negotiation

The Essential

Sourcing Skills

Handbook series

5.1

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Negotiation

The Essential Sourcing Skills Handbook series

Strategic sourcing

1. Launch process 1.1. Category Profiling 1.2. Business Needs 1.3. Sourcing History 1.4. Stakeholder Mapping 1.5. RACI Matrix 1.6. Communications

Charter 1.7. Change Management 1.8. Transition Analysis

2. Current position 2.1. Portfolio Analysis 2.2. Seller’s Perception

Matrix 2.3. Relationship

Positioning 2.4. Risk and Vulnerability

Analysis

2.5. Specification Challenge

2.6. Supply Market Analysis

2.7. Opportunity Analysis 3. Strategy development

3.1. Request for Information

3.2. Conditioning 3.3. Price and Cost

Analysis 3.4. Supply Chain Analysis 3.5. Quick Wins

4. Strategy selection 4.1. Options Analysis 4.2. Request for Proposal 4.3. Supplier Selection 4.4. Capability

Assessment 5. Strategy

implementation 5.1. Negotiation 5.2. Contract Award 5.3. Debriefing 5.4. Implementation Plan 5.5. Savings

Post-implementation management

6. Supplier performance management 6.1. Problem Solving 6.2. Service Level

Agreements and Key Performance Indicators

6.3. Total Cost of Ownership

6.4. Contract Register 6.5. Relationship Audit

7. Supply chain management 7.1. Market Movements 7.2. Industry Curves

8. Specification management 8.1. Learning Curves 8.2. Value Analysis/

Value Engineering 8.3. Gainsharing 8.4. Exit Strategies

Strategy implementation 5.1

© 2010 SpringTide Consulting Ltd. All rights reserved. 3

5.1 Negotiation

Introduction

Negotiation is a sequence of events that builds and reinforces perceptions and beliefs and ends either with an agreement being reached or with one party

walking away. Sometimes this takes a significant length of time to resolve

(as in politics and conflicts), with both sides adopting different positions and accessing

new information that often changes their stance. Thus, negotiation is in general not a one-off event that is concluded in a few hours.

The dynamics of negotiation are commonly thought to be either:

adversarial: win/lose; or

collaborative: win/win.

However, such polarisation of views is an injustice to

negotiation. Essentially, through agreeing the terms of the contract both parties will have met their own needs and interests, although one to a greater extent than the other. Occasionally, however, agreement is not reached as each side pushes the other into a corner, creating tension and deadlock.

This can happen when both believe that they have a high best

alternative to no agreement (BATNA) and neither is willing to concede: egos rather than logic drive the negotiation and both sides lose.

Summary

Negotiation should aim to optimise the agreement for both parties (i.e. win/win), though favouring the buyer more than the supplier

All aspects of negotiation should be planned in advance, including:

possible outcomes concessions opening team roles influencing methods gathering of supporting data

The negotiation meeting comprises

opening probing testing and moving closing

After negotiations, a review is conducted and bonding with the supplier begins in order to form an effective buyer–supplier relationship after the possible conflicts of the negotiation process

5.1 Strategy implementation

4 © 2010 SpringTide Consulting Ltd. All rights reserved.

It is therefore not as black and white as many text books describe. Effective negotiation focuses on the extent to which both sides can gain and how one gains more than the other.

Objectives

To optimise negotiation outcomes for both parties: ideally to favour the buyer’s organisation more than the supplier

To plan and condition well in advance of the negotiation meeting(s)

To understand early in the process the needs and interests of both parties

To devise a negotiation strategy to realise those needs and

interests To execute and deliver against the strategy without

resorting to breaching boundaries (unless new information

changes parameters) To create an ongoing framework for dialogue and

development To use team dynamics and maintain professional conduct

throughout the process

Bu

yer w

ins

Supplier wins B

uyer l

oses

Supplier loses

L

W W

W

L

W

L

L



Relevance

The balance of power between the buyer and supplier is in a constant state of flux, driven by the ebb and flow of market forces (Porter’s Five Forces; see 2.6 Supply Market Analysis)

and other factors, including:

Effective negotiation requires logic in terms of both planning

and psychological mind games. The higher the stakes are, the more elaborate becomes the game, requiring participation by more experienced individuals. The results can be optimised through the understanding of some fundamental issues.

It is important to remember that both parties are negotiating

because they want to exchange something: usually a product or service for money, but occasionally the supplier’s interests may be satisfied by rewards other than money. For example, a provider with no track record may be trying to enter an industry sector and may offer products or services on a gratis basis in return for references and marketing rights. Therefore,

the buyer must establish what each party wants from the arrangement and how these interests can be satisfied.

