The Holy Grail for many software and hardware companies, especially the early stage type, is the big deal. Everyone is looking for a big deal. Especially for startups, the deal that will fund the company’s early activities, provides market credibility and momentum in the marketplace. Of course, if all goes well there can be nothing better. Many times this big deal is done with large technology OEM partners. (For the purposes of this article I’m including large software companies as “OEMs”). But if you’re “lucky” enough to do one of these big deals, they often end up fitting in the “be careful what you wish for” category.
TARGET YOUR TECHNOLOGY OEM PARTNERS CAREFULLY
Targeting is where it all starts, good or bad. It’s important to pick compatible partners. Companies seeking 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 to what the OEM might do TO their business!
Does the OEM partner have the potential to cause severe channel conflict? Will they tie up the smaller partner in endless meetings, procedures, and negotiations? They might have a corporate structure and culture foreign to your way of doing business. One that causes you to pull your hair out from frustration. Leaving you unable to accomplish even the most simple business objective, at least 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.
So get to know your OEM partners as well as you possibly can BEFORE you sign a deal. It’s tempting to rush in and sign before “they change their mind”. But the actual ongoing relationship is even more critical than written deal terms to potential success. It’s a lot like dating before marriage. No matter how attractive the partner is, you need to make sure you can live with them later on.
NEGOTIATE FROM STRENGTH
In addition to the compatibility concerns outlined above, I don’t like to do deals with people who 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, of course. 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 appear to be. Above all, you need to discuss this possibility internally and create a “line in the sand” that you won’t cross. That’s easier said than done! 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. It’s easy to fear that 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. Know what your minimum successful deal looks like, and be prepared to walk if you can’t get there. Otherwise, you run a great risk of signing a lopsided tech OEM deal that you will deeply regret. Not to mention the opportunity cost of tying up your scarce time and resources. Resources that might have been used working with more compatible technology OEM partners.
WORK WITH OEMS ON EVEN TERMS
Now 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. That’s because they are more process-oriented and structured. They also often include many more people in relationship management. All of this is fine. But it needs to be tempered so that the larger partner doesn’t “swallow all of your available resources whole”. It can easily happen if you don’t guard against it. The OEM partner has more resources than you (but will always think they are busier!), as well as more process-driven requirements that need to be met.
Don’t be afraid to draw the line at a reasonable point, and remind your OEM partner 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. Again, 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”
Say you’ve tried everything that you know, as politely as possible, to keep the relationship equitable and reasonable. But it still just isn’t. At this point, don’t be afraid to say NO. In my consulting practice, I meet many smaller company executives who 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 to deal 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 one’s best interest.
HAVE REALISTIC EXPECTATIONS
The last key point I’d like to convey is that it’s vital 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. 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 in segments that they don’t feel would enable an adequate return if they invested in developing the product themselves. It is rare for products that are licensed or resold from such partners to get anywhere near the push that the products designed internally in a large company would. Not impossible, but rare. It’s essential to be realistic about this so you won’t be disappointed and end up negatively impacting your company. The results of these partnerships 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. Much more 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.
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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.