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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 most
often utilized way to establish (or adjust) complex business relationships. Most senior supply
management professionals would agree that negotiations remain the primary methodology for dealing
with "alliance" or "strategic" types of supplier relationships—i.e., the ones that account for a large
proportion of supply-chain expense.

Some negotiations are conducted from a position of strength, others not so much. Certain situations and
conditions, 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 has
a supply chain professional worked diligently on negotiating a big transaction only to have an internal
customer "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 a
sole source or single source deal. As discussed later in this article, competition is the best way to
quickly 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 the
sourcing process too late decreases your ability to effect a fully competitive bidding process, forcing you
into 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 miss
important changes that affect the final outcome.
· Our position is weak when "inside" information is known to the supplier. It's not uncommon today
for supplier personnel to be located at a customer facility, where they can become privy to details that
can undermine a negotiation. Several months ago, in preparation for an important business process
outsourcing negotiation on behalf of a major corporate client, I attended a meeting with the client's
senior 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 sign
on an adjoining office indicating it was occupied by one of the finalist bidders. Turns out they were
contracted for other services by this client, and had a project manager in an office right there. I insisted
that we change the location of our planning meeting, as even knowledge of the names of the managers
involved 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 negotiating
process. The obvious answer is to avoid these pitfalls to begin with. This article will help you do that. But
just as importantly, it will offer practical advice on how to strengthen your negotiation stance when you
find yourself in a position of weakness—when you're striving to "negotiate out of a hole" to put together a
winning deal. In short, these seven techniques can lead to a stronger negotiation position, even when the
odds are against you.

As part of that negotiating process. The later supply management becomes involved in the acquisition process. I was a senior director for sourcing in one of the three most profitable companies in the United States. . we got involved at the beginning of the big deals. (Exhibit 1 tracks the savings reductions along the procurement timeline. the lower the potential savings. we never would have gotten near that sensitive negotiation.) Late involvement places the supply management group in the unenviable position of simply "papering the deal. But because a strong relationship had been formed. Engineering. or IT. Prior to entering the consulting business. They do this by building a reputation—both among internal customers and with key suppliers—for adding value. somehow manage to become fully involved in the process from the very start. World class sourcing groups. our sourcing team had done a good job building high-performing supplier relationships that saved the enterprise more than a quarter billion dollars. we found ourselves becoming involved earlier and earlier in our LOB divisional planning processes—even when the planned acquisition fell outside the conventional wisdom of where procurement could add value. As our successes grew. Had our team not already proven our worth to the marketing group EVP.Technique 1: Involve Supply Management Early and Often Far too many procurement groups find themselves negotiating from a position of weakness because they failed to communicate and coordinate with their internal customer from the very beginning of the sourcing process." which contributes only minimal value. That internal customer could be a line of business (LOB) or strategic business unit (SBU) organization within the enterprise. Over several years. One example was our involvement in negotiating a $45 million sponsorship agreement with the PGA (Professional Golf Association). we were able to secure significant concessions previously left on the table by the enterprise's marketing division. by contrast. or a stakeholder support function like Finance.

