Category Archives: Negotiations

Buy, Buy, Buy, Once Bitten Twice Shy

Many procurement functions and executives see price negotiation and reduction as the primary element of their role. In doing so, they run the risk of missing out on the major benefits that can be obtained by focusing on other aspects of the wider value picture.
Full Value Buying: Moving Beyond Price Negotiation, Peter Smith & Jon Milton, 2015

Why? Is it because they think price trumps all? Is it because they don’t think there’s value in non-price factors and services? Is it because they once focussed too much on the bigger picture, didn’t do their homework, greatly overpaid, did not realize any savings, got hung out to dry, and are now once bitten, twice shy? And does it really matter?

As SI has been proclaiming for years, it’s not TCO (Total Cost of Ownership), it’s TVM (Total Value Management). It’s not how much you pay, it’s the return you receive. As Finance will tell you, it’s all about the ROI. Paying a bit more for a value-added service from the supplier that saves you money is a good return. Paying a bit more in a dual-source strategy to large suppliers with high-volume production lines to prevent otherwise likely stock-outs is often the best insurance policy you can buy. And paying a bit more to use a supplier you are certain does not use child labour, does not subject its workers to poor working conditions, and does not use conflict minerals, banned raw materials, or illegally obtained goods and services costs a lot less than the PR nightmare and lost sales that could result from a brand scandal.

But these are just some ways to increase the value of a purchase. In Mr. Milton and Mr. Smith’s latest paper on Full Value Buying they describe techniques, such as specification improvement and demand management that can generate returns above the 10%+ that an organization can typically save through skillful spend analysis or decision optimization (which are the only two traditional sourcing techniques that generate consistent year-over-year savings in the double digit percentages).

In the paper they address four major mechanisms that can affect the cost of a buy and the upper bound on cost savings that each factor can traditionally bring:


Mechanism Saving Potential
Purchase Price (TCO model) 20%
Specifications 30%
Whole-Life Factors 50%
Demand 50%


These numbers may seem high, but consider the following. Changing the specifications slightly to allow a lower cost material to be used which can also be used in a more efficient (and cost effective) production process can easily shave 50% to 90% off of 40% (or more) of the cost if a (rare earth) metal that costs $50 an ounce is replaced with a metal that costs $10 an ounce. Changing the design that allows the product to be easily disassembled and valuable metals recovered (upon forced recovery subject to environmental disposal laws) can turn a losing collection business into profitable recovery one. Buying Accounts Payable and Marketing extra monitors so they don’t have to print PDF invoices to enter them or documents they need to reference when composing project specifications can cut organization paper demand by over 50%. And these are just a few examples.

the doctor strongly encourages you to check out Mr. Smith’s (co-authored) latest piece for more details on how these mechanisms can be applied across a range of categories to not only bring costs down, but even value up to the organization. After all, he went to Washington. (Figuratively and literally.)

What The A-Team Can Teach Us About Supplier Negotiations, Part II

Today’s guest post is from Mason Lee, Manager of the Strategy and Operations Practice at Archstone Consulting, and Matt Kucharski, a Senior Consultant in the Strategy and Operations Practice at Archstone Consulting, a division of The Hackett Group.

In Part I, we discussed how the Hackett Group’s point-of-view on Strategic Sourcing Negotiations is that it is a team effort, and that you should be sending in your A-Team. We also overviewed the role of “Face”, the Frontman. Today we will discuss the rest of the roles.

“B.A”. Baracus – The Muscle
When all else fails, sometimes you need to bring the pain and, to do that, you are going to need some Muscle. “B.A”. pities the fool who takes NO for an answer. At the negotiations table, people often have a tendency to stop when they first hear that word. If you want to maximize the result of your negotiation, be sure to bring your “B.A”.; his role on the mission is to handle challenging topics like price. Just make sure that you have enough ammo (fact-based analysis) to give him the confidence to negotiate aggressively.

While supporting our client through their negotiations with a major Hotel chain, both parties were far apart on price. The hotel representative continually stated that the room rates offered were the best they could do and insisted that they did not have visibility into our client’s historic spend and stay volume. Armed with analysis, our “B.A”. presented the client’s historic data and proved more aggressive pricing was warranted if the chain desired to keep the business. As a result of providing proper ammo and “B.A’s” inability to take no for an answer, an incremental 15% savings was achieved.

