The Holy Grail for many software and hardware companies–especially the early stage type– is the big deal. Everyone is looking for the big deal, the one that will fund the company’s early activities, provide market credibility and momentum in the marketplace. Of course, if all goes well there can be nothing better. Many times the big deal is done with large technology OEM partners. But often when these deals do happen they end up fitting in the category of “be careful what you wish for”.
TARGET YOUR TECHNOLOGY OEM PARTNERS CAREFULLY
This is where it all starts, good or bad. It’s important to pick compatible partners. Companies looking for large technology OEM partners are often blinded by the potential of what the OEM can do FOR their business. They often fail to pay any attention at all to what the OEM might do TO their business!
Does the OEM partner have the potential cause severe channel conflict? Will they tie up the small company in endless meetings, procedures and negotiations? Do they have a corporate structure and culture so foreign to your way of doing business, that you end up pulling your hair out from frustration–unable to accomplish even the most simple business objective, without moving mountains? Sometimes with large companies it’s difficult to even figure out who you need to speak with–let alone get a prompt, unambiguous answer.
Get to know your OEM partners as well as you possibly can before you sign a deal. It’s tempting to rush in before “they change their mind”, but the actual ongoing relationship is critical to potential success. It’s a lot like dating before a marriage; no matter how attractive the partner is, you need to make sure you can live with them later on.
NEGOTIATE FROM STRENGTH
I don’t like to do deals with people that are confident they have the upper hand. If they think they can push you around–they almost certainly will. Usually one partner needs the other to a greater extent, but you want to try to avoid dealing with partners where you have little or no leverage at all. It generally doesn’t’ turn out well. It’s very important to make sure that you negotiate a deal that you can live with, no matter how attractive those potential technology OEM partners appears. Above all, you need to discuss this possibility internally and create a “line in the sand” that you won’t cross–and be prepared to walk away if the negotiations cross that line.
This can be a painful and difficult thing to do when you are seeing big “dollar signs” in your eyes–and fear if you stay strong you might blow the deal. But remember, you have something that the other side wants as well–or they wouldn’t be talking to you. If you don’t know what your minimum successful deal looks like and you aren’t prepared to walk, you run a great risk of signing an OEM deal that you will regret. Not to mention the opportunity cost of tying up your scarce time and resources, which might have been used working with more compatible technology OEM partners.
WORK WITH OEMS ON EVEN TERMS
Once you’ve negotiated a deal that you can live with (and hopefully prosper!), it’s time to get to work with your partner. Try to keep the playing field as fair and even as possible in the relationship. Of course, it’s important to be accommodating to your partner, and respect the differences in operational procedures. Big tech OEMs will usually move slower than early stage software and hardware companies, are more process-oriented and structured, and often include many more people in the relationship management. All of this is fine, but it needs to be tempered so that the larger partner doesn’t “swallow all of you available resources whole”. It can easily happen if you don’t guard against it. They have more resources than you (but will always think they are busier!) as well as more process-driven requirements that need to be met.
But don’t be afraid to draw the line at a reasonable point and remind them that you have fewer people and resources available. Suggest a phone meeting instead of flying three people across the country–or ask that they come to your place, rather than always trekking to their headquarters. Propose that one of their folks spearhead writing that joint position paper instead of some scarce resource in your company–I’m sure you get the picture. Sometimes larger companies will smother you without even knowing they are doing it–don’t be afraid to remind them that you need to do business a little differently than their normal approach.
KNOW WHEN TO SAY “NO”
If you’ve tried everything that you know–as politely as possible–to keep the relationship equitable and reasonable–but it just isn’t–don’t be afraid to say NO. In my consulting practice I meet many smaller company executives who just don’t feel they can do this with larger technology OEM partners. They’ll talk tough in internal meetings, but when back in discussions with the partner, the tough talk turns to submission. They just feel like the OEM partner is too important to their business to risk ever offending them in any way. Sometimes they are just too intimidated dealing with executives from an industry giant. Unfortunately, that attitude is a prescription for indentured servitude for your company. I’m not suggesting being unpleasant; in fact when standing up to a larger technology OEM partner it’s critical to be calm, polite and non-defensive. But by all means be firm in delivering the message of what your business can, cannot and won’t do. If you don’t, what could be a profitable relationship can turn very sour and spiral downhill, which is in no ones best interest.
HAVE REALISTIC EXPECTATIONS
The last key point I’d like to convey is that it’s very important to have reasonable expectations in partnering with large technology OEMs. Many small software, hardware and SaaS companies go into these deals believing they will be “company-makers”. In my experience, this rarely happens. Be realistic about what the OEM partner can do for you, and build your business model around the most conservative projections of their performance that’s possible.
Large companies usually decide to OEM products from smaller, more nimble partners to fill niches that they don’t fully understand, or don’t feel would pay back if they invested in developing the product themselves. It is very rare for products that are licensed or resold from such partners to get anywhere near the push that the products developed internally in a large company would. It’s very important to be realistic about this so you won’t be disappointed. Results may be largely out of your control, so project conservatively. If revenue exceeds your conservative expectations you’ll be overjoyed.
That’s my condensed advice on working with the big software and hardware technology OEMs of the world. There is much more that could be discussed, as this is a common activity for many companies. What’s been your own experience? Post a comment and let us know your own view.
Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com
If you liked this post please share it with you colleagues using the “share” buttons below:
Keep up the good work.
Rich,
This is very good advice. We have a very small company with less than 25 people. We have learned a lot about dealing with large OEMs, much of this was learned the hard way. The legal costs of engaging a large OEM can be overwhelming. While the OEM ‘partner’ has a team of lawyers on salary to crank out pages of contract red-lines and revisions during negatiations.
Large OEM companies push for reductions in the quoted prices for them based on ‘inflation’ or, as is common at this time (2021) ‘the chip shortage, even when our costs have gone up to based on
(1) Specific customer improvements requested by the OEM outside the scope of our contract which we oblige in order to keep the business (yes, out of fear of losing it)
(2) Inflation
(3) Chip Shortage
So, from my perspective, we are impacted by, at least, double the amount. Our additional value added, above and beyond our contracted scope of work, is not rewarded in the next contract and we are dealing with the same cost increases they are, but we get no revenue increase ourselves.
What is the best negotiation tactic for this?
Sorry Will, I just noticed that I never responded to this. It’s hard to give you advice with just a couple of paragraphs of information.
A lot depends on what you are offering, especially how “proprietary” it is. I infer from you comment about “fear of losing the business” that’s it’s not very proprietary.
If I’m wrong and it’s something they’ll have a problem getting elsewhere, that’s your negotiating tactic.
But even if not, you can always appeal to the OEMs rationality and fairness – if you are considered a “good” supplier by them. Any good partner should understand that if they push a partner to terms that are too unfavorable, they risk losing the supplier or have service level or product quality suffer. There is almost always pain in losing a supplier, so “switching costs” is itself is somewhat of a proprietary advantage.
But you can’t overplay this is dealing with a larger company. I’d recommend that you evaluate and decide how valuable this business is to you:
1) Can’t lose it under any circumstances?
or
2) If the price drops below X, we’d rather not have it.
If it’s 1), I think you know the answer – swallow hard and don’t make waves. If it’s 2), use a price slightly above your “walk-away” price to use as your bottom line negotiating price. Don’t bluff; that’s almost always a bad idea. If they try to get to this price point, let the OEM know that you’ll walk. And be prepared to do it if necessary.
Hope this gives you some ideas, and again sorry for the momumentally late response.