Can our company avoid losses due to sunk cost negotiation?

Question

I feel my company is losing a lot of money on each project iteration because of a negotiation technique employed by our business partners(customers). I want to find out the name of this technique and references so that I can point my colleagues to it because they don't get the point or don't care right now, which I believe is a terrible mistake.

Here is how it goes every time:

1. Customer asks us to develop feature X,Y,Z for our next project iteration software
2. We agree on timeline of the project (releases of each feature, bugfixing, test periods)
3. They slow down sales process as much as possible
4. They require to keep the schedule and they want to receive each release. So we release the features as they are being developed (e.g. continuous delivery). To make sure they don't deploy our project, we give them expiring "demo" licenses. (I think we should not release anything at this point)
5. Project is 75% done - still no sales agreement, but we are converging on a somewhat reasonable price. Twist: They say: maybe feature X,Y,Z is not really needed project is going to be cancelled.
6. Our sales team contacts them with a severly discounted price to make sure that we are at least not in the red for this project.
7. They negotiate the price even lower knowing full well that we are running after our lost investment.
8. We agree on a price that is ridiculously low and they accept the project with features X,Y,Z.

I think at point 4 we seriously decrease our negotiating power because Customer knows well that we have serious investment in the project and we have to get an agreement. So they know our company will not decline their very low offer because we want to keep the project green at least.

I suggest that our company should not provide proof that we have sunk cost(as in sunk cost fallacy) in the project. So I think we should not release anything until the sales process is complete. (even if we keep developing behind the scenes to keep our dev resource allocation even.)

Questions:

• Is our company really making a mistake and losing money here?
• Is this issue documented in the literature as a known bad practice so that I can point my colleagues to it? Does this have a name? ("proof of sunk cost" maybe?)
• If known bad practice, what are our best steps to mitigate this?

note: every time I point out to my colleagues that we are losing negotiating power, they seem confused and say: "But we are providing demo licenses, so they cannot deploy it.", which is beside the point. My point is that Customer should not have the knowledge that we have sunk cost.

Answer 1

You have several problems. You're focusing on an emergent one instead of the roots.

Project is 75% done - still no sales agreement

As nvoigt said, this is one of your problems. One possible solution is doing no work until the feature specs are signed. That will work, but has some issues, such as lack of Agility.

I'm going to provide a different approach, that will also work and has different issues. To do so, I'll reframe:

Project is 75% done - still no sales agreement [and still no payment]

You could ensure you're getting paid for time-and-materials. The customer pays you at the end of each week you work on the customer's project. Even if you deliver nothing. No pay, no work.

Obviously, this will need to be negotiated at the start.

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Another problem you have is:

PM's[sic] are only evaluated by customer satisfaction [...] the PM could not care less about our profits.

You have an employee in your company that is being evaluated on a metric that leads to lessened profits. This needs to be brought up to upper management. Upper management must be made aware of the costs that this evaluation method is having on the overall business. Bring this up to your manager and ensure it gets trickled up until it reaches someone who can fix this - which may need to the CEO.

Answer 2

Project is 75% done - still no sales agreement

Why would anybody in your company move a finger without a contract in which the customer agrees to pay (whether it's for a feature or by the hour)?

You tell them you start working as soon as the contract is signed. It's that easy. Anything else is silly and yes, losing money. Even with genuine well-meaning customers... they could just get new management that decides your product is not useful any more for their new course.

The problem is not the sales team. The problem is whoever signed off on you starting to work, before the sales team finished their job.