Although supply chain managers today have access to a wide range of e-sourcing and auction technology tools, they still use conventional negotiations as the way to establish or adjust the business relationships.
Most senior procurement professionals would agree that this is the preferred way to handle alliances and strategic supplier relationships, which collectively account for a large proportion of supply chain spending.
In my many years of leading negotiations on behalf of Fortune 100 companies, and in training corporate and conference audiences on best practices in negotiations, I’ve become impressed with the levels of preparation of the typical supplier negotiating team compared to their procurement opponents.
It’s apparent that those suppliers’ teams are making the time to cover every possibility they can think of. The team on the other side of the table? Not so much.
Inventor Thomas Edison is quoted as having once said, “A genius is just a talented person who does his homework.” Many negotiation experts have rightly observed that 75 percent of the total time spent in the negotiation process should be spent in preparation activities, which should ideally include important tasks such as the solicitation and evaluation of supplier proposals, the development of a negotiation strategy, and the endorsement of the senior management team.
Nobody should ever underestimate the importance of securing the support of top management and the heads of the business groups impacted by the negotiation.
Sometimes it takes great time and energy to get the stakeholders’ buy-in for the negotiating approach. But failure to do so will impair the negotiation team’s ability to perform.
Nor should there be a question about the need to solicit and evaluate proposals from suppliers. When competitive solicitations are part of an optimal multi-stage sourcing strategy, the supply chain management team has the advantage of beginning the negotiation from a known point. The RFx process can also provide the team with valuable information about the supplier’s company.
At the same time, it is essential to craft a clear strategy for the negotiation. This strategy should formalize the primary and secondary objectives to be addressed with the supplier. It should identify acceptable ranges of solutions for each negotiable element such as the maximum supportable solution (MSS) and least acceptable solution (LSS), as well as clearly identifying the “best alternative to a negotiated agreement” (BATNA)—the fall-back plan in the event that the negotiation is not successful.(1)
These are the basics. In fact, preparation should go much further. The remainder of this article will describe seven preparation techniques that can empower the procurement team to produce a winning negotiation performance time after time. Let’s look at each technique in turn below.
Technique 1: Familiarize Your Team with the Supplier’s Company
Although my colleagues and I usually train corporate procurement groups on best practices they can use in negotiations, we sometimes train Fortune 500 sales groups on the same topic. We have come to understand that the average sales team usually enters a high-value negotiation knowing far more about the buying organization than the other way around.
Here’s one recent snapshot. A leader of a 100-person sourcing group at a healthcare organization recently told me that during a break in a recent negotiation between his team and a major supplier, he had noticed that one of the supplier’s negotiation team members had left their leather notebook open.
On the exposed pages were printouts of the LinkedIn profiles of each of the healthcare company’s negotiation team members, several bullet points of each person’s perceived “likes” and “dislikes,” and key leverage points to use on each person. This procurement executive conceded that the sales group was far more prepared for the negotiation than was his own team.
There is little excuse for the procurement team not to spend some time reviewing the supplier’s company website in advance of the negotiation event. This easily accessed information will usually provide detailed information about the supplier’s various business lines, operational facilities, growth plans, company history, and so forth.
Most supplier websites also have a page named “press releases” that can help get your negotiation team up-to-date on major events affecting the supplier.
The site will probably list some of the names of the supplier’s customers; a short time spent on Google or LinkedIn can usually help to find the procurement leader of the supplier company’s current customers, opening the door for the purchaser to contact and speak with other procurement professionals about non-confidential aspects of their negotiations with this same supplier.
Nor is it onerous to spend half an hour reading the supplier’s annual report (assuming, of course, that the company is publicly listed). This document not only provides important financial information that can be advantageous to the buying organization—everything from profitability to debt load to revenue growth—but it can also reveal business plans about capacity, expansion, and so forth.
In one case, a single fact noticed in a distributor’s annual report provided invaluable intelligence for upcoming negotiations, enabling me to save the company $2.5 million over time.