“Howling Mad” Murdock – The Unconventionalist
In many circumstances, it is impossible for a sourcing professional to know as much about the category in question as the subject matter expert they are supporting. In these circumstances, do not be afraid to bring in “Howling Mad” Murdock, your subject matter expert, to help you develop a creative approach and gain credibility as a result of their knowledge. Since some subject matter experts may not be experienced in negotiations, it is valuable to conduct a preparation session with the individual in order to gain alignment on the objective; if you just turn them loose, you never know what may happen.

During the course of lengthy negotiations between our client and HVAC providers, progress was at a standstill. Our client was facing an increase in equipment pricing from all engaged providers. Out of conventional options, our “Howling Mad” Murdock saw an opportunity to expand the scope of the negotiations and bring HVAC services into the mix. By combining equipment and services, our client was able to contract with a single supplier for all their needs and realize 20% in savings.

Hannibal – The Tactician
During the course of negotiations it is important to observe and proactively modify your plan based upon the actions of the supplier. “Hannibal” knows how to do this best. After establishing your preliminary strategy, it is crucial to be able to modify your ground-game based upon what you observe. Is a supplier representative highly analytical? Time to bring out the reports and quantitatively demonstrate where you stand. Is the supplier agreeing to everything? Maybe you have not asked for enough and need to recalibrate.

During negotiations with a German-based metals supplier we hosted, company representatives clearly believed they had won the business, were stonewalling, and were engaging in side conversations at the table. Our “Hannibal” knew it was time to act, calling for a break. During the pause in action, the team revised tactics and sent in the Sr. VP (who had been previously quiet) with a stern message and strong proposal. Our “Hannibal” also decided that only the Sr. VP should speak while the rest of the team remained silent and stoic to reinforce the seriousness of the proposal and shutdown cross-talk. The result of “Hannibal’s” plan was an additional savings of $500K.

The next time you reach the point of Supplier Negotiations it is of the highest importance that all planning, strategizing and due diligence have been completed before attempting to channel the characteristics of the A-Team. A great negotiations team should have the ability to leverage the expertise of “Hannibal”, “Face”, “Howling Mad”, or “B.A”. in order to capitalize on the unique elements that arise. At the end of the day, you’ll “love it when a plan comes together”.

Thanks Mason and Matt for this great two-part post!

What The A-Team Can Teach Us About Supplier Negotiations, Part I

Today’s guest post is from Mason Lee, Manager of the Strategy and Operations Practice at Archstone Consulting, and Matt Kucharski, a Senior Consultant in the Strategy and Operations Practice at Archstone Consulting, a division of The Hackett Group.

From 1983 to 1987, The A-Team delivered five seasons of action-packed episodes to its cult following. The ex-U.S. Army Special Forces unit, turned mercenaries, were constantly on the run for a “crime they didn’t commit”. The four “soldiers of fortune” who made up the team were Colonel John “Hannibal” Smith, Lieutenant Templeton “Face” Peck, Captain H.M. “Howling Mad” Murdock, and Sergeant First Class Bosco “B.A”. Baracus. The sitcom has left its mark on popular culture through its iconic van and catchphrases. But the creators of the A-Team were unlikely to be aware that they were also providing us with valuable lessons in Supplier Negotiations.

Supplier Negotiations are a critical step within the Strategic Sourcing process. After profiling a category, developing sourcing strategies, and engaging the market, it is time to more personally engage your potential future state supplier(s). The Hackett Group’s point-of-view on Strategic Sourcing Negotiations is that it is a team effort. Your A-Team should be comprised of individuals with different skill sets in order to increase its strength and ability to adapt.

“Face” – The Frontman
“Face” had a knack for making friends everywhere. “Face” was the master of the win-win, excelled at breaking the ice, and had an ability to get both parties feeling good. On your negotiations team, “Face” is the persuader and consummate influencer of the group. Use your team’s “Face” to open up the meeting and set the tone or when negotiations get rocky, consider channeling your inner “Face” to diffuse the situation.

In the show, “Face” also had a knack for scrounging up whatever resource the team needed no matter where in the world the team was. You can apply this invaluable ability in business. When negotiating with incumbent suppliers, chances are that there are opportunities for you to become a better customer. Give your incumbent the opportunity to constructively communicate what is not working optimally for them then send your “Face” back into your organization to locate a solution.

