Seven Ways to Build Your Negotiating Strength

By Mark Trowbridge -- Supply Chain Management Review, 3/1/2009

Despite all the "eTools" available in today's supply management toolkit, negotiations are still the mostoften utilized way to establish (or adjust) complex business relationships. Most senior supplymanagement professionals would agree that negotiations remain the primary methodology for dealingwith "alliance" or "strategic" types of supplier relationships—i.e., the ones that account for a largeproportion of supply-chain expense.

Some negotiations are conducted from a position of strength, others not so much. Certain situations andconditions, in particular, tend to weaken our negotiating position. Here are some examples:

· Our position is weak when the supplier knows that they have the business. How many times hasa supply chain professional worked diligently on negotiating a big transaction only to have an internalcustomer "submarine" the process by disclosing to a supplier that it is going to get the business?

· Our position is weak when there is only one known provider of the product or service—as in asole source or single source deal. As discussed later in this article, competition is the best way toquickly arrive at market price level. This competitive factor is missing in sole/single source negotiations.

· Our position is weak when there is insufficient time to "compete" the requirements. Starting thesourcing process too late decreases your ability to effect a fully competitive bidding process, forcing youinto a defensive position for any subsequent negotiation.

· Our position is weak when internal colleagues or executives seem to be on the supplier's side.· Our position is weak when key concessions have already been made to the supplier by other

entities in our organization, such as engineering or the head of a business unit.· Our position is weak when we fail to recognize the scope and complexity of a multi-faceted, high-

value acquisition. Complex negotiations are like a spider web; if you change the position of one strand,all the others move. And if we approach a complex negotiation in a simplistic manner, we may missimportant changes that affect the final outcome.

· Our position is weak when "inside" information is known to the supplier. It's not uncommon todayfor supplier personnel to be located at a customer facility, where they can become privy to details thatcan undermine a negotiation. Several months ago, in preparation for an important business processoutsourcing negotiation on behalf of a major corporate client, I attended a meeting with the client'ssenior procurement professionals to plan our strategy for negotiating with the two leading bidders.When I entered the glass-walled conference room scheduled by the client, I was shocked to see a signon an adjoining office indicating it was occupied by one of the finalist bidders. Turns out they werecontracted for other services by this client, and had a project manager in an office right there. I insistedthat we change the location of our planning meeting, as even knowledge of the names of the managersinvolved in our planning meeting would be advantageous to that bidder.

It's not unusual for a company to encounter one or more of these circumstances during the negotiatingprocess. The obvious answer is to avoid these pitfalls to begin with. This article will help you do that. Butjust as importantly, it will offer practical advice on how to strengthen your negotiation stance when youfind yourself in a position of weakness—when you're striving to "negotiate out of a hole" to put together awinning deal. In short, these seven techniques can lead to a stronger negotiation position, even when theodds are against you.

Technique 1: Involve Supply Management Early and Often

Far too many procurement groups find themselves negotiating from a position of weakness because theyfailed to communicate and coordinate with their internal customer from the very beginning of the sourcingprocess. That internal customer could be a line of business (LOB) or strategic business unit (SBU)organization within the enterprise, or a stakeholder support function like Finance, Engineering, or IT. Thelater supply management becomes involved in the acquisition process, the lower the potential savings.(Exhibit 1 tracks the savings reductions along the procurement timeline.) Late involvement places thesupply management group in the unenviable position of simply "papering the deal," which contributes onlyminimal value.

World class sourcing groups, by contrast, somehow manage to become fully involved in the process fromthe very start. They do this by building a reputation—both among internal customers and with keysuppliers—for adding value.

Prior to entering the consulting business, I was a senior director for sourcing in one of the three mostprofitable companies in the United States. Over several years, our sourcing team had done a good jobbuilding high-performing supplier relationships that saved the enterprise more than a quarter billiondollars. As our successes grew, we found ourselves becoming involved earlier and earlier in our LOBdivisional planning processes—even when the planned acquisition fell outside the conventional wisdomof where procurement could add value. One example was our involvement in negotiating a $45 millionsponsorship agreement with the PGA (Professional Golf Association). As part of that negotiating process,we were able to secure significant concessions previously left on the table by the enterprise's marketingdivision. Had our team not already proven our worth to the marketing group EVP, we never would havegotten near that sensitive negotiation. But because a strong relationship had been formed, we gotinvolved at the beginning of the big deals.

