The following excerpts from an ICN Negotiations Workshop illustrate how these ploys could take advantage of a customer who, unfortunately, is having to acquire a computer without a negotiating team and under inflexible, predetermined “priorities” that are assumed to be all-important. These conditions are ideal for a vendor to implement these ploys with, sometimes, devastating results.
L – WORKSHOP LEADER
A – WORKSHOP ATTENDEE
L So, you only have a certain amount of money to spend, and you were faced with the problem of how to get the type of computer you need for that amount of money?
A Yes, that entered into it … as a matter of fact, that was it!
L What happened prior to this point in the selection process?
A We sent out bids to 12 prospective suppliers of this equipment, telling them the equipment we wanted and asking them to bid on it.
L These were lessors, brokers, dealers?
A Yes.
L So, at what point in the process are you now?
A We have selected the broker with whom we would like to do business. He has given us a very good deal.
L So, they can meet your budgetary concerns?
A They have met our budgetary requirements; amazingly, their bid comes to within one dollar of the figure we had in mind.
L Did the low bidder know the figure you had in mind?
A Yes, they did.
L I’m curious as to how they knew the figure you had in mind.
A We thought telling them was the easiest way to get them to bid within the critical monthly budgetary amount we were thinking of. As a matter of fact, they were higher until we told them the number they had to hit to get the business.
L You said, in effect, “Here’s my hot button (monthly payment).” Would you have any knowledge as to whether your budgetary amount was under the market or over the market?
A Not too much. I think the reason they hit the number was to get the business.
L Did you feel during your evaluation process that these guys had a good number as compared to the other guys?
A No, no, we didn’t. The other guys seemed to indicate that the figures given to us by this particular broker would not be realistic.
L In what way?
A Well, they just said it was impossible to supply a machine, with all the features we needed, at that monthly figure.
L Maybe you’ve got a real deal here, maybe you don’t … let’s talk about it. Where is their machine coming from?
A I haven’t any idea, they just said they were going to supply me with the machine and all the features.
L But they would not tell you specifically where it was coming from?
A I’m not sure they know themselves where it is coming from.
L What makes you believe that?
A It doesn’t make any difference, does it?
L It makes a heck of difference sometimes. Have they provided you with any serial numbers of the equipment?
A Serial numbers? Why do I need serial numbers?
L Well, first of all it should be part of your evaluation process. You should have requested serial numbers on all of the bids, because it is one good way of finding out whether they have actually got a product to sell you.
A They said they did.
L Yes, that happens very often. They may be “low balling” you in anticipation of signing you up merely in the hope they can locate some equipment of the type you want, and bring it in at they price they have quoted you. However, there is a very strong possibility – and it happens all the time – that once you have executed an agreement with this particular supplier, all of the competition will go away, because it will be announced that the ball game is over and the buyer has elected to go with a certain offer. You are then in a situation where you are at the mercy of the vendor to produce, and the vendor can wait out the timing of the situation – to the extent that when you get close to your operational requirements, you have no choice but to “stand still” for the system at a higher price. Do you have any close-in operation requirements, as far as getting it installed within a certain time?
A Well, yes, this coming November.
L Could they get you strung out a little bit?
A You bet! But I don’t think they would, if they could help it.
L What could happen is that a week before the system is scheduled to be installed, your selected supplier comes back and says they could not locate a machine. The fact is, all they’ve got to do is say, “We couldn’t find the gear and bring it in at that price; we’re really sorry.” What would you do?
A That can’t happen, we’ve got to have the machine then!
L What obligation does the lessor have to perform for you at the price, and within the time frame?
A None, I guess. But they do have their reputation to protect and we do have some kind of contract.
L Would non-performance really impact you?
A It would be worse than that; I made commitments to my management that this thing would be up and running and we would start making the conversions and all. I’d look pretty dumb if the machine wasn’t in.