Detailed planning in advance of the negotiation meetings optimises the outcomes by increasing knowledge, confidence and anticipation of the supplier’s tactics.

Buyer Supplier

Tied supply chain

Intellectual property/patent

Dominant market changes

Short supply/ urgency

Tool-kit

Credibility/ track record

Attractiveness

Money/ time



When to use

All types of sourcing project involve an element of negotiation. For non-Routine products and services (see 2.1 Portfolio Analysis), negotiation takes place after the supply base

has been filtered through the Supplier Selection processes (see section 4.3) such that only a few suppliers who meet the Business Needs and Wants (see section 1.2) are called in for negotiation meetings.

The Tool

For products and services procured by the Request for Quotation route (often those in the Routine Portfolio quadrant;

see 4.2 Request for Proposal), the negotiation process is straightforward, with price alone as the determining factor. Here, a quick-fire round of negotiations is appropriate. For such

items, an e-auction is an effective mechanism for concentrating competitive tension within a narrow window of time.

For the other three Portfolio quadrants, negotiation comprises a planned sequence of events in three distinct phases: before,

during and after discussions.

1. Conditioning Conditioning should have been planned early in the development of the sourcing strategy (see section 3.2), covering the whole Supplier Selection process, and this must

be maintained throughout the negotiation phase. Conditioning helps in

starting to position the buyer’s expectations and setting in advance of meetings a range of requirements (but not

•Conditioning

•Planning

Before

•Opening

•Testing and moving

•Probing

•Closing

During •Post-mortem

•Bonding

After



using figures as this may set expectations too low),

for example: ‘We must achieve reductions against current levels’ ‘Unless service improvements are real there is no other

option than to terminate and go back out to market’ positioning the potential dynamics of the forthcoming

discussions

informing the supplier that all internal functions are aligned and divide-and-rule tactics will not succeed, for example:

‘We have the support of the board’ ‘A multi-disciplinary team, including design, is involved’ ‘The mandate to take action has been secured’

confirming that the process is not merely benchmarking

‘We will use a structured approach to Supplier Selection

and incumbent suppliers will have no undue advantage’ ‘Providing that your proposal is competitive and meets

our needs we will switch suppliers.’

2. Planning

A negotiation plan is essential for complex projects in order to align the negotiation team to a structured and informed approach and to facilitate the anticipation of the supplier’s position. Knowledge is power and gives the negotiating team both confidence and professionalism.

Outcomes planning

The buyer must have a clear understanding of the key parameters of the negotiation:

stretch target: the highest outcome desired, potentially the opening position to set high aspirations

target: the preferred minimum position along with other concessions

fallback: the minimum position only to be accepted if other

concessions are realised, such as a longer warranty period.

The negotiation plan should include the ideal outcome (stretch), along with other acceptable scenarios between the stretch

and fallback positions. If the fallback is not achieved, then negotiations should be abandoned as to continue would breach

boundaries. This is where the BATNA must be considered, i.e. what the realistic options are if negotiations fail:

walk away walk away and re-energise competition, inviting the

prospective supplier back into the process with appropriate Conditioning



negotiate with other bidders

go to court (if the negotiation forms part of a dispute) delay revisiting the sourcing process until market forces

change.

Consideration should also be given to the supplier’s likely

BATNA. Reviewing the BATNA and carrying out the research reveals how realistic and credible the ‘fallback’ position truly is.

Concession planning

The negotiation plan lists possible concessions – both the buyer's and a perception of the supplier's (long- and shortlists) – ranked and weighted according to importance.

Concession planning is critical for the testing and moving phase. It is often performed as a bolt-on to the negotiation plan to ensure that all aspects are covered and that deal-breakers are recognised and incorporated into the BATNA. A list of negotiation objectives is compiled, comprising low-priority throwaway elements, medium-priority elements with room to move, and high-priority deal-breakers. Each is ranked

according to their value to the buyer or whether they are non-negotiable, and then according to their value as perceived by the supplier. This helps in outlining the sequence in which concessions are intended to be given and therefore ensures that essential elements are secured first.

Concession Value

to buyer

(£)

Value

perceived by

supplier (low/

medium/ high)

Non-negotiable?

Importance

(low/ medium/

high)

Terms and conditions

Payment 3% Medium No Low

Warranty 5% Low No Medium

Price 15% High Yes High

It is also important to assess what concessions the supplier may be willing to make: the buyer should always ask for something in return for any concession given.



Opening planning

The opening approach (high, low, challenging, soft) is included in the negotiation plan, as it helps in setting expectations. Much can be lost through poor execution of the opening to a negotiation, for example:

‘About 10% would be fine’ ‘We are down to just a few minor issues to resolve now’ ‘I was not confident that the previous supplier could meet

our exacting and challenging needs.’