We had a negotiation in which our supplier and buyer were equally frustrated with each other (to the point of shouting and nearly ending the relationship) because the supplier was missing orders and the buyer’s orders kept changing. Our “Face” intervened, calming everyone down and eventually helped the supplier revise its planning systems all-the-while also going back into her buying organization and securing commitments to provide better forecasts.

Come back tomorrow for Part II!

Thanks Mason and Matt!

An Interesting Piece on Physical vs. Virtual Negotiation

Last summer, eSide ran an interesting article on how (and where) you negotiate matters that overviewed different types of negotiation techniques and which work best in person, over the phone, and through e-mail. Given the amount of time that one spends on the phone, and, particularly, online (using e-mail and instant message communication) using a modern strategic sourcing system, this is now basic information that every Supply Management professional needs to know.

The article starts off by noting that negotiations are generally most productive when conducted in person, which is obvious when you consider that behavioural researchers say we lose 75% of the (nonverbal) communication content when speaking on the phone. The take-away from this is that all critical / high-value negotiations that are expected to result in the signing of a contract should be conducted in person. This doesn’t mean that all aspects of the negotiations need to be conducted in person, as you could conduct the initial rounds of a multi-round negotiation by phone or e-mail as you are working your way through the process to select a vendor of choice, but that the final negotiation should generally be in person.

Then it notes that there is strength in numbers. A team will always have an advantage over a single opponent as different members can play key roles that make the approach highly effective. However, it does not that there is an optimal team-size, and that a team that is too big can hinder as much as it helps. (It also has to have an empowered leader whose final say is final.)

For a telephone negotiation to be effective, you have to be prepared. Good interrogatives/questions draw information out from the other party during the discovery phase of the negotiation process. Inversely, bad interrogatives/questions don’t.

E-mail negotiations give the impression that you want the relationship to be arm’s length. If this is not the case, then you probably shouldn’t use e-mail for anything more than to gather information as a precursor to a telephone and/or in-person negotiation.

If you do use e-mail, remember the following:

  • once you give your position in writing, it’s harder to change it,
  • email encourages prompt, direct response, leaving little wiggle room,
  • it could indicate that you aren’t comfortable negotiating in person, that you can’t make decisions without consulting with someone else, or that you don’t have the time for the recipient,
  • it can put you at a nonverbal disadvantage (depending on the situation), and
  • it can be used to bypass you!

The advantages and disadvantages of e-mail work both ways! Just like a supplier can be at a disadvantage if they commit their position to writing first, you can put yourself at a disadvantage if you commit your position first. Similarly, just like a supplier will be at a disadvantage if he’s not used to e-mail negotiations, you can be at the disadvantage if the supplier is an expert at e-mail based negotiations, phrasing, and legalese and you’re not. Finally, and most important, just like you can use it to bypass a low-level supplier sales rep and get right to the VP, you can be bypassed if the supplier get’s a hold of your stakeholder’s direct e-mail! So while the article might focus on the advantages of e-mail based negotiations, it’s more important to keep the disadvantages in mind as one-slip up and you’ve given the supplier the upper hand.

But the most important thing to remember when negotiating by e-mail:
you may, technically, put a legally binding contract in place by agreeing to something the other party offers in an e-mail! Certain bodies of law (including the most recent changes to Article 2 of the Uniform Commercial Code) now explicitly regard electronic correspondence as being “in writing”. (See 2-211 [3] in particular, for example.) Take heed!

Intesource – A Strong Sourcing Solution for Mid-Market Supply Management

When we last covered Intesource almost three years ago in 2010 in this post about intelligent sourcing through Intesource, we noted that this full-service offering eSourcing provider had a fully-featured e-Negotiation platform with SIM, document/contract management, and a relatively unique integration with Microsoft Sharepoint for those clients that ran on a Microsoft back-office and wanted to use these solutions to collaborative author documents and track changes.

Besides integration with the Microsoft platform, which is very common in the mid-market that can’t always afford, and often doesn’t need, the massive ERP solutions found in the Fortune 1000/Global 3000, other unique differentiators at the time were their massive template library for e-Negotiation events, integrated feeds from over 160 market exchanges for up-to-date raw material and commodity price information, and hands-on experience running tens of thousands of events. This put them in a restricted group of providers.

