Preparation to negotiation. The boss's perspective.
Many managers evaluate the negotiating skills of their team members based on the course of the negotiations themselves, appreciating the dynamics, assertiveness, tactics, and style of negotiation. Often, less successful people are assessed lower, even though they achieve equivalent results, and in the long term, they build better, healthier relationships with their suppliers or customers. Such people know that preparations for negotiations account for 90% of the success of substantive negotiations. Being well prepared and having a well-worked negotiating partner there is no need to make up for tactics, improvisation, and stardom. Depending on whether the industry in which we operate is relationship-oriented or transaction-oriented, preparation for negotiations and their quality can have a significant impact on the achievement of the annual goals of the organization.
Below I present four mistakes that can be made while preparing for negotiations. It is worth checking if your team members commit them, which affects the result of your department and the quality of relationships with external business partners of your company.
Mistake # 1: Too narrow definition of negotiation parameters
The negotiation parameters are something natural, resulting from the requirements of the request for quotation (RFQ). The project team or the buyer themself spends a lot of time preparing the scope of the inquiry, which will help objectively (apple to apple) compare the offers presented by suppliers. After several rounds of inquiries or negotiations, the best cost and technical offer is selected. Narrowing down the talks only to the scope of the scope of new potential business (the matter of the RFQ only) may make negotiations difficult, lead to stiffening of the position, and the emergence of an impasse. In such a situation, it is worth thinking about extending the negotiation horizon to maximize the benefit for your company.
The production company already uses five machines from company X. The first machines were installed at the plant 7 years ago. Currently, the coordination and purchasing director is conducting a tender procedure for the purchase of two additional machines worth two million EUR. The competition of supplier X is pushing hard and is 4% cheaper than supplier X. Supplier X is not able to lower the price of new machines anymore, because it is blocked by guidelines from the German headquarters.
The production director strongly emphasizes the purchase of machines from supplier X because he already knows their level of reliability and does not want to increase the complexity of maintenance. The finance director pressures both to get along and make a cost-optimal purchase. How can expanding the number of negotiated parameters affect stakeholder satisfaction?
The logistics and purchasing director, in consultation with the production director, may enter negotiations on two additional parameters that will eliminate the 4% difference in the price of new machines, for example:
- updating the automation and software of five currently used machines to the latest version
- extending the warranty support for currently used machines by 12 months
- two-year free subscription for preventive remote monitoring of all machines by the supplier
Improvement of O.E.E. (Overall Equipment Effectiveness) of already installed machines by up to 1% can completely change the competitiveness of supplier X to buy two new machines from. Even if they are still 4% more expensive than the competition.
Mistake # 2: Failure to define the meaning of individual negotiation parameters
Even when we properly prepare the list of negotiation parameters, we rarely ask ourselves:
- which parameters we care about the most,
- which parameters our supplier may care about the most
This type of combination allows you to prepare well for the so-called concessions trading in conditional bids. If one parameter, e.g., the service completion date, is especially important for both parties, it is a conflicting parameter. Reaching an agreement on this parameter will be difficult and will require compensation on another parameter, e.g. price, step payments and contractual provisions regarding liability.
Our analysis may also include parameters that will be of little importance to both parties, e.g. the possibility of providing a written reference and inviting another client for a reference visit. It will be a mistake to give such parameters "for free" or combine them with other parameters that are irrelevant to us. It is better to use these as benefits for the other party in exchange for things that are important to us, e.g. a price reduction or an acceleration of the service deadline.
Imagine a situation where, while working in a medical company, we negotiate the preparation and implementation of a dedicated set of process robots (RPA) for the AP process (handling invoices from suppliers). Our internal goals are:
- lowering the cost of handling invoices
- reduction of the number of employees necessary to ensure the continuity of the process
- increasing the rate of timely payment of invoices
- reduction of the risk of fraud
We received offers from several potential partners using licenses from the same solution vendors. What may be an irrelevant parameter for us and an important parameter for some of the potential suppliers:
- for a partner who has not yet implemented any project in the medical industry, a reference or a reference visit may be an important parameter in return for a reduction in price or implementation time
- for a partner who has received EU funding and accounts for the return on investment, the implementation of the project by a specific date may be important in return for extending the scope or invoicing one of the foreign business units instead of the Polish legal unit of our company
Mistake # 3: Relying on routine and overestimating your experience
The experience we gain in professional life can be both our ally and a threat to ourselves. Over the years, some things seem obvious to us, and the result of the interaction is known in advance. In our minds, which like convenience, patterns take precedence, we turn on our personal "business autopilot". What could the consequences of this be?
The dynamics of a major crisis such as the COVID19 pandemic are testing our experiences very quickly. In the period March-April 2020, the goods of the first necessities, incl. protective masks (e.g., surgical masks, K / N95) used by medical services and employees of every company have become in Europe. In the period September-October 2020, nitrile gloves became a scarce commodity. Based on the experience of the "quiet years", buyers began to collect information from subordinate business units about the needs, consolidate the quantities, started tendering processes, counting on lower prices in exchange for larger quantities. All these activities consumed time, and the demand accumulated in the blink of an eye, especially consuming the opportunities of the affected air coordination. When the buyer secured the quantity and price, they very quickly realized that the more important negotiating parameters were the logistic availability of aircraft and logistic rates. The prices of the masks or gloves themselves were relegated to the background. Experience has failed, and smaller batches with more frequent deliveries have often proved to be the better solution.
Mistake # 4. Improper preparation of the members of the project team for negotiations
Preparing all stakeholders for negotiations is particularly important in indirect procurement and in typical in project driven sectors, where the specification is the result of the competencies of suppliers and the needs of end-users. Technical people who are not used to negotiate often have a problem with what we can call fairness in negotiations. People who rarely negotiate may perceive overstatement in negotiation or labelling openings and breaks in negotiation as lying or unfair to the supplier. The lack of involvement of such people in the process of preparing for negotiations and familiarization with the strategy may have disastrous consequences for us as negotiators. It can also cause serious conflicts between the purchasing department and e.g. the design or IT department.
One of the techniques in the repertoire of backdoor sales often used by salespeople is to ask questions and verify the information received from several sources. Non-commercial people in our negotiation team often see no risk indirectly answering sellers' questions. Usually, the seller will convince the technical person that this specific information is necessary for him to build the best, most advantageous offer. This is often the case, but not always. What information can the supplier verify in technical departments:
- What other companies are you considering?
- What is your budget for launching production or preparing a demonstrator?
- Do you have any problems, is there anything else we can help you with?
An overly open answer to each of the above example questions may prevent the achievement of a favorable negotiating result. It should be remembered that technicians are not acting in bad faith, it is salespeople that use social engineering to gain an advantage in negotiations.
18+ years of experience in project sourcing and strategic procurement. Managing Partner at Eveneum, a company specialized in advisory and competencies development. Focused on sectors where relationship building and trust element between partners is the mission critical factor. Supports customers on early suppliers engagement processes and early procurement engagement into R+D work. He has been delivering projects related to: negotiations on behalf, niche technology suppliers scouting. Keynote speaker at Polish and international conferences. Lecturer at Jagiellonian University (Procurement Management post graduate studies).