Category Archives: contract management

Common Negotiation Ploys – Are You Falling for Them?

While your goal as a procurement and contract professional is to get the best deal you can, the sales people at each and every vendor that you deal with have the same goal. But whereas you have to split your time between determining internal customer requirements, writing RFXs, negotiating contracts, managing contracts, and educating and managing your internal customers, your sales counterparts get 100% of their time dedicated to sales — and they’re spending all of that time trying to figure out ways to get more money from you.

And if they can’t get it from an honest day’s hook, they’ll get it by a con man’s crook. Not only does your average sales professional get weeks of training before they’re even let out into the field, filled with “tactics that work”, but they spend every day figuring out how to improve these “tactics that work” and add more to the arsenal. Meanwhile, if you get a 2-hour crash course in “negotiations”, you’re lucky.

So what can you do? Since you can’t become a negotiations expert overnight, and will never have the time to invest in negotiations training that your counterparts will, the best thing you can do is lean to spot the ploys the sales people will try to use on you and your organization. This deprives them of a significant amount of their arsenal and makes it much harder for them to justify unfair markups in negotiations.

The following are 16 common ploys that sales people will use to try and take you for a ride:

  1. Pop-Tart
  2. Surprise!
  3. Getting to Know You
  4. Misdirection
  5. Making an Impression
  6. Mirroring
  7. Wait!
  8. Hurry Up!
  9. Resources, Not Results
  10. That Would Set a Precedent
  11. Bracketing
  12. The Only Game in Town
  13. That Would Violate GSA
  14. That Would Violate SOX
  15. Evil Eval
  16. Divide & Conquer

And while some of them, like:

  • Surprise!,
  • That Would Set a Precedent,
  • That Would Violate GSA, and
  • That Would Violate SOX

are easy to spot, because it’s hard to miss a sales person showing up unannounced or making some outright, often ridiculous claim, that something can’t be done for some specific, probably irrelevant, reason, others, like:

  • Getting to Know You,
  • Misdirection,
  • Mirroring, and
  • Divide & Conquer

can be almost impossible to spot. A really good con artist err sales person won’t make it obvious when he or she is trying hard to get to know you, will make misdirection so subtle that it will seem like the conversation is going where you want it to go, will not change his or her outward mannerisms quickly, and will be very careful not to do anything that would alert you to the fact that he is simultaneously charming your internal customer.

So how can you spot these ploys and what can you do to make sure they don’t happen to you? First of all, you buy a copy of Stephen Guth’s Contract Negotiation Handbook and you read the chapter on ploys very carefully. Then you observe your supplier’s sales people very carefully and, over time, one by one, you’ll see them using these ploys on you.

The book is also filled with negotiation tactics; tips, tricks, and traps of contracts; and subtleties of terms and conditions negotiations; but the description of the ploys is key. Because if you don’t spot them, nothing else really matters as it’s impossible to negotiate the best deal once you, or your internal customer, has fallen for a ploy. There are lots of books out there on negotiations, but this is the first book I’ve found that does a superb job of not only identifying all of the common ploys, but providing you with great advice on how to spot the ploys and counter them (in addition to telling you why they so often work).

And once you’ve mastered the ploys and are ready to take your negotiations to the next level, you can attend a seminar. There’s an upcoming NAPM seminar on the 26th in the D.C. area. For more details, see the VMO blog.

BravoSolution: Making Spend Analysis More Useful to the Average Supply Management Professional, Part II

In yesterday’s post we discussed how, for one reason or another, spend analysis is not used enough in the average organization. But, as I said before, this doesn’t have to be the case. Spend Analysis can continue to deliver value year over year if it is properly integrated into daily supply chain activities. And the key to making this happen in your average Supply Management organization is integrating spend analysis not only into the (e)Sourcing process but the e(S)ourcing suite.

In BravoSolution’s Collaborative Sourcing Suite, Spend Analysis is integrated into the Contract Management, Compliance (& Spend) Management, and Performance Management solutions and will be integrated into Risk Management in the next version of the solution that is currently under development. In todays post, we will discuss the benefits of integrated spend analysis and what is available in BravoSolution’s suite.

By integrating Spend Analysis into the Contract Management solution, BravoSolution assists an organization in achieving a global view of sourcing and spend. From day one, an organization can not only track the contract details, but can track forecast data (total spend, cost reduction, demand management, etc.) and spend on an on-going basis by business unit and time-period (by setting up the periods for which spend is to be tracked). Then, on a regular basis, current and forecast saving reports can be (re)run with the click of a mouse button. For selected contracts, the actual savings report will summarize forecasted spend, actual spend, spend variance, expected savings (to date), actual savings, and variance, and the forecast savings report will summarize cost reduction, demand management, process savings, cost avoidance, cost increases, and total savings.