These opening remarks create a clear impression of position, target and aspirations.

There is a variety of opening strategies that can be adopted, each with its own advantages and disadvantages.

Approach Advantages Disadvantages

‘Is this your last and final offer?’

The supplier may believe that unless price is reduced they will not proceed

Quick way of intensifying fear

Eradicates time spent on gauging the supplier’s pricing level

Creates an immediate floor

It is difficult to retract due to losing face

‘This is all I have available and I’m not prepared to concede quality’ (empathy approach)

If genuine, this indicates willingness to trade

Places the problem on to the supplier to resolve, perhaps by suggesting alternative methods

May be merely a ploy, which could damage reputation if the buyer has to back down

Used too frequently, so may not be believed

Eliminates the opportunity of gaining more

‘Take it or leave it’

Dominance can achieve results if the timing is right

Appropriate for Routine or Leverage categories

Challenges creativity by pushing the supplier to an extreme position

Creates hostility and anger

Can have later repercussions

The buyer loses face if forced to back down

As far back as the 1960s, psychologists studying negotiation found that people with the highest aspiration (high opening)



combined with small concessions were likely to achieve the best

outcomes in negotiation.

There are situations when it is advisable to avoid revealing an opening position as the supplier’s first offer may come within the target range. A way must be found to avoid a stand-off,

for example:

‘No, you go first’ ‘Hypothetically, what would it be worth?’ ‘Other similar contracts were in the range of...’

‘If I were to ... what would it be worth to you?’

As demonstrated by Cialdini’s research on persuasion principles of reciprocity, it may be prudent to make a small concession to

demonstrate willingness to negotiate and therefore open dialogue without reaching an immediate impasse.

Team planning

As the level of project complexity increases, the negotiation

requires the involvement of more people as well as the buyer. In team negotiations, roles must be allocated to individuals in the negotiation plan:

lead: conducts the negotiation, offering opinions and

concessions questioner: does not offer opinions or concessions but asks

questions to gain information, clarification and focus agent provocateur: argues the opposite view to ensure that

all aspects are covered bank: keeps track of all micro-wins gained and concessions

made

observer: listens to verbal exchanges and observes body language and phraseology, recording and gaining an understanding of the supplier's intentions and motives and watching out for the supplier's use of Conditioning and evasion tactics

The team rarely comprises five people, so individuals may

be assigned multiple roles.

The anticipation of the supplier’s team, in particular the key decision maker, is also important in order to assess the

probable dynamics of the negotiation meeting.

Influencing methods

The aim is to plan the use of a variety of influencing methods along with the timing of their use and the determination of which team member will use which approach.



Influencing methods include:

emotion power persuasion

logic intimidation tactics.

For example, emotional outbursts can be anger, guilt, disappointment, betrayal and upset.

The negotiation plan should also cover:

Portfolio position SWOT analysis: playing to strengths while recognising

how the supplier can undermine a strategy Seller’s Perception Matrix (see section 2.2)

SWOT analysis: having a clear sense of how the supplier views the account and what is important to them; this will help in prioritising concessions

Relationship Positioning (see section 2.3) SWOT analysis: recognising how the positioning of

the relationship may help or hinder discussions; for example, an enduring relationship may withstand difficult negotiation points more easily than a newly formed association

styles and tactics pace

tacking through the use of different styles anticipation of the supplier’s style, possibly from

Sourcing History (see section 1.3) which may reveal, for example, sustained periods of maintaining price levels

how the supplier's styles may influence the buyer’s own team

rules

adjournments: at what point they should occur team misalignment: how to recognise and resolve;

typically, too many team members attempt to take the lead role and offer concessions or break boundaries contradicting the agreed strategy, in particular when

personal power agendas begin to conflict new information: how to react without permitting the

supplier to gain the upper hand psychology

body language: recognising signs in both the buyer’s and supplier’s negotiating teams

listening: using questions to gain information persuasion methods: as noted by Robert Cialdini



anticipation

supplier's needs and interests: it is essential to understand these in order to move towards agreement

wild cards: nature and timing data requirements

market intelligence: competitive landscape financial: current pressures, ratios, opportunities

precedence: past negotiations and outcomes.

The negotiation team meets prior to the meeting with the supplier to review the negotiation plan and perhaps play out various scenarios if conflicts with the supplier are likely.

3. Opening discussions

The opening should be conducted by the lead negotiator according to the negotiation plan.

Psychological reactions from the supplier are noted by the observer. For example, opening by going through the long list of items to be discussed allows the observation of the supplier’s reactions to each point, providing an indication of the probability of success and enabling some on-the-spot mental re-appraisal of the wish list. This is not an exact

science, but does give some insight into the disposition of the supplier. The team should interpret the supplier’s body language and act accordingly, for example:

Frown Concentration Proceed

more slowly

Raised eyebrows

'Is that all?'