Sometimes it’s worth it to personally purchase just one share of a supplier company’s stock. It’s nice to automatically receive the company’s annual report and quarterly financial statements—and nicer still if the information they contain turns out to be critical to your personal career success.
A third technique that procurement professionals should use to become smarter about their prospective suppliers is to read the research available through their own online brokerage services (for example, E*TRADE, TD Ameritrade, Charles Schwab) in order to access stock analyst ratings and reports on the supplier company’s stock. Stock analysts are paid experts who review company operations and identify strengths and weaknesses—exactly the type of information we need to have before entering a key negotiation.
Your personal brokerage website can also be set up to flag the supplier’s stock symbol. This lets you know when there is news about the company or when the stock increases or decreases by a predefined amount.
It’s also good to use the information that your company’s finance or sales organizations may already have about the supplier. This may include information about the supplier’s financial stability from sources such as Dun & Bradstreet or Experian, general updates from news stream sources such as Thompson Reuters, and company or industry analytic information from subscription services like Hoover’s or the Corporate Executive Board.
Technique 2: Discover the Supplier’s Agenda
The procurement negotiation team can gather valuable information about the supplier’s team and its strategy even before the negotiation begins. We find it useful to e-mail the supplier’s team leader, volunteering our team to prepare a written agenda to be distributed to all participants and requesting two key sets of information:
- attendee names, titles, e-mail addresses, and phone numbers of everyone who will be representing the supplier in the negotiations and
- a list of the issues that the supplier wishes to discuss.
By combining this information with your own team’s information, you have enough to prepare a written agenda.
This “discovery” phase brings several benefits. First, you’ll know in advance who from the supplier’s organization will be participating in the negotiations. It’s very useful, for example, to know if the supplier’s attorney will be there.
With this advance notice, you can arrange to have one of your company lawyers attend the meeting. The supplier may wish to play “musical chairs” later, but this technique makes such attempts very obvious to everyone involved. The buying organization can close the door on any issues raised due to an unannounced participant.
Also, by receiving a list of the issues that the supplier wants to talk about, it’s less likely that they will surprise your team with a topic to which you’re not prepared to respond. And the buying team can sequence all the negotiation issues in a way that will build momentum in the negotiation, lead more logically to resolution of key issues, and more readily drive the negotiation toward an outcome that favors the buyer.
Importantly, the pre-questions will also put the supplier on notice about the issues on your team’s agenda. That way, they will come prepared for that interaction; they can’t easily say: “Sorry, we’re not prepared to discuss that today.”
Technique 3: Profile the Supplier’s Negotiating Team Personnel
Now that you have the list of who will probably be on the other side of the table, it’s important to try to get to know these individuals before meeting them in person. Trust takes time to earn; the more you can do ahead of time to establish the foundations of a relationship, the more you are likely to win trust.
The U.S. Federal Bureau of Investigation employs talented analysts who profile the criminals they want to capture and arrest. Just as importantly, skilled procurement negotiators should profile the behaviors, personality types, temperaments, and learning styles of their negotiating opponents. This should be done well in advance of key negotiations, and can make a huge difference in how your team deals with the supplier’s representatives.
There are plenty of ways to learn about the personalities of those your team will shake hands with on the first day of negotiations. A good starting point is to go to social networks such as LinkedIn or Facebook.
There you can very quickly get a sense of the men and women themselves—their educational backgrounds, ages, where they’ve lived, companies they’ve worked for, where their professional interests lie, what they do in their spare time, what sports teams they follow, and much more.
If the other side is a current supplier, it’s invaluable to meet with one or more of the company’s executive team several months before an important negotiation. The meeting can take place as part of a typical supplier relationship review or it can be set up as a casual business lunch.
Another method is to strategically ask the supplier’s sales representative or inside customer service person a little bit about the executive’s personality type and management style. As long as the negotiation is not in the immediate future, they will usually be glad to provide this information.
