7 Critical Questions to Uncover Procurement Savings

DO YOUR NEGOTIATION STRATEGIES ALIGN WITH YOUR GOALS?

I. One-Off Negotiations vs. Long-Term or Strategic Relationships: Don’t Confuse the Two  

It’s surprising how often Procurement teams prepare for and conduct negotiations without really thinking through the type of relationship that’s on offer. For most people, they simply approach it as a bare-knuckle fight to get the best price / make the most money / obtain bragging rights as the “winner.” And sometimes this is the right approach. But if you use this approach for long-term / strategic relationships, it will probably come back to haunt you – maybe not next week or next month, but sometime during the span of the agreement. And shortly after the pain of a failing relationship, the blame game will follow. Most of this can be avoided (notice I didn’t say “all of this”!), and the key lies in aligning your negotiation strategy to the situation. 

When developing a negotiations strategy for a Procurement event, the first thing you should think about is whether this is a one-off negotiation(or one which you expect to repeat at defined intervals) or an ongoing relationship that must deliver superior, reliable results for both parties over the entire lifespan of a reasonably long contract (think three or more years).

So that we start off on a solid foundation of understanding, let’s define each of these clearly:

A. One-Off / Distributive Negotiations / Fixed Pie

This is the classic zero-sum game, where every point / dollar that you win results in a corresponding loss for the supplier, and vice versa. This approach has been around since the beginning of time and goes by the colloquial name of haggling. In these situations, each side is trying to get as much as they can for themselves, and why not? Not only will there probably not be long-term interactions in the future, there usually wasn’t a prior relationship, either. Assuming that the supplier can meet some minimal levels of service and quality consistently, price is almost always the overriding dimension. And, as for trust, all there is to this issue is the delivery of the goods or services in question, and the payment of the bill in a timely manner.

Examples of these types of relationships are buying / selling a used car, making a purchase on ebay.com, or purchasing highly commoditized goods and services on short-term agreements or no agreements at all.

B. Ongoing Relationships: Integrative Negotiations / Each Side Wins Something

Unlike the one-off negotiation, in which winning on price, to paraphrase Red Sanders and Vince Lombardi “isn’t everything, it’s the only thing,” ongoing relationships have multiple dimensions for success or failure. These include timing, quality, convenience, and responsiveness, among others. Thus, it’s important to have a good sense of the value you assign to each of these and how easy / difficult and inexpensive/expensive it is for a given supplier to deliver on each.

In these situations, there is often a pre-existing relationship, and the supplier is providing something that is strategic or critical to your ability to deliver for customers and other stakeholders. Thus, the agreement must work for both parties, not just for a month or a quarter, but over the entire length of the contract.

“Special requests” and flexible service needs (for both parties) are frequently overlooked aspects to these relationships. What do you want the response to be when you need something a day, a week or a month earlier than specified? What about the supplier asking you to pay an invoice in 10 days as opposed to the agreed 30-day terms because they’re having a momentary cash flow issue? Real life is going to intrude numerous times during a three-plus year agreement, so think about how you’d like your supplier to respond to these events as they arise.

Suffice it to say that these negotiations / relationships should be “win-win” or at least have some wins (even if they’re not equally balanced) for both sides, else it will not be sustainable. And these types of relationships must engender trust, collaboration and cooperation throughout.

I. Understanding Your Objectives for a Negotiation

When approaching a supplier negotiation as part of either a Strategic Sourcing event, a contract renewal or a point-in-time purchase that has just arisen, procurement staff often treat these situations the same, i.e., using price as the predominant goal / yardstick for success. And why is pricing usually dimension number one, and everything else being a distant second? Well, unit cost or hard dollar savings are an easy, objective measurement, and they flow to the bottom-line. Given that Procurement has many internal customers - it usually reports to the Finance function, the bottom-line reigns supreme in that realm.

But the other dimensions are important to the business and must be given actual weight. Quality, Reliability, Timely Delivery, etc., are valued by both internal and external customers, and thus ways to measure and reward suppliers and procurement staff along these dimensions are critical.

It’s important that you set goals along the relevant dimensions of “success for the business” (and not just Procurement), communicate them to the relevant parties, and ensure that you can measure and manage the Key Performance Indicators that you define for the event.

II. Understanding the “Frame”

Before obtaining input from stakeholders and putting pen to paper on the negotiation strategy, you must first make the determinations on One-Off vs. Long-Term Relationship and Strategic vs. Tactical purchase. Of course, after speaking with key stakeholders, it’s possible that your initial position could change, and if it does, you’ll have to adjust accordingly. But the discussions with stakeholders will mostly focus on needs vs. wants, and how they would like to see the different relationship dimensions prioritized.

When negotiating these types of agreements, it’s important to understand the relative importance to each party of the many dimensions. The priorities and actual targets for these dimensions will define your (and your counterpart’s):

· BATNA (Best Alternative to a Negotiated Agreement) 

· ZOPA (Zone of Potential Agreement) 

· LAA (Least Acceptable Agreement)

· MDO (Most Desired Outcome)

For both One-Off and Ongoing Relationship negotiations, it will also be helpful to do research on the supplier, and find out about their recent company performance and goals, sales targets, challenges that they’ve faced, etc. It will also be helpful to find out as much as you can about the motivations of the people with whom you will negotiate. And of course, you should ask your counterpart about what they hope to achieve, and why.

This is all a part of trying to achieve the state of being that Chinese General Sun Tzu so eloquently described 2,500 years ago: “Know the opponent (your counterpart) / know yourself, 100 victories in 100 engagements…”

III. Aligning Your Negotiation Strategy with Your Goals

Once you know the kind of negotiation that you’re about to enter, have input from your key stakeholders regarding what is more important to them and what is less so, and have done some research on the supplier company and negotiating team, you’re now ready to develop your negotiation strategy. The strategy should detail realistic as well as stretch goals, what you can give away without much heartburn, and what you think the supplier can give you without much trouble.

But remember, your strategy will probably assume that your counterparty / counterparties are rational and reasonable. And given that we are dealing with humans, who are unpredictable by nature and have radically different negotiating styles, you must also be flexible and adaptable. 

I was going to close by quoting the Rolling Stones, but I think you know lyrics. With the right preparation and approach, you’ve just increased the odds that you’ll get more than just “what you need” by quite a bit.

Good luck!