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NEGOTIATION GAME
Buying IT services - the buyer’s situation
INTRODUCTION

The supplier - an IT Company – is providing programming services for converting a main frame
computer-environment to a client-server based system with a PC platform (for personal computers). A
client-server based system facilitates new, faster and more efficient administration. The IT Company is
also known to be able to develop customized system for its customers.
The buyer - FF Logistics - a well known provider of transportation services is focusing on road
transportation. FF Logistics think they need another 22 000 hours of programming services during a 13
month period to finalize the conversion of their main frame IT platform to a client-server based PC-
system. The project is quite big, and FF Logistics has already started it last year.
Last year the prices for programming services have varied between 66 and 77 Euro per hour, depending
on the service provider. The trend, however, is increasing prices. Last year FF Logistics paid 77 Euro per
hour to the IT company, and FF logistics bought 3 000 hours from the IT Company.
Four service providers, the IT Company, Maneken PIT (Programming & IT), Leuven LN IT and JBIT
could deliver programming services to convert the current system to the PC-system. All of them could
accommodate almost the same specifications. There are however differences between the four providers
regarding documentation and the competence of the personnel delivering the programming services.
The IT Company and their competitors all know that FF Logistics will make a deal shortly. The contract
could either be a fixed price for the whole deal, or based on a price per hour and a predefined number of
hours. The IT Company has so far not offered their quotation. Originally, the Request for Quotation only
dealt with the conversion of the IT-system to a client-server based one, but lately a few other areas have
been added: a new market system (for tracking and tracing the trucks), training, and documentation.
Based on the answers of the RfQ, FF Logistics has selected a number of suppliers for further negotiation.
According to van Weeles purchasing process, FF Logistics is now entering the third step of the
purchasing process:

FF LOGISTICS

FF Logistics (Belgium) is one of 12 companies owned by Ivan Jaktmeister. Jaktmeister has chosen to let
the companies work quite independently from each other and the companies are not part of one legal
Group. Ten of the 12 companies are freight forwarding companies in Germany, one is the Belgian
company, and finally there is one “production company” in Germany. The production company owns a
total fleet of 145 trucks, where of 16 are registered in Belgium.

You and your colleagues represent the management team of FF Logistics (Belgium). Your company
needs external support to finalize the conversion project of your IT-infrastructure from a main frame to a
client-server based PC-solution. According to an independent IT consultant the remaining part of the
project needs another 22 000 hours programming work during a 13 month period. It is preferred to order
this from only one company to reach best price and quality.
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Although FF Logistics is a very profitable company with an extremely good liquidity, the margins in the
transportation industry are currently reduced considerably. To improve their effectiveness and efficiency,
FF Logistics last year decided to buy a client-server based PC system in two steps. The total project was
budgeted to 2 million Euros. Today, from this budget, 1 395 000 Euros remain. The management team
developed a business case for the budget. The pay-back time for the project was calculated to be 2 years.
The earlier the project is finished, the earlier FF Logistics can leverage on the increased efficiency and
effectiveness. One existing bottleneck is that only 10 programmers can work at the same time in FF
Logistic’s buildings.

The projects started last year and FF Logistics used 3 providers of programming services: JBIT, Maneken
PIT and the IT Company. Leuven LN IT offered an all to high price last year and is hence not a tested
provider by you yet.

You have now received three explicit quotations from JBIT, Maneken PIT and Leuven LN IT. All
quotations were based on your RfQ indicating the need of 22 000 hours. Some of the prices seem very
high. The bids, in Euros per hour, are as follows:

 JBIT 82,5 Euro

 Maneken PIT 80,0 Euro
 Leuven LN IT 68,5 Euro

The market system

In addition to conversion of the IT platform, FF Logistics would like to implement an effective system to
be able to track and know the positions of their long haul trucks, to be able to work up and influence their
current and future clients in a more effective way, and to be able to improve their management and
control of claims from customers. The last issue is for being able to invoice more efficient and improve
the cash flow. The type of system supporting this activity is called a “market system” by the logistics
industry. FF Logistics is looking for a supplier of such a market system. By implementing such an
advanced market system, FF Logistics hope to reclaim their position as the market leading freight
forwarding company. The capacity utilization has lately decreased considerably (se figure). One year ago
a drop in the capacity utilization seems to have affected the whole transportation industry. The
competitors seem to have recovered much better compared to FF Logistics. This concerns the company,
who cannot find a good explanation for this situation.