And once their opponents are profiled, the negotiation team will be empowered to deal with their leaders in a more innovative manner.
Technique 4: Review the Supplier’s Performance History
There’s an old expression that says those who cannot remember the past are condemned to repeat it. While that may not be strictly true, it certainly underscores the importance of checking on any past relationships between buyer and supplier. Information about the supplier’s past performance can be extremely valuable when negotiating a new relationship.
Assuming that your company has a good supplier management program in place, then it should be fairly straightforward to review the opposing party’s performance records and scorecards. It’s also very useful to interview anyone from your organization who has managed earlier relationships with this supplier, as they may have useful advice for the negotiating approach. They can also provide helpful information about the supplier’s history of performance for your organization.
Several years ago, our firm helped a large company to renegotiate an important outsourced technology service relationship. This was a single-source circumstance, and thus our negotiating team had little leverage. The company’s management team warned us that the supplier had successfully increased its prices at all prior contract renewals.
Sure enough, the supplier notified the company of a cost increase before we even entered the negotiation session. Seeing what we were going to be up against, I asked our team to review the supplier’s historical performance with them.
One key metric put the supplier at a historical 95 percent performance level—a level that was acceptable to the company that we were helping. Our investigation of the supplier’s published marketing materials revealed statements that said most of their customers experienced a 98 to 99 percent performance level for the same metric.
So when we entered the negotiations, we took a different approach: We indicated that we would agree to a modest fee increase but nothing near what the supplier had proposed. The supplier’s team was somewhat surprised.
Later, we told them that our company would only pay their proposed fee level if they provided the 99 percent level that they said they delivered to others. Anything less would invoke tiered penalties. Specifically, for each percentage point drop in monthly performance, we insisted on a 3 percent reduction in total fees.
The supplier reluctantly agreed. Two years later, they have still not improved their performance to the promised level. In that time, our client company has received an ongoing 12 percent cost savings.
Technique 5: Select and Prepare Your Negotiation Team
It shouldn’t be necessary to say that each member of the buyer’s team should be very well prepared for the big day. But in our experience, many procurement negotiators still short-change this basic.
The fundamental step is to ensure that the right players are on the negotiating team. Ideally, they should have been on the cross-functional sourcing team that has been preparing for the negotiations. They should have a common understanding of the history leading up to the negotiation and the goals for it.
Team members should be chosen, or excluded, based on their leadership and negotiation abilities. Your team must comprise decision-makers who cover the scope of the negotiable elements to be discussed.
We mentioned that the wrong team members should be excluded. Let’s face it: There are some employees who really shouldn’t be part of a negotiating team. It might be the senior manager who always manages to work around procurement, or the engineering director who is friendly with one of the supplier’s vice presidents. Or it might simply be the manager who always gives in to other’s requests.
If you are obliged to include a “problem person” or weak player for political or positional reasons, consider a divide-and-conquer staffing strategy. Using this approach, a large negotiation group might be broken into specialty sub-teams to limit the involvement of certain people. This approach worked very well during a sourcing project for one of the world’s largest insurance companies.
The insurer wanted to replace more than 2,000 of its multi-function devices, copiers, printers, fax machines, scanners, and other digital office equipment. The buying team had gone through the strategic sourcing process and narrowed the field to the leading finalist, which was invited to the insurer’s headquarters for a week of negotiations.
Unfortunately, one of the insurance firm’s senior information technology professionals fell into traps set by the supplier—enhancements that the technology person found hard to resist.
Observing this, my team suggested that the negotiation teams could be more effective if broken into sub-groups focused on technology, commercial terms and pricing, and legal contract terms.
The technology person was assigned only to the technical team, and we narrowed the focus of the other teams. The results? The insurance company saved $5 million a year through the concessions this supplier made during the subsequent negotiations.
