative equipment, the provisions that will apply if the equipment turns out to be a lemon, how taxes will be paid, what the limit on liability is, and all warranties.

 

Motivations

In addition, the contract should include ‘motivation’ to make the vendor respond to these pints. These motivators may include liquidated damages, grants, and a ‘good faith’ agreement.

Liquidated damages allow a buyer to void a contract under certain circumstances and get back some percentage of the purchase price. Grants give the buyer access to secret information- such as the source codes that make certain machines run- if a vendor defaults. A good faith agreement is like a most favored nation clause in international trade. For example, the vendor promises that if it raises its maintenance charges, it will charge our company the lowest rate it charges any other company. It’s a difficult agreement to obtain, but worth trying for.

Maintenance is important. So make sure to find out how much uptime the manufacturer will guarantee – and what penalties it will accept if it doesn’t live up to its promise. Not so long ago, we talked with three manufacturers. Each guaranteed 95% uptime on virtually the same product. If they didn’t make their target, one promised to reimburse us for 1% of our maintenance costs, another for 5%, and the third for 10%. We can guess who got the order.

 

We then list all the elements we want in the contract by priority-

         those that are essential;

         those that are important, but not mandatory,

         Those that would be nice but are not vitally needed.

 

Plan to include all these elements. We may not obtain everything we want, but we will get more that if we don’t even try to negotiate.

 

 

Add and subtract

Now we will be ready to write a contract. Many manufacturers will object strongly if we don’t use their standard contract. So we may do best to start with the manufacturer’s contract and then add to and delete from it as necessary. Make sure our attorney reviews our efforts.

It will then be time to negotiate. The preliminary negotiations will be with the manufacturer’s sales representative. Hold them in our offices, where we will be most comfortable and in command. Make our needs known and ask the representative to convey them to his company.

In the process, try to enlist him as an ally. That may not be as hard as we think; he will have a vested interest in nailing down the sale and obtaining a commission. At some later point, when an agreement is close, we will need to meet with the manufacturer’s senior representative on the contract. He will probably promise to be completely reasonable, but take his assurance with a grain of slat. After all, he has priorities, too. If the negotiations falter, we may have to resort to certain tactical maneuvers. For example, we may say that we are willing to give up certain features in order to get others, but the company’s lawyer won’t allow it.  And if the vendor seems unwilling to meet our essential needs, we may find it advisable to threaten to buy a competing product.

If the tension becomes excessive, take a break. We can go to another room, have some coffee, and relax. Perhaps negotiations will continue, perhaps not. But if they do we may reach agreement quickly.

 

Get it in writing

It’s necessary to be firm in negotiating because no company wants white elephants that don’t operate as expected. That’s why it’s important t to put everything in writing and ponder the implications of every clause.

One of Chrysler’s radio commercials features its five year or 50,000 mile guarantee. The announcer says- ‘ask the other auto manufactures if they will give you such a guarantee. If they tell you they cars are so good that they don’t need that type of guarantee, tell them to put that in writing.’

To get our order, every vendor will tell us what we want to hear. Let the vendor say it, make a note of it, and put it in writing- making sure we have included every claim and promise made in the vendor’s sales brochures. Then ask the vendor to sing what we have written. That’s when negotiations will begin.


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