Category Archives: Negotiations

Procurement Game Plan: A Review Part II.2

Charles Dominick of Next Level Purchasing and Soheila R. Lunney of Lunney Advisory Group recently released The Procurement Game Plan: Winning Strategies and Techniques for Supply Management Professionals. In our first post, we set the stage with The Purchasing Professional’s 10 Commandments. In our second post, we covered the first four chapters of the book that discuss organizational role, supply management strategy, talent, and social responsibility — the stage that a modern supply management professional has to act upon. In our last post, we continued our detailed review with a discussion of the chapters on strategic sourcing and supplier qualification. This post begins our discussion on the chapters on negotiations, and our next post, which will complete our discussion on negotiations, will conclude Part II of our review.

The first chapter on negotiations is on negotiating with suppliers: jockeying for position. This is important, because if your instinct is to take the advice of Meatloaf and “go on the red … go on the green … go on all the colours that you see in between … run all the tolls … run all the signs … run all the way across the double white line” as you jockey for position, you’re doing it wrong. (Peel Out by Meatloaf) The first step — after the issuance of an RFP, the receipt of the responses, and the initial evaluation using a weighted scorecard — is to select which suppliers to negotiate with. As the authors note, if you decided to negotiate with a supplier, than all suppliers who ranked higher must also be negotiated with as to do otherwise would not be ethical (and we’ve already covered how important ethics are).

Then, the authors describe a process for structuring the ultimate contract and this is a good starting point. The steps suggested are:

  1. Identify the best deal for each service/product and term
    Best price, payment terms, warranty, lead time, etc.
  2. Structure the Ultimate Contract on paper
    Based on the best terms available for each service, product, and term, what would the ultimate contract look like? This is the overarching goal.
  3. Decide what could be sacrificed and what an Acceptable Contract Is
    Realize that no supplier is going to be so efficient that they are best-in-class in every service, product, and term and decide what contract would be acceptable. Once this is reached, negotiations can be concluded once you have determined that the supplier will do no better.
  4. Put Yourself in a Confident, Ethical Mindset
    Now that you know what is feasible, you can ask for more from the best / preferred bidder because you know at least one supplier can do it. You don’t have to disclose the supplier (as doing so would be unethical), but you can disclose the best offer you got.

The only thing I would add is create a BATNA – Best Alternative to Negotiated Agreement – that you could fall back on should the negotiations be unsuccessful. This way, you will not be under pressure to cave in to a less than optimal contract AND you have a disaster recovery plan in case the supplier that is selected can not deliver. For example, it could be spot-buying every three months, giving the business to an existing supplier (who may not be best-in-class in those products or services or slightly more costly but a supplier that has proven that it will do what is necessary to deliver), or shifting the production / service delivery back in house.

The next topic that is tackled is structuring payments. There are some great ideas in this section, particularly the one on spreading out big up-front payments (like license fees) over multiple years to insure the supplier has an incentive to keep performing, but the example provided is, unfortunately, very bad!

The example the authors give is that of a three-year contract from an (enterprise) software provider for a license to an enterprise software product, implementation of such software, and three years of maintenance. The authors recommend spreading the big up-front licensing fee and implementation fee over three years, which is a great idea, but suggest that you do this by reducing the licensing fee and increasing maintenance. ACK!!! As an enterprise software professional, this scares the bejeebies out of me! (My initial reaction was ZOINKS!) When it comes to enterprise software, due to the high up-front investment and asset value, once a solution is selected, the enterprise always ends up hanging on to it for well beyond the initial projections. This means that the enterprise ends up paying maintenance fees for years beyond the initial depreciation of the asset. And the way maintenance fees work is that the provider always tries to jack them up on renewal by a good 10% to 20% a year. So if you double, or triple, maintenance fees, then you can expect to be paying those inflated fees for the lifetime of the software as these fees are never lowered. So, if the software was used for six years, instead of three, in the authors’ example, and the organization miraculously managed to hold the maintenance fee flat, instead of having a total cost of $372,000 over six years, your organization can expect a total cost of $492,000 over six years! Consider the following tables:

Three years:

