Category Archives: Negotiations

Molly Fletcher’s 5 Mistakes Everyone Makes in Negotiations

Yesterday at Jaggaer Rev 2019, the best presentation was the guest keynote speaker. While the vision from Bonavito was interesting, and an overview of the enterprise technology journey to date from Zahiri was illuminating for those who haven’t been in tech for almost three decades, neither were very enlightening with respect to how current and potential customers could do a better job of Procurement right now.

On the other hand, Molly Fletcher’s talk (of the Molly Fletcher Company) really hit home and didn’t overlook the fact that at the end of the day, every strategic engagement will be between people who will put the final touches on a contract that, once signed, will govern a relationship for years to come. Moreover, when you negotiate a good contract, both parties understand up front what the other is looking for — and this usually means that you can literally set and forget the contract until renewal time (but still have confidence and assurance on the off chance something goes wrong).

So what are the mistakes? And how do you overcome them? We’ll get to them. But first, it’s only fair to tell you that we’ll be trying to explain the five mistakes — and corrections — in source-to-pay terms, as opposed to the much more exciting — and real — sports (negotiation) terms that Molly, a sports agent rock star, used. (In other words, her presentation is exciting and engaging … and you really should see it if you get the chance, or, even better, organize it when you get the chance.)

1. Not Knowing Who You Are Negotiating With

Some negotiators think that who you are negotiating with doesn’t matter — it’s all about the negotiation and getting the best deal. And while it can be all about the negotiation and getting the best deal if that’s what both sides want, this is only going to work if both sides are interested in (almost) the (exact) same thing. If both sides only care about the number at the end of the day, it might work. But if one side only cares about the number but the other side cares about the future direction of the organization they are partnering with and how the product, service, or overall relationship is going to improve and grow, then the negotiations aren’t going to go anywhere.

On the other hand, if you know what matters most to the other organization, and what they want at the end of the day, and address that continuously during the negotiation, you have a much better chance at a negotiation that is not only smooth, but truly profitable. If what the other side wants the most is not the most important factor to you, a few concessions on the other party’s wants can lead to more concessions against your wants. If the other side just cares about the price, and you waver a little bit, they might throw in more services or better delivery terms or R&D support.

2. Negotiation is a Transaction

The outcome is a transaction in the form of a contract, but the negotiation itself is not a transaction. The negotiation is a relationship where both parties want to continue the interaction with the goal of coming to an agreement that will see both parties working together for months, to years, to come. If you overlook the relationship, you may never get to the transaction.

3. Getting Offensive

All offensiveness does is cause the other party to become defensive. And defensiveness never results in an open dialogue where the other party is looking for a way to overcome the disconnect between the desired outcomes of both parties and cross whatever perceived impasse has been reached. The solution here is to instead get curious, ask questions about possibilities, or orthogonal opportunities, that will instead get the other party to open up about what they really want or what they might be able to do if they can’t meet your need in a direct fashion.

4. Everything Has to Happen Now

Presuming you are starting a negotiation before you need the product or service, or a contract renewal before the contract ends, you have time — and usually more than you think (even if you have to expedite a shipment). Just because your timeline says you should finish in a week, that doesn’t mean you have to. Sometimes the other party just needs time and a little time can make all the difference — and the more strategic the negotiation, sometimes the more time you need. And even if it means you are without an agreement for a month or two, or buying from the spot market, it’s not always the right thing to rush a strategic negotiation. If the negotiation could result in a 5 year long-term deal that is more valuable than any extra costs you’d pay in the short term as a result of a short delay, especially if the supplier or partner could be strategic and bring innovation and value to your organization you could not get otherwise, can often be more than worth it.

5. Not Asking with Confidence

Always ask with confidence. Do your research. Know your facts. Know what you are asking for is reasonable. And then ask with confidence. Not only will you not get what you don’t ask for, but you won’t get what you do ask for if the other party has any sense at all that you expect you might not get it. Be confident … always. (But don’t be foolish. It doesn’t matter how confident you are, you won’t get a price below the supplier’s cost of goods, for example. But it never hurts to challenge the margin.)

If You’re Still Negotiating With the Carrot and the Stick …

… you’re not getting anyone’s attention but good ol’ Bugs. And, generally speaking, giving all the hijinks he causes, it’s best if his attentions are focussed on your competition.

So how should you be negotiating? With facts. Preferably binders of facts (but they can be in e-form on your tablet — no need to kill trees unnecessarily.)