The collaborative style is best suited for more complex negotiations. When negotiations follow a structured bid process (RFP. is a core tenet of collaborative negotiations. no single or sole source constraints. Rather it means that negotiations are conducted in a positive manner and are focused on creating solutions that can work for both sides." Collaborative negotiations: · Focus on mutual problem-solving in a collaborative fashion. auction. the OEM will work with its design team to determine in advance how much the subassembly should cost. . Many examples of competitive bargaining can be found in the automotive industry. especially in cases where both the supplier and OEM have similar cost data available to them. But to have a competitive environment in any acquisition. rather than oppositional positioning. Competitive bargaining can be applied in a wide range of circumstances. · Time for Competition. · Are non-confrontational. Competitive bidding drives suppliers down to a market-efficient pricing environment where the negotiation process can work optimally. The buyer's internal line of business groups must be willing to use any of the qualified bidders." This is the traditional way of hammering out a deal. The buyer must have enough volume to warrant interest from a sufficient number of qualified bidders. · Ability to Move. The big auto manufacturers don't usually ask a supplier. Technique 2: Differentiate Between Competitive and Collaborative Negotiations Most supply management professionals certainly would prefer to begin each acquisition from a position of strength derived from a competitive environment. The buyer must be able to move the business away from the current provider. for example. marked by hard discussions focused mainly on price and based upon concrete facts. First and foremost. Sufficient time must be available to proceed through the entire competitive process (RFx). even including single-source supplier relationships where an attractive alternative or fall-back plan exists. there need to be a number of qualified suppliers in the targeted marketplace—that is. Competition is a great way to level the playing field. including ones where you're "negotiating out of a hole. Competitive bargaining works in many situations. the following conditions must exist: · Competition. This does not mean the buyer is weak. The use of positive group problem- solving techniques. RFQ. there can be no binding commitments. It's also not a good tactic when negotiating from a position of weakness. · Willingness to Change. buyers can usually leverage a negotiation technique known as "competitive bargaining. and then approach the preferred supplier (which has sometimes been involved in the design process) with a target price that must be met. "What will this dashboard console subassembly cost?" Instead. The ability to keep things positive is a critical skill for supply management professionals. and so forth) or when accurate cost data is known for the product or service in question. Yet it's not the best tactic for complex acquisitions where dynamics in addition to price are in play. · Sufficient Volume.

The buyer's first job is to prepare the negotiation team. prospective purchase volumes. in researching data to be used in negotiation. Successful collaborative negotiations require greater skill and experience than competitive bargaining. for example. but not to pressure. and so forth—to ensure that everyone is in full agreement with the negotiation goals. These discussions typically involve a multitude of issues that must be resolved to the satisfaction of both sides. the negotiators need to understand that these various issues are interrelated. a solid understanding of the material or service being sourced. this can create a lopsided advantage for the supplier. Top negotiators have to be able to juggle multiple balls at a time in a collaborative negotiation. HR. you need to follow the Boy Scout motto of "Be prepared. There is no good excuse for being less prepared than the seller. But much additional value can be gained in the preparation stage by doing the following "extras" to fully inform your team: . you look for people who collectively bring good communication and relationship skills. marketplace position. The procurement team should spend much time gathering information before a major supplier negotiation session. Conflicts should be resolved early by escalating them to executive management. One reason for this is that the seller's sales people are often better-trained. They know the buyer's financial performance. taking caucus breaks. the 2008 Cross-Industry Benchmark Survey from ISM and CAPS Research shows that the average procurement group spends just $1. the typical supplier negotiation team is better prepared than their buyer counterparts. the positive atmosphere essential to collaborative negotiations quickly evaporates. they leave themselves vulnerable to being taken advantage of on the other elements under negotiation. Once the buying company yields to pressure from its sales opponents to focus solely on price. and so on.184 per year training each supply management professional. Put another way.000 annually training its major account A collaborative negotiation quickly falls apart if the buying organization compromises on this guideline. The cost model of the entire package can change quickly if the negotiator does not understand the effect of one concession on another. By comparison. preparing negotiation strategy. planning team member roles. Technique 3: Prepare the Team to Fight the Tough Battles When my firm trains supply management groups in advanced negotiation last year indicated that the average Fortune 100 company spends $10. company trends. An article published by Salesforce. Much of this data gathering is done through traditional sourcing tools and techniques such as proposal evaluation. and more." Generally speaking.· Yield to principle. engineering. or Hoovers. accounts payable. The seller's sales people also usually know more about the buying organization than vice-versa. reference checking. When coupled with the unfortunate tendency of some procurement groups to exclude their LOB counterparts from the negotiation process. Moreover. This requires meeting with all key stakeholders—LOB/SBU leaders. OneSource. and a clear understanding of the respective roles in the sourcing process. and cost analysis as well as through data providers like Reuters. finance. Broadly speaking. So when an inexperienced negotiation team overly focuses on one point. we drill home the principle that 75 percent of negotiation time should be spent outside of the room—that is. They also know more about their own product or service than do the buyer's procurement personnel. Careful selection of the negotiating team members is critical in this regard.