Negotiated Proposal with Up-Front License Fee
Cost Component Amount Payment Due
License Fee 132,000 Upon Signing
Implementation Fee 120,000 After Implementation
Maintenance Fee $20,000 @ start of year 1
Maintenance Fee $20,000 @ start of year 2
Maintenance Fee $20,000 @ start of year 3
TOTAL $312,000  
Negotiated Proposal with Modified Payment Structure
Cost Component Amount Payment Due
License Fee 72,000 Upon Signing
Implementation Fee 60,000 After Implementation
Maintenance Fee $60,000 @ start of year 1
Maintenance Fee $60,000 @ start of year 2
Maintenance Fee $60,000 @ start of year 3
TOTAL $312,000  

Six Years:

Negotiated Proposal with Up-Front License Fee
Cost Component Amount Payment Due
License Fee 132,000 Upon Signing
Implementation Fee 120,000 After Implementation
Maintenance Fee $20,000 @ start of year 1
Maintenance Fee $20,000 @ start of year 2
Maintenance Fee $20,000 @ start of year 3
Maintenance Fee $20,000 @ start of year 4
Maintenance Fee $20,000 @ start of year 5
Maintenance Fee $20,000 @ start of year 6
TOTAL $372,000  
Negotiated Proposal with Modified Payment Structure
Cost Component Amount Payment Due
License Fee 72,000 Upon Signing
Implementation Fee 60,000 After Implementation
Maintenance Fee $60,000 @ start of year 1
Maintenance Fee $60,000 @ start of year 2
Maintenance Fee $60,000 @ start of year 3
Maintenance Fee $60,000 @ start of year 4
Maintenance Fee $60,000 @ start of year 5
Maintenance Fee $60,000 @ start of year 6
TOTAL $492,000  

But if you structured it as a three-phase license fee and implementation fee, the costs wouldn’t change. You would end up with something that looks like this:

Negotiated Proposal with Up-Front License Fee
Cost Component Amount Payment Due
License Fee 72,000 Upon Signing
License Fee 30,000 @ start of year 2
License Fee 30,000 @ start of year 3
Implementation Fee 60,000 After Implementation
Implementation Fee 30,000 @ start of year 2
Implementation Fee 30,000 @ start of year 3
Maintenance Fee $20,000 @ start of year 1
Maintenance Fee $20,000 @ start of year 2
Maintenance Fee $20,000 @ start of year 3
Maintenance Fee $20,000 @ start of year 4
Maintenance Fee $20,000 @ start of year 5
Maintenance Fee $20,000 @ start of year 6
TOTAL $372,000  
Year Total Payments
One 152,000
Two $80,000
Three $80,000
Four $20,000
Five $20,000
Six $20,000
TOTAL $372,000

Managing Indirect Spend: An In-Depth Review, Part I.2

In Part I.1 we began our review of Managing Indirect Spend, a new book by Joe Payne and William (Bill) Dorn of Source One that is the culmination of everything they have learned while doing nothing but Strategic Sourcing, primarily on Indirect Spend, since 1992 — before it was cool. And as SI noted in its last post, clocking in at 422 pages, this book is an incredible handbook for anyone who wants to get a handle on indirect spend, which has increased in organizations across the board since outsourcing and right-sizing rose to fame in the 1990s. (And if you think otherwise, download SI’s free eBook white-paper on Spend Visibility: An Implementation Guide, dive into your spend, and see just how much of it is indirect.)

Today we’re going to continue our review of Part One — The Process, and dive into the last three parts of Bill and Joe’s excellent adventure into the strategic sourcing process and discuss:

  • Scorecarding
  • Negotiations
  • Contracting

A Balanced Scorecard is a strategic performance management tool that tracks supplier performance against a set of metrics in order to provide a well-rounded picture of the supplier that can be used to monitor and control performance. While most organizations introduce balanced scorecards after a supplier has been selected, scorecards should also be used when determining which suppliers to invite to the table, and everything — pricing, capabilities, past performance, market intelligence, supplier responsiveness, and employee perception — should be built into the scorecard to help insure the most appropriate supplier is selected.

The chapter also makes some great points that are often overlooked:

  • Scorecarding can be a teambuilding activity
    The entire cross-functional team can contribute to the process.
  • Scorecarding fosters buy-in to the awarded supplier.
    As everyone knows that the supplier was selected only after all data and all viewpoints were carefully considered and organizational needs fully balanced.
  • Scorecarding can deliver market insights not otherwise obtainable.
    Especially when supplier references are checked as part of the process.
  • Insights only come when a full history of the relationship is obtained
    Suppliers only give you references they believe will be glowing and cast them in the best light. Thus, it is vital to ask the references what supplier interactions were like from day one, what issues were encountered, and how (effectively) they were resolved. How long before the customer reached its current level of satisfaction?
  • A lot of questions will need to be asked!
    The authors provide a starting list of sixteen on page ninety-seven, and depending on the category and its nature, this might just be the ice-breakers.