Facts that show:

  • you know what the product should cost to make,
  • you know what margin should be healthy for the supplier,
  • you know what value-add services the supplier can offer more economically than you,
  • you know what performance metrics are reasonable, and
  • you know what the market offers are right now (and whether or not the supplier can beat them).

Suppliers don’t respond to sticks if they believe you really need them and they can get away with what they want, nor do they respond to carrot if other customers seem more enticing. Plus, they will wonder what crawl-out shelter you just climbed out of because no one from a modern organization negotiates like that anymore.

Especially if they are a typical sales organization that is all about the relationship (and talking win-win even if their definition of win-win is win for the organization, win for them at bonus time) or a more modern, Gen-X led, millennial-influenced organization that’s all about the synergy.

In the first case there will be value pitches followed by claims no one can do what they do as well and lots of smooth talk to get you off guard for when they indicate that their price (even if it has a margin that is twice industry average) is really as good as it gets and the latter will try to entice a deal from the synergy.

But regardless of organization type, every organization will respond to fact-based negotiations. With fact-based negotiations, they can’t hide fat margin behind claims of high cost, high-value, or synergy as the only way they can dispute your models, metrics, and market insight is to provide their true costs (or own research from third parties if they expect their costs to rise over the expected contract term).

And the above isn’t that hard to gather. It might take some elbow grease and a category expert, but once you’ve built the proper model and identified the proper data sources, it’s quick to update.

All you need for a fairly accurate should cost model is:

  • the bill of material break down
  • the typical energy required to produce one unit (kWh)
  • the typical labour required (labourer hours by labourer type)
  • the average industry margin

If it’s a contract manufactured product, you have this, if not, you can get an industry expert to help you craft a typical bill of materials. Your current supplier, or an industry expert, should be able to roughly estimate the typical energy overhead (based on typical production process). Similarly, your current supplier (or industry expert) should know average labour requirements against the production line.

All that’s left is understanding the acquisition cost of the materials, energy, and labour. Most raw materials are traded on exchanges, so it’s easy to get an average market cost. Most countries either have electrical utilities as state owned organizations or as highly regulated private organizations with standard prices per kWh. And most countries or labour bureaus compile average labour rates. Industry insight gives you standard margins, and you can see it’s not hard to build a reasonably accurate should cost model with expertise and elbow grease. And since the only way for a supplier to challenge it is to provide their costs, you can get even the model more accurate if their costs are actually higher. (And if they don’t challenge your model, then its relatively accurate or their costs are actually lower. In the latter case, they might get a bit more margin than you want to give in negotiations, but chances are you’ve lowered your cost as well with the model.)

This just leaves an identification of what services they can likely offer more economically, which again comes down to good modelling, and performance metrics (along with cost / profit impacts), which you should be gathering across your supply base. Then you can negotiate for better performance metrics (with penalties if they are not met) with an incumbent that isn’t doing as well as they should and wants to keep the business, or baseline metrics with a new supplier that wants the business based on current average performance across the supply base for the metric in question.

So gather your facts, and give yourself a true edge in negotiations.

The More Things Change … Negotiations

Ten years ago we posted timeless principles to steer you through negotiations and, looking back, they truly were timeless. Each is as true today as it was then as they were a decade before we summarized them.

Negotiating is not about dividing up a limited pie in ways that are divisive. It is about making a bigger and better pie.

If each side sees the pie as small, then each side is going to want a bigger piece of that pie. But if the pie is large, both sides will be happy with a piece that is about half.

Conflict is at the heart of negotiation but only a positive view of conflict will result in a successful outcome.

Both sides must believe that a resolution will occur that both sides will be happy with.

There is a time to speak and a time to shut up in negotiations. When you do more listening than speaking, you actually increase your power.

If you don’t understand what the other side wants, really, really wants, then how do you know what you really need to give up and what you don’t? After all, you must

Recognize that you will only reach agreement by understanding the deeply-held needs of the other side.

Both sides make a lot of demands, but at the end of the day, only a few of the demands will generally be non-negotiable.

In power negotiations, when the stakes are high, let the other side believe what you or they want them to believe. But don’t lie or be dishonest.

If you can distract them away from what the biggest value is to you, it might help.

You can only succeed in negotiations with a win-win attitude.

As per our first point, you have to be focussed on enlarging the pie so you can divide it up in a way that both sides see a win.

Negotiating is an essentially human way of interacting.

That’s why you will get to keep your job when Procurement bot takes over inventory, re-ordering, spot-buying, and the vast majority of your job.