Since then, they have continued development work on the platform and added additional functionality that not only enhances the end-to-end strength of the platform, but narrows the group of competitors that can say the same. Three particular enhancements stand out — award analysis, market price centre, and mobile interfaces. We will describe each in turn.

Intesource has added an award optimization component that, while not true strategic sourcing decision optimization, is a very useful analytic component that will allow a buyer to determine a near-optimal, if not optimal, award for non-complex sourcing events. In the new component, buyers can create multiple award scenarios based on pre-defined rules, such as low-quote (which selects, for each item, the supplier with the lowest bid), low-group (which selects, for each group, the supplier with the total lowest cost for a group, or bucket, of item), or low program (which selects the supplier(s) with the lowest cost based upon a program specification, which could be to select suppliers with the highest quality, shortest-lead time, or MWBE specification where possible); or by hand-picking suppliers for each item and/or group. Then, the buyers can compare each scenario side-by-side to see how the different scenarios compare and what is gained for each price sacrifice.

Intesource‘s award optimization module is not true optimization in that there is no underlying model, it doesn’t support cross-item / group rebate / discount bids, specification of capacity is currently limited to the event level and the specification of macro-qualitative constraints is limited, and you can’t yet re-run a scenario to see what would change if a supplier increased/decreased prices/quality/etc across the board by 5%, but as SI pointed out five years ago in it’s post on (Spend) Analytics vs. (Decision) Optimization, if your organization had a spend analysis product that allowed you to build a spend cube any time you wanted – on any data you wanted – on any dimensions you wanted – and then throw it away when you’re done then there would be nothing to stop you from building a cube on your RFP or Auction data, building cross tabs and tree maps, and then changing the cube to look at the data a different way. You’d find that you wouldn’t need optimization or a plethora of deterministic reports to find out who the lowest cost supplier was, who the highest quality supplier was, who the lowest cost supplier was relative to your quality metric, or any other query that can easily be answered by rank and cross-tab queries. And, as a result, you’d be able to solve many simple scenarios without optimization — and this is what this tool is attempting to do. Intesource realizes that many supply management organizations, especially in the mid-market, don’t have the advanced sourcing and modelling skills required to build complex optimization models and is endeavoring to build a tool appropriate to its user base. And while it’s not perfect, the reality is that, for an average (smaller) mid-size organization, continued development will allow Intesource to approach an 80% solution as many sourcing events and models of a (smaller) mid-size organization aren’t that complex and this type of solution will get such an organization much further than just e-Negotiation alone.  And on those 80% of events, the results will be near-optimal, if not optimal. 

Intesource has centralized all of its raw material and commodity price feeds into a market price centre that integrates the feeds with additional graphing and reporting functionality, monitoring and alerts, and statistical modelling capabilities. In the market price center, users can view historical trends and price fluctuations, focus in on any particular period of time, extend trend projections into the future, monitor prices, cash, and futures contract specifications, set watch lists to monitor key categories, set alerts to immediately inform the user if a price threshold is reached or a price fluctuation exceeds a certain threshold, and even pull up all of the information associated with the exchange(s) a commodity or raw material is associated with.

Finally, like a few other providers, it is tackling mobile, but it is doing it in a smart way. The reality is that, while you might want mobile access because it sounds really cool, in practice it’s typically not very cool because you can’t do really do anything useful on a 3″ to 4″ screen, and what you can do is limited on even a 9″ to 10″ screen. Realizing that all you can really do is retrieve critical pricing and status information, Intesource is building a customized read-only interface that will allow you to determine current event status, bid information, and whether or not there is anything you need to to do or respond to when on the go.  And it’s working with its customer base to develop an appropriate interface that they can use effectively. 

Other improvements since 2010 include an improved contract centre with more (user-defined) meta-data, search, and alert functionality; an improved vendor management (SIM) capability with embedded Q&A, enhanced search, attachment management, compliance, and watch-list capabilities; more milestone and scorecard management capabilities; an RFI question library with thousands of questions indexed by category, commodity, and other attributes (built on an analysis of 12 years worth of RFI data) to allow for quick definition of templates and RFIs; and a roles-based public event calendar. Intesource is constantly developing new modules, functions, and features with a roadmap largely driven by its user community as all requests are reviewed quarterly by an advisory committee and prioritized based upon overall demand and usefulness.

Intesource is a solid player in the eSourcing mid-market that should be included in the candidate pool by any company that does most of its business in North America.