An increase in capacity utilization with 10 percentage units in the Belgian market, is calculated to
improve profit by 1 million Euro annually. This part of the project is not part of the budget, but the policy
is that investment within FF Logistics should have a payback time of maximum 2 years.
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Capacity utilization

100%

FF Logistics
90% Industry average

80%
Percentage

70%

60%

50%

40%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Month

Your opinion so far about the different providers are summarized below:

JBIT

Good quality regarding documentation and programming. JBIT had however bad discipline among the
programmers that could not keep their times; they promised much but seldom met their promises. The
project leader of JBIT, Grete Clever, was however very good and knowledgeable. She has now left JBIT.
Last year you bought 4 000 hours from JBIT, price 72,0 Euro per hour.

Maneken PIT

Maneken PIT is a relatively new company that last year did the programming job excellently. The
documentation was however lousy, which still creates problems. Last year FF Logistics bought 2 000
hours for 74,0 Euro each from Maneken PIT.

Leuven LN IT

Last year when you met them, they behaved carelessly. After a very arrogant presentation of their
proposal, they offered a ridiculously high price. Hence, you chose not to buy their services last year.
Leuven LN IT has since worked hard to gain your confidence, and promised early in this years buying
process to offer a very competitive quotation.

The IT Company

The IT Company provides, without discussion, the best technical support to their services. If there is any
incident, highly qualified staff is sent out to the site to find and eliminate the problem without extra costs.
The IT Company offers the most outstanding technical support to its services. If something goes wrong
they send out highly qualified personnel to repair without extra costs. They also give advice, run tests
after installations and suggest methods and changes for optimizing and balancing the use of the system.
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The experiences from last year was that the IT company, as a whole, is the best partner for project
management, delivery, and high & stable quality of the programming. The only problem is the IT
Company’s project leader John Labile. John is very knowledgeable, but is also an extremely difficult
person. He certainly lives up to his name.

FF Logistics’ IT-manager is certain that the remaining part of the project should not need more time than
20 000 hours, although an external expert has proposed 22 000 hours. You have now met all but the IT-
company and the situation is as follows:

JBIT

Guarantees to have finalized the converting of the system within 19 000 hours worked on normal shift
(no overtime). The total cost proposed is 1 567 500 Euros. If the should fail, JBIT promises to deliver
remaining hours needed for free. JBIT asks for a payment in advance of 450 000 Euro to guarantee the
finalizing of the project. JBIT estimates to have finalized the conversion within 12 months from start.
JBIT will come back with a proposal regarding education.

JBIT has offered the following market system: To be able to position and localize trucks, a number of
”poles” with readers are placed at strategic places. When the trucks pass these poles with readers, the full
cargo is read and reported by e-mail to the terminal. The costs proposed are 27 500 Euro per “pole” and
100 Euro per terminal. The system for accounts receivable ledger costs 7 000 Euro per office and the
system for influencing and managing the customers cost 150 Euro per terminal. JBIT gives an one year
guarantee on hardware. All the prices include hardware, software and installation. Education of the
personnel is an extra cost by 900 Euro per person.

Maneken PIT

Commits to complete the job within 19 000 hours, to proposed price, and to accomplish the conversion in
11 months. After 16 000 hours a control will be made, and if it then is found that more than 19 000 hours
are needed to accomplish the project, the excess amount of hours will be delivered to a price of 33 Euro
per hour. Maneken PIT would like the following payment plan: 40% at start up, 40% after 5 months, and
the final 20% after full converting. Maneken PIT has studied FF Logistics training and education needs.
FF Logistics has not seen the results yet. Maneken PIT has also promised to offer a market system.

Leuven LN IT

They guarantee to deliver the project within 11 months for the cost of 1 249 440 Euros. They will partly
work on inconvenient working hours. If they do not manage, they will pay damages of 120 000 Euros as
well as finalize the work with no extra cost. Leuven LN IT would like 50% of the payment in advance,
and then on each 30th day. Leuven LN IT does not offer any education/training and can not offer any
market systems.

