I was working with the procurement department at a major insurance company that was sourcing asset management software. At the start of the meeting, they said, "We want a 7% price reduction on our current $12 million spend; that's our goal and strategy."
I said okay and started with a Consequences of No Agreement (CNA) analysis, the insurance company's first. "What are the consequences to you if this deal falls through?" I asked.
"Well, we would have to go to another vendor," they answered.
So I asked, "Who is the most likely alternative?"
Their response was "Asset Soft, Inc. We have their proposal, it came in at $18 million. Quite frankly, the costs of switching are high, as we think the software requires more people to manage than another software solution."
"How can it be," I asked, "that your current vendor is already priced lower than someone you think is not as good?"
Their response was that several years ago they were the incumbent software company's first customer and, but for them, the software firm wouldn't exist.
I asked about now. "Don't you think the world has changed over the years? Don't you think the CNA of your supplier is to replace you with another customer willing to pay at least $18 million, if they are indeed better than the next-best vendor? And yet you want them to accept a deal at $11 million?"
They saw the point and, hopefully, so do you. This was a group of professional procurement officers in a Fortune 100 company who were irrationally going after this massive price reduction with little or no analysis beyond the fact that they were told to reduce the company spend by 7%. Sadly enough, this tactic may have actually worked with the supplier, especially if the suppler didn't do a complete CNA analysis on the insurance company to know that their acquisition price and operating costs were going to be higher to move to a different supplier's solution.