Stock analysts often have access to company information that the company's customers never see. · As part of the RFP or as a standalone item. Make sure your team always has visibility to the relationship's total cost picture and is not just negotiating isolated price points. This analysis gives a percentage breakdown of the various components of the supplier's cost model. · Understand trends affecting the supplier's major cost drivers.· Visit the supplier's website to learn about its various product lines. customers. When a particular price point changes. if chromalloy steel is a component in the supplier's products. weighted by actual historical or prospective future volumes. · Build a cost-analysis spreadsheet for use in the negotiations. But use these conversations to ask more than "Is this a good supplier?" Instead. you'll be able to instantly calculate the cost difference to see if it's a helpful concession. leverage the discussion to learn about the supplier's typical approach during negotiations. you need to understand the historical and forecasted price trends for this component. . Any information you can derive from the reference source may be helpful to your team's upcoming negotiation. and any insight into competitors to the supplier. backed up by strongly supported data. call references provided by the supplier. concessions gained by the reference. download its annual or quarterly financial reports to gauge their financial stability and understand their planned business direction. I'll often buy a share of the firm's stock in my own brokerage account so that I automatically receive these reports. Technique 4: Empower Negotiations through Factual Data Even when negotiating sole or single source transactions. new spend management technologies or techniques being employed. For example. and business announcements. · Use a data source or your own online brokerage account to download stock analyst reports that provide insight into the supplier's financial and business challenges or opportunities. it's helpful to prepare a "should be" cost analysis in advance of the supplier meetings. If I'm personally responsible for a key supplier relationship. A simplified example (for engineering services) is provided in Exhibit 2. · If the supplier company is publicly traded. details of cost structures. This should be formula driven. tactics used.

U. for example). technical support) is 18 to 20 percent of the original license fee. Bureau of Labor. "Should be" cost breakdowns can be developed in a number of ways. our firm identified several costs in addition to the license fee itself. Over the life of the product or service. resulting in a price tag of around $2. When entering into a single or sole source relationship. make sure you negotiate all cost factors—both present and future—before signing the deal. The client had already negotiated license fees and other expenses through a multi-round process. That's almost a doubling of the . Total Cost of Ownership includes much more than these elements in the equation. which includes: Cost of Acquisition (Sourcing and transactional purchasing costs) + Product Cost + Freight/Holding Costs + Disposal Cost Total Cost of Ownership But in reality. which we targeted for negotiation. · Using proposal information from competitive suppliers (of course respecting any confidentiality restrictions on such data). Most procurement professionals understand the classic formula for TCO estimation. TCO also includes such things as costs of customization. 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 far greater than the initial unit price. · Using published sources such as those from the U. operator time.000. product output. rather than hitting a wall by addressing only the final price. or other LOB group.. and then compared against the supplier's own cost accounting: · Using cost estimates prepared by your own engineering. Consider the following example. and so forth. My firm was recently invited by a corporate client to assist them in negotiating the license and installation of a large ERP package from one of the world's biggest software providers. The end result was additional cost savings of $500. installation.K. patches.S. · Using cost breakdowns for similar providers of other products or services. This type of cost breakdown can be used to effectively negotiate individual cost elements with a supplier. The average annual software maintenance expense (updates. Through careful review of the proposed license and service agreement. customer satisfaction.S. or when purchasing a capital (long-term) asset. upgrades. Producer Price Indices (in the U. and commodity indices. these elements actually may cost more than the original acquisition expense.5 million for the package. or EU. Failure to do this allows the supplier to charge premiums for other cost elements throughout the life of the relationship or asset. R&D. Purchasing Business Intelligence Center.