Eventually, every process results in negotiations, which are covered extensively in Chapter 6. The authors also make some great points in this chapter that cannot be forgotten:

  • Suppliers have the advantage — ALWAYS!
    Whereas a sourcing team spends 5% of its time, or less, sourcing a specific product or service, especially in an indirect spend category, the [lead] supplier negotiator is 100% focussed on selling that category of products or services every single day. They know everything about it, and the market waters around it, while the sourcing team is struggling just to tread water in the unfamiliar territory.
  • A proper negotiation strategy minimizes the chance a supplier will add extra margin in a first round bid.
    If the negotiation strategy pervades the entire process, and presents a business case to the supplier that your business is something they can’t afford to lose because they will profit immensely by gaining it, the supplier will be much more aggressive with its bidding up-front.
  • It’s Not Getting to Yes, It’s Getting to No!
    If the supplier never says no, then the sourcing team never came close to getting the supplier’s best offer.

The chapter also had some great techniques a buying team can use to improve pricing, as well as some very important things that a sourcing team should never do, which include:

  • no negotiating after a reverse auction
  • no negotiating in contracting
  • no setting artificial targets

and if it’s not clear why, then you should definitely read this chapter.

The last, and final part, of the basic process is contracting — getting it in writing. A contract should balance the need for legal protection with common sense. It should be concise and only address the relevant risks and identified resolutions. It should not be a generic — one size fits all — boilerplate MSA that is 100 pages in length where only 10 pages are really relevant. All that does is add time (for unnecessary review), cost (of the overpriced lawyers), and loss (while savings opportunities go unclaimed) to the process. With the exception of a few basic definitions, the only clauses that should be there besides negotiated terms and resolutions are a balanced force majeure clause, a right to audit clause, and, possibly, a right to first refusal clause. While the supplier should have the right to be late without penalty if an act of nature prevents it from business as usual, the buyer should have the right to seek alternate sources of supplier or terminate the contract if the supplier cannot recover in a certain amount of time and, especially in the case of software (maintenance) contracts, should NOT be required to make payments when the supplier is unable to perform. The right to audit should be for the life of the contract, the audit should be allowed to go all the way back to the start of the contract (even if four and a half years into a five year contract), and the buyer should have the right to recover all monies owed from overcharges, even if they were made four years ago.

The chapter also did a great job of explaining why:

  • legal should be brought in even before the RFP/Q to prevent issues from arising later on,
  • most favoured nations clauses, which symbolize much of what is wrong with government agencies, do nothing but bite you, and everyone else, in the @ss, and
  • continuous innovation clauses all but guarantee that there will be no innovation for the lifetime of the contract.

There’s some great advice in these pages — and more to come in Part I.3 which will discuss how to truly achieve continuous innovation, how to get stakeholder buy-in, and what not to do if the goal is success. Continue to stay tuned!

Want To Keep the Edge in Negotiations? Be Wary of Social Media

Earlier this year SI published a post on Common Negotiation Ploys that will be utilized by your sales counterparts every chance they get to try and gain the upper hand. We warned you that you had to be knowledgeable about each and every single one of these ploys because your sales counterparts, who get weeks of training before they’re even let out into the field in a supporting sales work, will do whatever they can to get the upper hand — and that’s the last thing you want.

In particular, you have to be wary of the

  • Getting to Know You,
  • Making an Impression, and
  • Mirroring

ploys because if you let the sales person become your friend, it will be a lot harder to stay impartial and bring your A-game, as you won’t want to beat him down and, more importantly, you’ll be a lot more likely to fall for the other ploys as you won’t want to believe that he’s trying to play you for the fool.