By integrating Spend Analysis into the Compliance Management solution, and matching all the way down to the unit level to find variance from contracts, Spend Analysis can help the Supply Management organization quickly pinpoint negotiated savings leakage and stem the losses. More importantly, the reports can be configured to report leakages and variances by supplier and contract (against the contract value and invoiced cost). If the variance calculations factor in discounts, rebates, and pricing tiers, then actual losses can be quickly computed. Then the recovery process can begin. BravoSolution’s suite, which includes integrated messaging for supplier performance tracking and hooks into performance management, includes the ability to track amounts paid and overpaid by supplier and contract to assist in recovery.

By integrating Spend Analysis into Performance Management, not only can spend be tracked by supplier, but spend can be broken down into high, average, and low performing suppliers. These reports can be high-level, based upon overall performance scores, or by individual KPIs from supplier scorecards. In addition, trends can be analyzed and the organization can determine whether spend to high performing suppliers is increasing, holding steady, or decreasing and whether or not action has to be taken. These trends can be plotted or (spider) graphed automatically, and benchmarks can be built and tracked over time.

And by integrating Spend Analysis into Risk Management, Risk Management can be taken to the next level. But that’s the subject of a future post.

So how successful can you be if you integrate Spend Analysis into Contract Management, Compliance Management, and Performance Management? Theoretically, the sky’s the limit (as spend analysis is now doing more than just measuring spend). Practically, the results are looking very promising. While BravoSolution only finished the initial integration of their core suite components with Spend Analysis last year, BravoSolution’s first four case studies are looking quite promising.

After an initial 3 month roll-out to a handful of advertising and marketing groups in a large media organization, the organization decided to roll out the contract and compliance management solutions to all 30 of its global groups. A second organization was able to get 50% of its spend in a compliance program in less than six months. A third organization was able to develop a performance management solution that it could roll out to thousands of franchisees to determine the appropriateness and effectiveness of its global contracts. And while the final savings numbers won’t be known for a while, the savings are tracking in the range enabled by High Definition Sourcing, 10% to 30%.

Next Generation Sourcing

As stated in yesterday’s post, for Sourcing to continue to have an impact in a modern Supply Management organization, it needs to be taken to the next level. And I’m not just echoing the statements of The Altimeter Group, AMR, CAPS, Greybeard Advisors, The Mpower Group, Purchasing Practice, or my own persistent ramblings over the years (as I have been pushing for Total Value Management and Next Generation Sourcing strategies since day one). A modern supply management organization truly needs to take their sourcing practices to the next level if they are going to continue to distill value from Sourcing.

When you consider that:

  • Once you institute RFX, the manpower savings from automating bids can only be claimed once.
  • By the time an organization gets to the third auction, there are no more savings to be had as the fat from supplier margins has been squeezed out.
  • Once the allocation has been optimized across the supply base in a way that minimizes unit costs, transportation costs, (interim) storage costs, etc., re-running the optimization won’t lower costs further unless something changes — such as the identification of a new supplier, an alternate material (that is cheaper), or additional demand (that increases the economy of scale).
  • Once contract management and monitoring is put in place and no invoices are paid that are not for delivered, defect-free products, at contracted rates, there is no more on-contract leakage to be stopped.
  • Once controls are put in place to stop off-contract purchases that should be on-contract (through integration of the e-Procurement system with the Contract Management system), there is no more off-contract leakage to be stopped.
  • And once spend analysis has identified all the opportunities, the savings won’t actually materialize until something is done about them. This something cannot be appropriately identified unless the appropriate information is available to the knowledge worker.

As a result, in order for a mature Supply Management organization to continue to extract considerable value from (e-)Sourcing, e-Sourcing needs to be taken to the next level. Whether you call it DDSN2 (Demand-Driven Supply Networks), Next Practices, or Total Value Management, the message is the same. Take your Sourcing to the next level, or risk decreasing returns.

So where does one start? Upgrade or bring in a modern e-Sourcing platform. For some organizations, who are already using a top-tier provider and who have purchased a suite license, this will just mean learning how to take full advantage of the end-to-end integrated functionality and improving processes. For others, using point solutions from top-tier providers, this will mean buying licenses to the whole suite and/or integrating the point solutions with other solutions they already have. For the market majority, this will likely mean either replacing existing first generation systems (from providers who haven’t made any updates to the base functionality in the last five years) or, in laggard cases, skipping first generation e-Sourcing systems entirely and starting off with modern systems that have better, integrated, functionality.

And then, once these systems are in place, processes are updated to capture more data and consider more information in sourcing decisions, in a process that one vendor on the leading edge likes to call High Definition Sourcing.

