Let’s assume that you have selected a few companies for your shortlist and are getting close to the final stage of negotiations. At that point you already have the “asking” rate, which should be within reasons. Negotiating space in offshore deals is rarely above 30% and if asking rate is 100% above your expectation the vendor should not probably be on your list.
Now, how to make sure that you get the best rate and at the same time not push your vendor beyond the line where your negotiating “success” will backfire? The key is to drive for “win-win” arrangement with every prospect vendor and pick the best one. Here are a few tips on doing that:
- First, most important, you need to set the focus of your negotiations. Your goal is not to minimize the rate but minimize the Total Cost of Outsourcing (TOC) over the terms of the engagement. TCO is an abstract concept unless looked at in retrospect, yet it could be reasonably assessed with some basic assumptions. After the assumptions are locked you can easily negotiate towards minimizing TOC.
- Next step is arranging your arsenal of negotiation options. You do not want it “all come down to rate”, that’s just one aspect of TOC plus it’s likely to stall the negotiations. List all aspects of the contract you could to negotiate and form your position on each of them. Offshore contracts typically offer large number of areas to negotiate, e.g. financial and payment terms, work hours, overtime rates, length of engagement, access to resources, multiple operation benchmarks and guarantees, etc. Each of these items could have a massive impact on the TCO.
- Research what is reasonable in terms of rates for your vendors. There are plenty of tools to do that. For example follow up with references the vendor should have given you (it’s amazing how much info you get if you just ask), check regional job boards to determine salary ranges, etc. Take you research data with grain of salt though, e.g. be aware of the timing of your data. For example I was involved in contract negotiation with the same vendor in 99, ’02 and just recently; the terms of the contract were somewhat similar, the rates for mid level java developer were respectfully $42, $21 and $27 an hour.
- Negotiation is a complex skill if not art. If negotiations are not particular your cup of tea you may consider involving professionals, in particular those who have experience negotiating offshore contracts. At least go through some serious reading on the topic prior to diving into the deal making. Here are a few great books to consider: Secrets of Power Negotiating by Roger Dawson, You Can Negotiate Anything by Herb Cohen, and Getting Past No by William Ury.
- One aspect of the rate is often gets overlooked – the rate changes overtime. The easiest approach here could be locking rate for the term of the engagement, yet it might be not feasible due to many reasons. You want to make sure that you do not get hit with huge changes and at the same time you do not want to find your vendor loosing money on your project due to for example natural changes in the cost of living. Linking rate changes to some objective index might be a path to consider, see an example below.
X. Cost of Living Adjustment. With respect to the rates stated in each Work Order with a term longer than one year, commencing on the first anniversary of the effective date and on each anniversary thereafter during the term of each such Work Order (each, an “Anniversary”), if the Employment Cost Index, Total Compensation, Not Seasonally Adjusted, Private Industry for Professional Specialty and Technical Occupations published by the Bureau of Labor Statistics of the United States Department of Labor (the “ECI”), as published on the most recent date the ECI was published prior to the Anniversary of the current year (the “Current ECI”). is higher than the ECI published on the most recent date the ECI was published prior to (i) the effective date of the Task Order with respect to the first Anniversary; or (ii) the Anniversary of the previous year with respect to all subsequent Anniversaries (the “Prior ECI”), then, effective as of such Anniversary, the then-current rates for such charges shall be increased by an amount calculated by multiplying then-current rates by a fraction, the numerator of which is the Current ECI and the denominator of which is the Prior ECI, minus 1. For example, on the first Anniversary of a Task Order, if the Current ECI is higher than the Prior ECI, the increase to the then-current rates under this Section 5 would be calculated as follows:
Increase to then-current rates = the then-current rate on the first Anniversary X ((Current ECI / Prior ECI) – 1).
If the ECI ceases to be published, then Consultant and Client will agree on and substitute another comparable measure published by the same or another reputable source.