It is now time to negotiate with the IT Company. If they can offer the “right price” this is the provider
you would prefer. Before the negotiation starts you should have discussed goals, tactics and related
matters with your peers.

Instructions to the Head of negotiation (managing director) of FF Logistics

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 Your first task is to provide roles within your team (different managerial positions, who will
focus on listening, who will focus on talking etc). Try to have at least a Finance manager and
a Purchasing manager.
 If you are more than three in the negotiation team, a specific project manager could be
appointed.
 The CEO can delegate the responsibility of being Head of negotiations.
 You would really prefer to have Grete Clever among your staff in FF Logistics. You have
tried to reach her, but not succeeded. Probably she has joined another firm.
 Ivar Jaktmeister, the chairman of your board of directors, has lately interfered in your
managing director’s work. The managing director has got a feeling that Ivar would like to
control everything he does. Ivar is a very pragmatic person with enormous charisma. In the
negotiation team you feel that you will try to handle this deal without interference from Ivar.

Some important details to consider for the negotiations

 FF Logistics has very low competence in computers. Preferably the personnel should know
more than the currently do not to be too dependent on the IT-system provider.
 If the conversion could be done faster than 13 months FF calculates with a saving of 80 000
Euro months. However, a potential saving in project time can not be used to increase the
budget of the conversion project.
 Could the market system (which not is part of the discussed budget but another deal)
substantially increase the profitability? What can the IT Provider offer in comparison to the
other suppliers?
 The documentation of finished systems should be included in the work.
 FF Logistics should write a service agreement with the provider. This has a budget, and
normally the service agreement is 10% of the total cost of the project.
 Project management and project organization: Who should have the total responsibility?
Who should be part of the project team? Etc… FF Logistics would not like to have John
Labile as project leader.
 Guarantees connected to potential advanced payments, and guarantees on the total systems.
 Potential installation of a market system outside the Belgian market. If the market system
gives expected results, FF could consider installation also on the German market.
 The budget. Note that part of it already is used. What remain is 1 395 000 Euro. The
maximum until finalized conversion is 13 months.
 Ownership of the market system? FF Logistics would like to own the system and consider it
a competitive resource. Could FF Logistics restrict the distribution of the system to its
competitors?
 Time. If the IT system provider could not complete the project on time, should we ask for
penalty clause?
Summary of FF Logistics RfP (Request for Proposal)

All the potential providers have got the following information in the Request for Proposal:

 Number of work places: 70 where of 55in Brussels, 10 in Antwerpen and 5 in Brugge.

 Conversion from the main frame computer environment to an internal client/service solution.
Current main frame-solution’s functionality and performance is basis for the specification of the
PC-solution. The IT-Provider, JBIT and Leuven LN IT and other consultancy companies have
worked with the specification for some months. FF Logistics would prefer to have only one
provider to complete the project. The project aims to create an even better market position for FF
Logistics by:
 More efficient & flexible administration
 More efficient marketing and market influencing
 Improved cash flow
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The main content of the project:

 Conversion to a PC-network

Additional work:

 Implementation of market system

 Education
 Documentation

Hardware is not part of the conversion project. Likewise maintenance and service are outside the project.
If the providers have ideas concerning those tasks, we should take that into consideration.

Our estimation is that about 22 000 hours are needed to complete the conversion. We assume that
increased effectiveness of the use of resources could decrease the time needed to complete the project, an
independent consultant has verified this opportunity.

FF Logistics finance

I ncome statement (M Euro)

This year Last year

Sales 48,75 52,68
Cost of sales -42,24 -41,32
Depreciation -1,28 -1,35
Operating income 5,23 10,01
Finacial income 0,65 0,95
I ncome before taxes 5,88 10,96
Taxes -1,33 -2,62
N et income 4,55 8,34

Balance sheet (M Euro)

Assets This year Last year Liabilities This year Last year
Fixed assets 6,94 8,25 Stockholders equity 4,55 4,55
Taxes receivables 0,45 0,81 Post-employment benefits 5,65 3,71
Accounts receiveables4,15 3,51 Profit 4,55 8,34
Cash and bank 6,23 5,86 Deffered taxes liabilities 1,16 0,65
Liabilities to suppliers 1,86 1,18
Sum 17,77 18,43 Sum 17,77 18,43