Negotiating Tip #29:
Hedging Your Bets About a Sole Source
Before renewing a sole-source contract, buyers will do well to review it head-to-toe and identify components that might be sourced elsewhere. Even when the equipment or software is highly specialized, another firm may be able to meet the specs.
With computer-aided design and manufacturing, the barriers to entry are a lot lower than they used to be. Even if the second source isn’t quite ready for prime time, it may be able to handle an ancillary role, like maintenance, training, or installation.
Before floating this proposition at the negotiating table, it’s important to run a cost-benefit analysis of potential sole-source competitors. If the alternative source can’t meet the buyer’s specs, or has a poor reputation, the sole source could call your bluff. (And most likely they’ll know—it’s their bailiwick, after all.) Here’s a good general rule: Threaten action only when you’re in a position to make good on the threat.
When a buyer floats the possibility that their firm will go elsewhere, even for a small portion of the business, it may motivate the seller to raise their game. This isn’t a magic bullet; they won’t necessarily offer an immediate price cut.
But by homing in on areas where the competition is most credible, the buyer may get something with real value to their bottom line—an extended warranty, for example, or free training on upgraded versions of the product.