Technique 2: Differentiate Between Competitive and Collaborative Negotiations

Most supply management professionals certainly would prefer to begin each acquisition from a positionof strength derived from a competitive environment. Competition is a great way to level the playing field.Competitive bidding drives suppliers down to a market-efficient pricing environment where the negotiationprocess can work optimally.

But to have a competitive environment in any acquisition, the following conditions must exist:

· Competition. First and foremost, there need to be a number of qualified suppliers in the targetedmarketplace—that is, no single or sole source constraints.

· Ability to Move. The buyer must be able to move the business away from the current provider;there can be no binding commitments, for example.

· Sufficient Volume. The buyer must have enough volume to warrant interest from a sufficientnumber of qualified bidders.

· Time for Competition. Sufficient time must be available to proceed through the entire competitiveprocess (RFx).

· Willingness to Change. The buyer's internal line of business groups must be willing to use any ofthe qualified bidders.

When negotiations follow a structured bid process (RFP, RFQ, auction, and so forth) or when accuratecost data is known for the product or service in question, buyers can usually leverage a negotiationtechnique known as "competitive bargaining." This is the traditional way of hammering out a deal, markedby hard discussions focused mainly on price and based upon concrete facts. Competitive bargaining canbe applied in a wide range of circumstances, even including single-source supplier relationships wherean attractive alternative or fall-back plan exists.

Many examples of competitive bargaining can be found in the automotive industry, especially in caseswhere both the supplier and OEM have similar cost data available to them. The big auto manufacturersdon't usually ask a supplier, "What will this dashboard console subassembly cost?" Instead, the OEM willwork with its design team to determine in advance how much the subassembly should cost, and thenapproach the preferred supplier (which has sometimes been involved in the design process) with a targetprice that must be met.

Competitive bargaining works in many situations. Yet it's not the best tactic for complex acquisitionswhere dynamics in addition to price are in play. It's also not a good tactic when negotiating from a positionof weakness.

The collaborative style is best suited for more complex negotiations, including ones where you're"negotiating out of a hole." Collaborative negotiations:

· Focus on mutual problem-solving in a collaborative fashion. The use of positive group problem-solving techniques, rather than oppositional positioning, is a core tenet of collaborative negotiations.

· Are non-confrontational. This does not mean the buyer is weak. Rather it means that negotiationsare conducted in a positive manner and are focused on creating solutions that can work for both sides.The ability to keep things positive is a critical skill for supply management professionals.

· Yield to principle, but not to pressure. A collaborative negotiation quickly falls apart if the buyingorganization compromises on this guideline. Once the buying company yields to pressure from its salesopponents to focus solely on price, the positive atmosphere essential to collaborative negotiationsquickly evaporates.

Successful collaborative negotiations require greater skill and experience than competitive bargaining.These discussions typically involve a multitude of issues that must be resolved to the satisfaction of bothsides. So when an inexperienced negotiation team overly focuses on one point, for example, they leavethemselves vulnerable to being taken advantage of on the other elements under negotiation. Moreover,the negotiators need to understand that these various issues are interrelated. The cost model of the entirepackage can change quickly if the negotiator does not understand the effect of one concession onanother. Top negotiators have to be able to juggle multiple balls at a time in a collaborative negotiation.

Technique 3: Prepare the Team to Fight the Tough Battles

When my firm trains supply management groups in advanced negotiation strategies, we drill home theprinciple that 75 percent of negotiation time should be spent outside of the room—that is, in researchingdata to be used in negotiation, preparing negotiation strategy, planning team member roles, takingcaucus breaks, and so on. Put another way, you need to follow the Boy Scout motto of "Be prepared."

Generally speaking, the typical supplier negotiation team is better prepared than their buyer counterparts.One reason for this is that the seller's sales people are often better-trained. An article published bySalesforce.com last year indicated that the average Fortune 100 company spends $10,000 annuallytraining its major account salespersons. By comparison, the 2008 Cross-Industry Benchmark Surveyfrom ISM and CAPS Research shows that the average procurement group spends just $1,184 per yeartraining each supply management professional.

The seller's sales people also usually know more about the buying organization than vice-versa. Theyknow the buyer's financial performance, company trends, marketplace position, prospective purchasevolumes, and more. They also know more about their own product or service than do the buyer'sprocurement personnel. When coupled with the unfortunate tendency of some procurement groups toexclude their LOB counterparts from the negotiation process, this can create a lopsided advantage for thesupplier.

There is no good excuse for being less prepared than the seller. The buyer's first job is to prepare thenegotiation team. This requires meeting with all key stakeholders—LOB/SBU leaders, engineering,finance, accounts payable, HR, and so forth—to ensure that everyone is in full agreement with thenegotiation goals. Conflicts should be resolved early by escalating them to executive management.

