In Part I we recapped Sourcing today, in Part II we did a deep dive into the key requirements of the review step as it is today, and then in Part III we did a deeper dive where we explained that while some steps were critical for a sourcing professional to undertake, others, while necessary, were a complete waste of skilled talent time as the majority of the tasks could be automated. Then in Part IV we began our deep dive into the needs assessment phase which we completed in Part V. This was followed by a deep dive into strategy selection in Parts VI and Part VII, the communication step in Parts VIII and IX, and the the analysis step in Parts X and XI. And upon review of these steps, we’re still at the point where some tasks have to be done by humans whereas others can be mostly automated. We’re becoming fairly confident that this is true across the entire sourcing cycle, but we can’t be completely sure until we complete our analysis, so that is what we are going to do this week.
In the next step, the negotiations step, we have the following primary sub-steps:
- Format Selection (online, offline, hybrid)
- Fact Prep
- BATNA fallback
- Audit Trails
In the format selection step, the senior buy decides the primary format in which the negotiations will take place. If it’s a low dollar or non-strategic buy, the buyer might conclude that the negotiations can take place entirely on line through offers and counter-offers, through a system that can ensure offers and counter-offers cannot be altered If it’s a high dollar strategic buy, the buyer might decide that all negotiations and communications of any kind must take place in person behind sealed doors. And if’s somewhat important but only mid-price, the buyer might decide that initial communications, offers, and counter-offers can take place on-line through a secure platform with unalterable audit trails and when both parties at least have a solid understanding of the other side, final negotiations will take place in person.
In the fact preparation phase, the buyer undergoes the collection of all information that could be relevant in the negotiation. Market costs, should cost models, supply and demand trends, customer needs, supply alternatives, and so on. This will consist of the relevant information collected in previous steps from the market, the supplier, and the organization’s systems. It will be synthesized into a cohesive set of documents, tables, and facts that can be used in negotiations to the benefit of the buyer so that, at the ver least, the buyer enters negotiations with knowledge.
In the BATNA phase, which stands for Best Alternative To Negotiated Outcome, the buyer determines what the backup plan is if the negotiation does not conclude successfully and lead to an agreement which is captured in a contract (which, even though listed as a separate phase, is a simultaneous phase that occurs during the lsat step of negotiations). Will the buyer take up negotiations with another supplier, temporarily buy on the spot market, or try to extend the current contract? If it’s a spot buy, will it be through a one-time auction or through a catalog from a non-preferred / non-contract vendor? If negotiations fail, especially if time-lines are tight, the buyer needs to be able to put a back-up plan into place quickly. Plus, if the buyer has a back-up, that limits the pressure that the supplier can put on the buyer.
Finally, the audit trail is not so much as a phase as the collection of the output of each step of the back and forth negotiation (which could take anywhere from 1 to n steps, for n quite large) that occurs between both parties. This step tracks who made an offer, who made a counter offer, who commented on the offer or counter-offer, what information was revealed by a party (or counter party), and does so in a secure, unalterable, queryable fashion that can be reported on at any time.
Except for the auditing, which you expect systems can automate, this sounds largely human driven as we choose the negotiation format, we need to get our facts in order, and we need to determine the best alternative to negotiation agreement, but, as we’ve discussed during previous steps, sometimes what sounds human driven isn’t. Sometimes it’s just human verification. But this is a subject we will explore in Part XIII!