values. That's because the supplier knows that it's got the business. (As the co-founder of our firm is fond of saying. In keeping with this technique. the rationale is that they may become over-dependent on these sources. concepts. try very hard to minimize practices that compromise your future negotiating position. you first need to have tracked the supplier's performance over a sustained period of time. license fee over a five-year installation life. So when a supplier thinks it has a deal locked up. Instead of letting the annual support agreement get within a month of expiring at year's end." Rephrased. In these types of negotiations. Using a scorecard. our paradigm is the way we see a situation. it helps to use the supplier's past performance as a lever in negotiating future product or services acquisitions. So why do many purchasing groups license a software package that will be depreciated for five to seven years. Such a dramatic move could also provide a competitive advantage over your own competitors if they source from the same supplier. Any supplier. Contract renewals are the most obvious examples of this. Many procurement groups try to avoid buying additional products and services over and above the main negotiated items. These include letters of intent. This would certainly change the paradigm. "There is no such thing as a permanent sole source. · Acquire Other Products and Services. additional purchases can often be used to leverage the core buys. · Lengthen the Business Relationship. it's usually too late to go back and renegotiate missed cost elements. With sole or single source buys in particular. sometimes the relationship can be materially enhanced through joint marketing or product development activities. But in reality. seeks secure. consider buying the supplier and integrating them into your firm's supply chain. This can be accomplished in a number of ways. So make sure you negotiate all foreseeable cost elements at the very beginning. including: · Start Renewal Negotiations Early. such as the simple example shown in Exhibit 3. and practices that constitutes a way of viewing reality for the community that shares them. long- term relationships with their customers. Technique 7: Leverage the Buyer's Performance Sometimes we find ourselves negotiating with suppliers who already have established relationships with our company. To do this effectively. consider contacting the seller's sales team in September and ask them if they'll hold the current price firm for another year. · Joint Marketing or Product Development. trial period agreements. but only commit to one year of maintenance at a time? Instead. even a sole source one. If you have the wherewithal to do so. Technique 6: Shift the Supplier's Paradigm The American Heritage Dictionary defines a "paradigm" as "A set of assumptions. or beta test arrangements.") Few suppliers will walk away from an opportunity to secure a three-year agreement in place of the one-year deal in the original bid specs. Although many procurement managers prefer to keep supplier relationships at arm's length. · Integrate vertically. it still may be possible to change their paradigm view in a way that leads to significant advantages. is a valuable way of monitoring . 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.

Either way. it was very difficult for the supplier to refuse this request. I learned that the client company had tracked the supplier's on-time performance of services at 95 percent (which the client considered to be an acceptable level). The following personal experience illustrates the value of performance tracking in gaining leverage. we finally told them we would pay the current price level if they achieved a 98 percent or better on-time performance. the provider knew that it was the only approved supplier. tying payment to performance was a beneficial strategy for this negotiation team. our team employed a different strategy in the negotiation. On behalf of one large corporate client. Because we had intentionally allowed the seller's sales executive to tout his firm's performance during the early part of the meeting. We told them that a tiered discount should apply to lesser levels of performance. The annual value of this sole source relationship was several million dollars. . Leading into the scheduled negotiation. After going through the motions of haggling with the supplier over price. The result of these negotiations was that the buyer would receive either a built-in discount (savings) for the current level of service or a higher level of performance from a good supplier.performance that also allows for benchmarking the supplier against other providers or similar products or services. I led a negotiation for a contract renewal with a key supplier. Knowing that this sales group would be inflexible about lowering prices.

Franklin rightly observed that when someone negotiates from a position of perceived need or weakness.Strength Conditioning Benjamin Franklin once said. That's because these techniques can alter a supplier's perception of your relative strength in the negotiation process. . they are exposed to the power of their opponents. Looked at another way. And that's what successful negotiating is all about. Choosing to employ some or all of these seven techniques can turn a potentially losing proposition into a winning deal." Mr. failure to employ these techniques in difficult negotiations practically ensures a less-than-optimum outcome. "Necessity never made a good bargain. even when you may not be dealing from a position of great strength. The seven techniques described in this article have been proven to generate value.