Careful selection of the negotiating team members is critical in this regard. Broadly speaking, you look forpeople who collectively bring good communication and relationship skills, a solid understanding of thematerial or service being sourced, and a clear understanding of the respective roles in the sourcingprocess. The procurement team should spend much time gathering information before a major suppliernegotiation session. Much of this data gathering is done through traditional sourcing tools and techniquessuch as proposal evaluation, reference checking, and cost analysis as well as through data providers likeReuters, OneSource, or Hoovers.com. But much additional value can be gained in the preparation stageby doing the following "extras" to fully inform your team:

· Visit the supplier's website to learn about its various product lines, customers, and businessannouncements.

· Understand trends affecting the supplier's major cost drivers. For example, if chromalloy steel is acomponent in the supplier's products, you need to understand the historical and forecasted price trendsfor this component.

· If the supplier company is publicly traded, download its annual or quarterly financial reports togauge their financial stability and understand their planned business direction. If I'm personallyresponsible for a key supplier relationship, I'll often buy a share of the firm's stock in my ownbrokerage account so that I automatically receive these reports.

· Use a data source or your own online brokerage account to download stock analyst reports thatprovide insight into the supplier's financial and business challenges or opportunities. Stock analystsoften have access to company information that the company's customers never see.

· As part of the RFP or as a standalone item, call references provided by the supplier. But usethese conversations to ask more than "Is this a good supplier?" Instead, leverage the discussion tolearn about the supplier's typical approach during negotiations, tactics used, details of cost structures,concessions gained by the reference, new spend management technologies or techniques beingemployed, and any insight into competitors to the supplier. Any information you can derive from thereference source may be helpful to your team's upcoming negotiation.

· Build a cost-analysis spreadsheet for use in the negotiations. This should be formula driven,weighted by actual historical or prospective future volumes. Make sure your team always has visibility tothe relationship's total cost picture and is not just negotiating isolated price points. When a particularprice point changes, you'll be able to instantly calculate the cost difference to see if it's a helpfulconcession.

Technique 4: Empower Negotiations through Factual Data

Even when negotiating sole or single source transactions, it's helpful to prepare a "should be" costanalysis in advance of the supplier meetings. This analysis gives a percentage breakdown of the variouscomponents of the supplier's cost model, backed up by strongly supported data. A simplified example (forengineering services) is provided in Exhibit 2.

This type of cost breakdown can be used to effectively negotiate individual cost elements with a supplier,rather than hitting a wall by addressing only the final price. "Should be" cost breakdowns can bedeveloped in a number of ways, and then compared against the supplier's own cost accounting:

· Using cost estimates prepared by your own engineering, R&D, or other LOB group.· Using proposal information from competitive suppliers (of course respecting any confidentiality

restrictions on such data).· Using cost breakdowns for similar providers of other products or services.· Using published sources such as those from the U.S. Bureau of Labor, Purchasing Business

Intelligence Center, Producer Price Indices (in the U.S, U.K., or EU, for example), and commodityindices.

Technique 5: Negotiate all TCO Elements Before Entering Relationship

The Total Cost of Ownership (TCO) associated with procuring and using a product or service is fargreater than the initial unit price. Most procurement professionals understand the classic formula forTCO estimation, which includes:

Cost of Acquisition (Sourcing and transactional purchasing costs)

+ Product Cost

+ Freight/Holding Costs

+ Disposal Cost

Total Cost of Ownership

But in reality, Total Cost of Ownership includes much more than these elements in the equation. TCOalso includes such things as costs of customization, installation, operator time, customer satisfaction,product output, and so forth. Over the life of the product or service, these elements actually may costmore than the original acquisition expense.

My firm was recently invited by a corporate client to assist them in negotiating the license and installationof a large ERP package from one of the world's biggest software providers. The client had alreadynegotiated license fees and other expenses through a multi-round process, resulting in a price tag ofaround $2.5 million for the package. Through careful review of the proposed license and serviceagreement, our firm identified several costs in addition to the license fee itself, which we targeted fornegotiation. The end result was additional cost savings of $500,000.

When entering into a single or sole source relationship, or when purchasing a capital (long-term) asset,make sure you negotiate all cost factors—both present and future—before signing the deal. Failure to dothis allows the supplier to charge premiums for other cost elements throughout the life of the relationshipor asset.