Since this process is the closest to what Sourcing Innovation believes is necessary for organizations that want to take their sourcing to the next level (and, in the words of CAPS, become value-focussed), this will be the subject of the next series of posts (starting next week). Stay tuned!

Information … Information … Information

Yesterday’s post discussed the lack of realistic starting points for an average organization that wants to merge onto the value focussed path and the need for information. Then the post discussed e-RFX applications and how they are not always the answer as most are not configured for collecting more than a moderate amount of data, and the information required to make the right decision might require a large amount of data to be collected.

For example, consider the information required to make the right decision in a global freight bid where the company has over 5,000 lanes across five continents that are currently being serviced, in part, by almost 500 carriers. Not only will there be a need to collect up to 1,000,000 LTL and TL bids to know what the lowest rates are, but there will be a need to collect data on capabilities (refrigerated, freezer, hazardous martial, etc.), capacities, and serviced lanes. And then, once all of the information has been collected, past performance, guaranteed service levels, (commitments to) sustainability (such as biofuels and hybrid vehicles) will have to be considered in addition to costs and on-time-delivery capabilities. And if multiple carriers are almost equal, long term viability, strategic partnerships, and/or commitment to social responsibility might also need to be considered.

All-in-all, this represents a significant amount of data that needs to be collected, analyzed, and distilled into useful information — data that is not even going to be collected if a firm is still using a first-generation e-Sourcing platform. This is because:

  1. Traditional RFX tools, which are now a commodity (as every provider and their dog has one — trust me), are not built to collect that much information.
  2. Most of the RFX tools that can handle that much information, typically by way of Excel import and export, are not designed with supplier usability in mind. No supplier is going to quote 5,000 lanes at multiple LTL and FTL levels if they only service 3,000 and 2,000 can be broken into 20 cross-regional groups where each lane in the group is priced the same by mile.
  3. Of the few tools that allow for generic pricing and (typically) single-dimensional overrides, most won’t designed with the ability to easily design multiple levels of overrides and the OLAP-like navigation that’s really need to quickly zoom in on the relevant data items (which need to be viewed or altered).
  4. And while most of the better RFX tools allow a user to define as many RFIs, RFPs, and RFQs as the user desires, these generally have to be crammed into rigid workflows that may or may not fit the scenario at hand.
  5. Plus, while most of the tools can push data out into an auction or a SIM tool (that is the foundation for SPM and/or SRM), most don’t allow data to be pulled back in, since the first generation e-Sourcing model was a linear RFX -> Auction -> Decision Optimization -> Award -> Contract Management -> SPM flow.

And then, once you get past all that, you still have to analyze the data to distill the information required to make a good award decision. Because even the best strategic sourcing decision optimization on the market will fail if it’s not provided with the right data AND the right constraints (or, depending on your choice of terminology, rules). The right constraints can only derived by a knowledge individual that has the right information at her disposal.

So how do get the right information? You take your sourcing to the next level. So what does this Next Generation Sourcing look like? Stay Tuned.

A Most Favoured Nation’s Rant

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

News yesterday:

U.S. Sues Michigan Blue Cross Over Pricing

The US Department of Justice and the State of Michigan have sued Michigan Blue Cross over their practice of having a clause in their contracts requiring that hospitals never charge other insurance companies less than they charge Blue Cross. In some cases they allegedly required the hospitals to charge 25-39% more than they charged other insurance companies The plaintiffs charge this is anti-competitive behavior.

US purchasing shorthand calls such clauses ‘MFN’ (Most Favored Nation) clauses.

My response:

Well duh, it's about dxxx time! These clauses are a refuge of lazy-axx purchasers who rely on their competitors to do their price negotiations. The clauses I've run into also would require sellers to open their books to audit so buyers can actually check what a seller charges others. If that isn't anti-competitive, I don't know what is.

It's also futile and, in some cases, comical. I had a major client who wanted me to agree to such a clause. They were some of the most lackadaisical price negotiators I've seen. They had just asked me to become an employee of their temp agency (for the same consultant rate) because they didn't have a process to reliably send 1099 tax forms reporting my income to the US Internal Revenue Service. That raised their cost 20% and increased my profit by 7% because now they didn't have to pay the employer's share of Social Security and Medicare. I was waiting for them to ask for a 7% price reduction but the request never came. Sure I signed their agreement but I made sure that my services to them were 'different' than services to others.

So if anyone thinks you're accomplishing anything with these clauses, look again. If it's not a more or less standardly defined good or service, all you've done is increase bureaucracy. If it's a standard product, I agree with the plaintiffs that it's anti-competitive.

Thanks, Dick!

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