With the team assembled, it’s then necessary to assign responsibilities. Of course, each individual will have been picked for his or her organizational responsibilities, but each must be assigned additional responsibilities that facilitate the smooth functioning of the team.
One person should be assigned to take notes, for example. Because it is the buying organization that should volunteer to create the agenda, it also should be the one that prepares and distributes meeting minutes that reflect the buying organization’s careful notes on the negotiated concessions.
Another person might be assigned to perform financial calculations, probably using a Microsoft Excel workbook that can recalculate total cost of ownership with simple cell entries.
Others might be tasked with observing and reporting on body language exhibited by the opposing team, or noticing which opponents are taking notes, and with what kind of intensity.
Technique 6: Rehearse Non-Verbal Signals
If your child’s soccer or baseball coach can successfully communicate and rehearse hand signals with her young players, so too can your negotiation team. Simple non-verbal cues can be a great asset during negotiations.
At a minimum, the buyer’s team needs to understand when to stop talking, or when to change the direction of the discussion, or when to take a break to caucus among themselves. The signals do not need to be theatrical or exaggerated; they can be as simple as tapping or clicking a pen, touching an ear, or closing a notebook.
Mobile phones set on silence or vibrate can also be used with care to transmit short text messages. But it is important to avoid the obvious effects of having multiple people reading or typing during the negotiation process.
Failure to have pre-arranged signals—and to have rehearsed them properly well ahead of the meeting—raises the risk that difficult topics may be aired in front of the opposing group or that the buying team will lose momentum or appear disorganized.
You do not want to be in a situation where your last resort is to kick a colleague under the table to stop him or her from sharing confidential information.
Technique 7: Develop and Complete a Strategy Worksheet
The negotiating team should go through a structured strategy development process well in advance of the meeting with the other side. That process, which may involve review or creation of many pages of analysis, can typically be summarized in a simple negotiation strategy sheet.
It is amazing to observe some supply chain professionals who have not laid out their negotiation strategy in writing. Just a little confusion about the key elements or targets of the negotiation event can result in a team member saying the wrong thing at the incorrect time.
Just as an army or sports team graphically lays out its strategy, a procurement negotiation team needs to set forth its strategy in writing to ensure full understanding and buy-in from the team members. Having the strategy summarized on a negotiation worksheet also can help the team to review its objectives just before entering the negotiation room.
Under no circumstances should you ever let your opponents see your summary sheet or planning materials. I firmly believe that every salesperson is taught, at a very early stage, how to read writing upside down. My own experience in procurement negotiations also has taught me to read things upside down across a table.
So what’s the best way to have your worksheet available but not visible to the other side? Go to the supplier’s website and right-click on their logo. Copy it to the middle of a clean Microsoft Word document, title the page something like “Negotiation with ACME Corporation” and then staple the document in front of the strategy worksheet and supporting documents.
The supplier will be surprised that your company is taking the negotiation more seriously than their other customers. And your team’s confidential information will be protected.
Electronic tools like an iPad can be used to display strategy information. But again, it’s important that the team members aren’t focusing on their electronic devices rather than participating in the negotiation itself.
Success Goes to the Well Prepared
When high-value contracts and supplier relationships are at stake, the company that is better prepared is the one that will sail through tough negotiations confidently—and with outcomes very much in its favor. Importantly, that confidence will come because you have spent the time and effort to prepare, not in spite of it.
There is no more perilous negotiation scenario than being over-confident to the point where you believe that preparation need only be minimal. It is equally dangerous to underestimate the capabilities of the supplier’s negotiating team.
It was Abraham Lincoln who once said, “If I had eight hours to chop down a tree, I’d spend six sharpening my axe.” Those are words with which to win every supplier negotiation.
End notes: (1) Roger Fisher and William Ury, Harvard Program on Negotiation (PON)
Mark Trowbridge, CPSM, C.P.M., is a principal at supply management consultancy Strategic Procurement Solutions.
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