Consider the following example. The average annual software maintenance expense (updates, upgrades,patches, technical support) is 18 to 20 percent of the original license fee. That's almost a doubling of the

license fee over a five-year installation life. So why do many purchasing groups license a softwarepackage that will be depreciated for five to seven years, but only commit to one year of maintenance at atime? Instead, why not ask the supplier for a discount on the full five years of maintenance?

Once a contract is signed with a single or sole source provider, it's usually too late to go back andrenegotiate missed cost elements. That's because the supplier knows that it's got the business. So makesure you negotiate all foreseeable cost elements at the very beginning. In keeping with this technique, tryvery hard to minimize practices that compromise your future negotiating position. These include letters ofintent, trial period agreements, or beta test arrangements.

Technique 6: Shift the Supplier's Paradigm

The American Heritage Dictionary defines a "paradigm" as "A set of assumptions, concepts, values, andpractices that constitutes a way of viewing reality for the community that shares them." Rephrased, ourparadigm is the way we see a situation. So when a supplier thinks it has a deal locked up, it still may bepossible to change their paradigm view in a way that leads to significant advantages. This can beaccomplished in a number of ways, including:

· Start Renewal Negotiations Early. Instead of letting the annual support agreement get within amonth of expiring at year's end, consider contacting the seller's sales team in September and ask themif they'll hold the current price firm for another year.

· Acquire Other Products and Services. Many procurement groups try to avoid buying additionalproducts and services over and above the main negotiated items. With sole or single source buys inparticular, the rationale is that they may become over-dependent on these sources. But in reality,additional purchases can often be used to leverage the core buys.

· Lengthen the Business Relationship. Any supplier, even a sole source one, seeks secure, long-term relationships with their customers. (As the co-founder of our firm is fond of saying, "There is nosuch thing as a permanent sole source.") Few suppliers will walk away from an opportunity to secure athree-year agreement in place of the one-year deal in the original bid specs.

· Joint Marketing or Product Development. Although many procurement managers prefer to keepsupplier relationships at arm's length, sometimes the relationship can be materially enhanced throughjoint marketing or product development activities.

· Integrate vertically. If you have the wherewithal to do so, consider buying the supplier andintegrating them into your firm's supply chain. This would certainly change the paradigm. Such adramatic move could also provide a competitive advantage over your own competitors if they sourcefrom the same supplier.

Technique 7: Leverage the Buyer's Performance

Sometimes we find ourselves negotiating with suppliers who already have established relationships withour company. Contract renewals are the most obvious examples of this. In these types of negotiations, ithelps to use the supplier's past performance as a lever in negotiating future product or servicesacquisitions.

To do this effectively, you first need to have tracked the supplier's performance over a sustained period oftime. Using a scorecard, such as the simple example shown in Exhibit 3, is a valuable way of monitoring

performance that also allows for benchmarking the supplier against other providers or similar products orservices.

The following personal experience illustrates the value of performance tracking in gaining leverage. Onbehalf of one large corporate client, I led a negotiation for a contract renewal with a key supplier. Theannual value of this sole source relationship was several million dollars. Leading into the schedulednegotiation, the provider knew that it was the only approved supplier.

Knowing that this sales group would be inflexible about lowering prices, our team employed a differentstrategy in the negotiation. I learned that the client company had tracked the supplier's on-timeperformance of services at 95 percent (which the client considered to be an acceptable level). After goingthrough the motions of haggling with the supplier over price, we finally told them we would pay the currentprice level if they achieved a 98 percent or better on-time performance. We told them that a tiereddiscount should apply to lesser levels of performance. Because we had intentionally allowed the seller'ssales executive to tout his firm's performance during the early part of the meeting, it was very difficult forthe supplier to refuse this request.

The result of these negotiations was that the buyer would receive either a built-in discount (savings) forthe current level of service or a higher level of performance from a good supplier. Either way, tyingpayment to performance was a beneficial strategy for this negotiation team.

Strength Conditioning

Benjamin Franklin once said, "Necessity never made a good bargain." Mr. Franklin rightly observed thatwhen someone negotiates from a position of perceived need or weakness, they are exposed to the powerof their opponents.

The seven techniques described in this article have been proven to generate value, even when you maynot be dealing from a position of great strength. Looked at another way, failure to employ thesetechniques in difficult negotiations practically ensures a less-than-optimum outcome. Choosing to employsome or all of these seven techniques can turn a potentially losing proposition into a winning deal. That'sbecause these techniques can alter a supplier's perception of your relative strength in the negotiationprocess.

And that's what successful negotiating is all about.