L What you would probably elect to do, in that event, is try to find a machine for some amount of money. After a certain point, it becomes almost impossible to go to another source – you know, you reach the point of no return. Or, your supplier finds a machine and says, “We have a machine, we can have it here next week which will meet your time frame, but we couldn’t do it for that number. You can get out of your agreement if you want to, and go to somebody else.”
A That can’t happen, either. I’m committed to management to bring in the machine at the figure we are talking about.
L Do you have any guarantee in your contract that they will perform for a certain price? By a specific date?
A No, there is no guarantee in it, but they said they would get a machine, and I believe them. I’ve spent a lot of time with them. They seem very capable.
L What are you willing to bet that they perform?
A Well, I bet they do. I’m convinced they will!
L How much?
A What do you mean, how much?
L I mean, how much have you bet that they’ll cut it? If you went with the deal, at this point you are probably committing your company to pay a minimum amount, if and when they get around to performing, if they want to. That is, if they can find a machine, buy it right, get delivery, and make a profit on it. Not to mention getting a good, or “high uptime” machine. It sounds to me like you’re willing to bet an unspecified amount of your company’s money and, possibly, your career if you are wrong in your evaluation of them and their promise (verbally) to perform. And by the way, what are they betting? Should you have more confidence in their ability to perform than they do?
A I, … I guess you’re right. I never thought about it that way. Ah, what do I do to, you know, to cover myself, or what should I have done, and what can I do now?
L Suppliers who have no doubt about their ability to perform are not reluctant to include in the agreement such things as serial numbers of the equipment, delivery dates, price warranties, rate warranties, reasonable penalties, and other types of things that would help you avoid problems – and keep you out of hot water with your management. Let me see your lease agreement. Do you have your lease agreement with you?
A Yes, I do.
L Oh, you’re going to get your money’s worth out of the workshop, huh? (Laughter).
A Certainly, that’s the whole idea.
L Just a tip – in the area of time and face saving – if you will structure your next bid process to eliminate this kind of “low balling,” you can do your selection more readily on “deliverables.” Your bids will be apples to apples.
A O.K., good point.
L Now, to the first thing on your agreement. Since you do not have the serial number, which is a key issue, I think you should provide in the agreement that, if they do not provide you with a serial number by a certain date – let’s make it about two weeks out – the entire transaction will be off. Or, maybe better yet, tell them you will not sign the agreement until you get a serial number from them. A lot of critical points have to be covered prior to equipment being shipped. You have to do everything you can to determine whether you are getting a lemon – as quickly and effectively as possible. Assuming they actually can find and provide you with a machine – and that’s a big assumption (or bet) – you could still get a lemon. They could ship you a system in pieces, out of a warehouse, and then it arrives at your site …
A No, that’s no problem because they said IBM would take care of installing and maintaining the equipment. They Code 20 it, and then it’s their responsibility.
L Oh, IBM has agreed. Run that by me again.
A The broker said that there wasn’t any problem on gear maintenance because IBM would take care of it. As you know, IBM has an excellent reputation.
L They probably also said to you things like it was IBM’s responsibility once it arrives, or did they?
A Yes, they said IBM would take care of the machine, and they will take care of it.
L Probably one of the greatest fallacies in buying or leasing used equipment is that … it’s IBM’s responsibility. I’ll agree that once IBM accepts the gear for maintenance, it is IBM’s responsibility to maintain it for X amount of dollars per month. And they will do an excellent job of it; however, brokers, dealers, and lessors utilize IBM’s reputation in talking to folks such as yourself, and saying things like “it’s IBM’s responsibility.” The fact is, IBM is not a party to this agreement. It’s just you and a broker, and it’s tough getting IBM to commit to an agreement they are not party to. But if your particular broker can get IBM to commit to maintain the gear no matter where it comes from, what condition it is in, without refurbishment charges, that’s really something. In other words, do you understand the point that IBM is really not a party to this agreement? The broker is making representations to you that IBM will do something, and IBM probably doesn’t know about it.
A Yes, they know about it. They have been very helpful.