It used to be that a sales person had to show up, wine you and dine you to get to know you. But now, thanks to social media, he can learn more about you in a few hours of background research than a few months of relationship building, all thanks to online reputation monitoring tools that allow him to gather and review every single piece of data you share on social network sites. If you’re not careful on sites like Facebook and Twitter, the salesperson will know your favourite sport, your favorite team, your favorite wine, and your favorite restaurant and invite you out for an evening discussion of their upcoming product release which will just happen to be at your favorite restaurant, where your favorite wine will be waiting at the table when you arrive, followed by a trip to the ballpark to see your favorite team, at home, square off against their arch rivals. And that discussion will just happen to address how they are going to solve four of the five biggest problems you have, which the sales person will already know.

And while you might think this sounds great, the reality is that your barriers will be weakened because of the comfort level you feel at your favorite restaurant and favorite ball park and then shattered by a discussion of what your problems are. You’ll then believe that the salesperson represents a vendor who actually cares about you and who actually wants to solve your problems when, in fact, the vendor has no intention of changing its roadmap and the “solutions” being spun are not solutions at all but temporary band-aids with weak glue that fall off as soon as they get a little wet. But the story will be so nicely spun, and a discussion of release dates so carefully avoided, that you’ll think the vendor is spinning gold when, in fact, the vendor is melting lead.

And the vendor will know all this because he will have read every tweet you ever made that relates to an interest or like, consumed your Facebook profile and all common threads, monitored every LinkedIn group you were involved in, and reviewed any and every presentation or paper you shared online in the past two years. That’s why, as HP VP Scott McClellan found out earlier this year when he demonstrated the hazard of sharing LinkedIn profiles, you have to be careful what you post on-line. It’s not just your friends who will be following you, but your enemies. And they will be paying MUCH closer attention.

Novice Negotiators – Your Counterparts Will Use Your Emotions Against You

As per this recent article over on eSide Supply Management on Using ‘Micro Expressions’ to Your Negotiation Advantage, negotiators who can read body language often have an advantage. And if you are emotional, they are sure to pick up on your unfiltered emotional actions and use those against you.

In particular, as per the article, they will be looking for signs of these universal emotions to use to their advantage:

  • Anger
  • Disgust
  • Fear
  • Sadness
  • Happiness
  • Surprise
  • Contempt

In particular, they will be looking for signs of Fear, since that means they can strong-arm you, Surprise, since that means they can pull a fast one while your mind is otherwise occupied, and Happiness, since that means that they don’t have to sweeten the deal any further to get you to sign.

That’s why, no matter what happens, you should always be cool, calm, and collected against an experienced pro. Don’t take it personally. It’s business, and, more importantly, it’s the organization’s business. No matter what happens, look at it from a neutral, outsider’s perspective. Pretend you’re a third party arbitrator and it’s your job to find a fair resolution to an argument. You might still be out-negotiated, but your counterpart will have less of an advantage.

That’s the reason that good negotiators have a Poker Face.

Six Red Flags In Any Relationship, Not Just Outsourcing

A recent article over on the Outsourcing Center, an Alsbridge Company, highlighted six red flags to help avoid a bad outsourcing relationship from ever starting that is a good read for anyone negotiating any kind of deal with a product or service provider, including a deal for (supply management) software and associated services.

The following six soft characteristic red flags are indicative of a provider that is likely to bring with it a dysfunctional and damaging relationship.

  1. Selling, Not Solving
    Is the provider listening and offering what you need, or selling what they have, whether or not it solves your problem.
  2. Telling, Not Listening
    Does the provider assault you with the triple digit PowerPoint presentation rapid-fire, without letting you get a word in edgewise, or let you drive the conversation, breaking out slides only as needed.
  3. Homogeneous, Not Diversified
    Is the provider diverse enough to understand your cultural nuances, or only aware of his or her own company’s culture.
  4. Complicating, Not Simplified
    Is the sales process, and proposed solution, overly complex, or is it simple and straight-forward, addressing the problems you have now, not the problems you may have in five years. While it’s important that the provider can grow with you, it’s not important that they dive into details of problems you don’t have today, or sell you solutions before you need them.
  5. Far, Not Near
    Relationships and decision making should be as close to you as possible, not half a world away.
  6. Arrogant, Not Supplicant
    The provider should be confident, but not arrogant. The provider should be willing to listen and understand your problem before proclaiming that they have solved it before. That’s confidence. And that is what you want.

While the lack of these red flags will not guarantee a good relationship, as a nearby supplicant solution-driven diversified provider that listens and simplifies can still be incompetent, at least there’s a good chance that the relationship can work. And any odds of success are much better than virtually guaranteed failure.