Are Your Suppliers Ripping You Off?

A recent post over on the public defender‘s blog asked if suppliers [are] still ripping us off. And it’s a good question, because it’s a common, constant, fear that is never talked about. Not only is it often the biggest elephant in the room, but it’s the biggest herd of elephants as there’s typically one in every room of every buying organization.

But rather than asking an array of speakers what their thoughts are, we’re going to get right to the point and give you the answer, which, surprisingly, can be summed up in six words.

That depends, are you letting them?

While your job in Procurement is to get the best damn deal you can, keeping costs as low as possible while keeping the benefits high to maximize value, the sales person’s job who is selling to you has, as their job, to get the most amount of money for the least amount of product and service, maximizing their profit and, more importantly, their bonus (which is typically 100% tied to the order value).

If you don’t do your homework and establish the true market price or true should cost price, then its likely that they can convince you that a 3% decrease on their current price (which is 30% over should-cost) is a savings and you walk away thinking you won when you are still being ripped off big time. We have to remember why so many suppliers were, and in some case, still are, resistant to e-Auctions — because these expose fat in supplier margins faster than any other sourcing exercise when you invite new, hungry, suppliers who will lower their margins just to win business.

In certain verticals, such as electronics and office supplies in particular, most suppliers make their profit by charging you as much as possible, which they do by offering you great prices on a small set of products and markups on a large set of related products that your users are just as likely, or more likely to order. For example, an office supplies vendor will give you the best deal on the 5 park of laser cartridges but the 10 pack will be 3 times the cost of the 5-pack, and the office manager, wanting to minimize orders, will order the 10-pack not knowing the 5-pack is the preferred product. And in electronics, they’ll give you a great deal on system configurations that sound good, but are sub-optimal, and then make money on upgrades a year later. For example, a desktop with the brand new processor, lots of space, and a HD screen, but only 4 MB of RAM when they know the default usage means that the machine should really have 8 MB of RAM. But there are only 2 slots, so both chips will have to be replaced at full retail rates down the road (as no special pricing was negotiated on upgrades, only full system replacements).

But it’s not just your indirect and MRO suppliers that will pull a fast one, any sleazy salesperson who sees an opening with a buyer who didn’t do their homework will pull a fast one. So if you don’t do your homework, and negotiate fact based, your organization is probably getting ripped off. Even if the costs are close to what they should be, chances are lack of hard fact-based negotiation means you missed out on value adds.

In summary, This Song’s Just Six Words Long, and whether or not you get ripped off is entirely up to you.

Anchoring Doesn’t Have to be a Problem …

… or even a concern, if you approach negotiations in a fact-based manner, instead of a seat-of-your-pants manner, like most negotiations are approached.

What are we talking about? We’re talking about the tendency for us to fix our thoughts around a particular number, point, or fact rather than thinking logically and independently about a decision. In particular, the fixation that occurs when people consider a particular value for an unknown quantity before estimating the quantity. From that point on, the estimates then stay close to the number considered, even if the estimate is way, way off. The absolutely proven phenomenon discussed in detail in the public defender‘s recent pro piece over on Spend Matters + on how to hone your procurement negotiation skills by learning the right way to think (fist part free, full article requires membership).

Anchoring happens if you begin your negotiation or event with a price that is based on current price, a recent supplier quote, a market index, or some other number that may or may not have any basis in reality. Anchoring is avoided if you start with a price that is based on a should cost model, for a product, or an amalgamated index by a large analyst firm or statistics bureau for services category.

The should cost model should be based on a detailed cost breakdown that takes into account raw material costs (at market indexed rates), average labour costs for a region, average overhead costs, and any advances in production technology. A current cost, a current market cost, or even a project cost from a trusted supplier is not a should cost – and negotiations should ALWAYS be based on should cost. It might seem a waste of time for a product you’ve sourced ten times over the past ten years, or a service that you’ve paid the same rate for from three different manpower suppliers over the past three years, but that’s a very small sample of the market price at large, or the should cost price.

So do a detailed should cost model (or, for a service, detailed market research and break it down against average salaries available through a number of portals, augmented with standard contractor / manpower / outsourcer mark-up) and start your negotiations around that reasonable, logical, point — even if it’s half of what the supplier is quoting. Remember, you can scream that they take their unreasonable cost off the table or you walk because you can say “look, I have a should cost model right here that backs up the reasonableness of my number — so we’re starting within 20% of this and adjusting as necessary, or we’re not starting at all”.