L It is to your disadvantage and, for that matter, IBM’s that you cannot check out the machine now and review the maintenance record, take a look at the equipment, and determine whether it is on IBM maintenance. As a matter of fact, if IBM is given the serial number of the gear, they can check through their own maintenance sources. Traditionally, IBM is kind of wary about “unknown” equipment coming in, because they don’t know what condition it is in, and they have a reputation to protect. Quite simply, they are not willing to spend an unlimited amount of money on maintaining gear that is not easily maintainable. Which brings up another point: At whose expense would the equipment be guaranteed for Code 20, or acceptability by the manufacturer? IBM’s, yours, or the broker’s?
A Well, I assumed that Code 20 was going to take care of that problem, and that’s all.
L Well, in reviewing your agreement, it doesn’t indicate that you will be guaranteed for maintenance, and it doesn’t say at whose expense. You don’t want your company or, for that matter, IBM to have to spend (which IBM may or may not do) $50,000 to $100,000 refurbishing the gear, especially on some broker’s word that it’s IBM’s responsibility when IBM doesn’t say it’s their responsibility.
A Well, I don’t see how it can be at my expense. Let me see it, let me read that paragraph … (pause). I see what you mean, it doesn’t say at whose expense.
L However, it does say elsewhere in the lease that, and I quote ” … this is a net lease, and that, Lessee shall be responsible for all costs and expenses of every nature whatsoever … related to the equipment.”
A Well … ah … I guess it would be at my expense. But the broker said …
L Would it impact you at all, as to when IBM accepts it for maintenance, and would it do you any good to have equipment sitting around your shop for an unlimited amount of time, keeping in mind that the way this agreement reads, you are paying the rental the whole time from when it hits your floor?
A That’s amazing.
L There’s more … you’ve got to provide for the eventuality that your equipment must be accepted by the manufacturer for their maintenance agreement at standard prices and terms by a certain date, or so many days after the delivery date, to protect yourself. And then if it all goes to pot, you should be able to cancel the agreement and/or be entitled to a certain amount of money that will reimburse you not only for your out-of-pocket expenses, at that point, but also for the damages that your company would incur due to non-performance by the supplier. It goes much further than that: I notice here in the agreement it talks about miscellaneous charges, and … apparently when you were reviewing the agreement, you picked up that you weren’t going to pay for packing at the shipping site and marked that provision out. Good!
A That’s because we had an experience when we had to ship out some gear that we sold … almost $2,000 in packing. We’re not going to fall for that one again.
L So you did a good job in picking up on the packing in the miscellaneous charges; but recently we saw a larger deal, a $2,000,000 transaction, where the lessor came back and hit the lessee with a $40,000 bill under “miscellaneous charges.” As you see, the wording clearly states “including, but not limited to, packing and shipping, etc.” But it does say that anything connected with the vendor’s expenses arising out of this agreement can be billed to you.
A Well, what in the world did the $40K cover?
L Well, I’m sure it covered more than packing (which it also covered). It included things like the broker’s fee … that is, the equipment broker’s fee. It covered the money broker’s fee, it covered all the parties’ fees. You can see here under “miscellaneous charges” that they can, again, pass on to you practically whatever they want. All the charges associated with this agreement, which would be interpreted to mean all of the marketing expenses for proposal preparation, taking you to lunch, lawyers’ fees, administrative cost, all the brokers they have to pay, everything. Read it again.
A You’re right. That’s a … a… blank check!
L It may very well be the case here, unless you can either get that provision totally taken out or get it limited to some reasonable amount. If you don’t, the so-called “low ball price” may end up being the very highest price, and you may be in a situation where you find yourself going to management in a panic needing more money for the lease rate because you haven’t guaranteed the lease rate at all. Another, yes, another expensive surprise. You haven’t guaranteed a delivery date, you haven’t guaranteed at whose expense it will be accepted for maintenance, when it will be accepted for maintenance, and so on. I know you have a sense of urgency, but consider the consequences of facing your management with some of these surprises later.
A Well, to say the least, it would be horrendous!
L Another thing here; well, let me ask you in the form of a question. What happens if the lessor does not pay for the equipment?
A What do I care if he doesn’t pay for it, that’s his problem … I guess … isn’t it?
L Well, I think it may end up being your problem. We recently saw a $5,000,000 transaction where the lessor was unable to raise the financing on a “lowball deal” very similar to the one you are involved in. The lessor did get the gear and brought it in and ended up without the money to pay for it. And the customer had already converted, it was installed and had been accepted for maintenance. The lessee was even paying lease payments to the lessor. The seller darn near came to repossess the gear.
A You’re kidding.
L And, through some monumental scrambling on everybody’s part, which included higher interest (lease) payments by the way, the lessee ended up keeping his equipment. So, you’ve got to make sure the lessor does pay for the equipment, and that is why it’s best to have a “commencement date” if payment is to occur after acceptance.
A I can’t believe some of the things you’re telling me. Is this always what happens when you buy a used computer?
L Well, it happens very infrequently, but everybody thinks it happens to the other guy.
A Well, I’m glad to hear that it only happens infrequently, but I see what you mean.
L Let’s go back to the beginning … the way it should be done. First of all, identify that the lessor has the gear, so you will be able to inspect it at the selling site. Find out if it’s on maintenance. Make sure that it is packed with packing acceptable to the manufacturer. We have seen equipment come in, after a deal is struck, virtually in pieces because it was not packed correctly. The equipment must be packed with packing that exceeds the manufacturers specifications, under the supervision of the manufacturer, at the lessor’s expense. The keys to any agreement are who does something, when they do it, and who pays for it. Also, on keying your delivery dates, make sure that the delivery is not considered consummated until the last item ordered arrives at your site. This is a good way to tie down the delivery sequence. I also notice in your lease that you assume all risks for anything that happens to the equipment from the moment you signed this agreement forever. Are you inclined to do that?
A Well, I don’t see how that can be a problem. What can happen?
L All kinds of things can happen and most lessors and vendors say you should just carry insurance on that. I feel you need more than that insurance because, reviewing your lease document, you would be required to replace the equipment if something happens to it. You would have more to worry about than getting another piece of equipment for yourself, bringing it to your site, and meeting your management’s time frame. You would also have to worry about going out on the open market in a panic to buy replacement equipment for the lessor. You should take the approach that the lessor is supplying the machine and bringing it in no later than a certain date. You will prepare the site according to specifications that you and IBM have pre-approved as being acceptable. If the machine passes its acceptance test, then you can believe that the lessor sold you a good product, as represented.
Then, and only then, should you acknowledge that the machine is there, start the lease, and assume risk of loss. And the lessor must do all this within a certain time frame. If not, the lessor should have to compensate you for the amount of money you’ve lost – require a performance bond or liquidated damages. You should invoke a whole different philosophy of buying equipment. If the lessor has good equipment or can get good equipment, they won’t have any real problem with this type of thing. If they are selling you promises, which may be the case here, they will have big problems with any of these points. Also, the lease document should not start until the lessor demonstrates that the equipment is paid for, because many times the lessor does not pay for the equipment for up to 90 days after the lease starts or, in some cases, does not pay for the equipment at all, and you are faced with the possibility of having your equipment repossessed. I notice that you do not have quiet enjoyment in your agreement.
A Quiet enjoyment?
L A good quiet enjoyment provision simply forbids someone from repossessing your equipment as long as you are not in default in the agreement. Also, about your rates … here’s a rate escalation prohibition provision that you should have your attorney put in the agreement. This also keeps you from signing a blank check.
A Well, I sure don’t want to do that.
L The “low ball” many, many times ends up becoming one of the higher priced ways to get the computer. In essence, your whole selection process was wrong. What you should have done at the beginning – when you went out on bid – was to tell the vendors not to say or imply anything during the sales campaign that is not going to be part of the agreement. Tell the vendors they may be asked to put up performance money on their representations. Then you could have made your selection on deliverables, taken the real honest-to-goodness lowest price for all the products and services you need, and gone from there. Right now, you don’t know if you have the lowest price, the highest price, or something in between.