Reconsider criterion: not

ambitious enough?

Head in hands

Finds demand

impossible

Reconsider criterion: too ambitious?

Taking notes, pausing,

underlining

Positive or negative emphasis

Watch out for other indicators



4. Probing

Probing identifies the supplier’s interests and needs. A common mistake is making offers without knowing where the supplier’s boundaries are, making incorrect assumptions. The supplier’s aspirations may differ greatly from the buyer’s expectations, perhaps driven by changes to market share, and this may raise or lower the negotiating range.

The questioner interviews the supplier in an attempt to establish their motives.

Present questions

•The buyer should ask many questions

•Logical staircases of questions can be built

•Answers must be listened to attentively

•Rephrasing using hypothetical ('what if?') questions can remove a deadlock and extract information

Rationalise information

•What does the supplier want?

•What are the supplier's interests (not positions)?

•Positions should be avoided as they mask important matters:

•the position 'I must get £2000/day' may be followed by immediate rejection

•the interest 'I do not want to compete solely on price as it would adversely impact the market position; I can consider other values to deliver in order to warrant the higher rate' leaves room for further discussion

Observe reactions

•Negative reactions include shuffling or shifting paperwork and crossing arms defensively

•Positive reactions include smiling and nodding

•Positive reactions should be followed up with further probing

•Confusion requires clarification: more questions and information

Believe

•The supplier's responses should not be taken at face value (they may be genuinely confused)

•The buyer must believe in their own interests and focus on them

•The truth can be revealed by asking 'Why?' repeatedly

Evaluate

•The buyer should evaluate how the supplier will react to probing: some negotiators enjoy the challenge and therefore techniques must be deployed to deal with them, for example:

•rephrasing the question to test their resolve: is the same response given?

•checking their conviction: is the rejection of an idea their own view, informed by others, firm, informed by all the facts? or are they pushing boundaries?

•asking the supplier whether they believe in their statement and to explain ramifications for both parties



5. Testing and moving

Movements are now made based on fallback positions and tradable items. This is where the front-end planning pays off, as well-researched positions and awareness of the BATNA and influencing methods are crucial. The buyer should know the

value and importance of tradable items, and should have determined the supplier’s range.

The supplier will also have targets that they want to achieve. Sales representatives know their boundaries and remain

confined by them. It is important for critical negotiations to involve senior executives from both sides, as they will know how far boundaries can be breached, if at all.

For most negotiations, there will be a range within which both parties can agree: the zone of possible agreement (ZOPA).

For example, if the buyer has a stretch target of –25% and a fallback of –8%, and the supplier will discount within a range of 5–15%, then there is a ZOPA of 8–15% where they could reach agreement. A low opening position from the buyer would make it difficult to achieve the 15% figure. If 10% has been achieved quickly, then the buyer is within the supplier’s range and should

continue to push, maintaining appropriate body language, until an emphatic ‘no’ is declared (the ‘Russian front’).

This is also the time when influencing methods are deployed to

persuade the other party to lower their request; for example, emotional outbursts such as anger, guilt, disappointment,

betrayal and upset. The buyer should remain calm and composed and not react to such outbursts from the supplier, remaining focused on the issues and asking for a rational explanation for the objection. The buyer should not respond to the demand by making concessions.

This phase is similar to playing chess or poker: unforeseen events are experienced and created, and the side armed with multiple responses and anticipation of the other side’s moves tends to gain the upper hand.



6. Closing

Closing is a dangerous time as it is difficult to assess whether all the concessions have been optimised. This assessment is facilitated by the No Principle: how many times and how emphatically the supplier has said ‘no’ to a request. The

supplier may suddenly change their response from ‘no’ to ‘yes’ or ‘maybe’ if they believe that there is still competition and they may lose the business.

It may be helpful to divorce the final decision from the

negotiating event to allow time for final reflection. Some negotiators may become impatient or do not want to spend any more effort as targets have already been reached and

therefore agree to demands after the reflection period.

At this stage, the supplier can use many tactics in order to

close the deal and is watchful for signals from the buyer:

Tactics for sealing the close and achieving last-minute concessions can now be used, and are also adopted by the supplier (see overleaf).

Relaxing: physical

•Nodding

•Moving closer

•Smiling

•A lot of eye contact

•Closing notebook or file

Relaxing: language

•Restating the situation

•Enthusing

•Using 'we'

•Agreeing

•Overt statements

•Saying 'yes'

•Saying 'and finally...'

Relaxing: technical

•Signing off samples

•Showing preference

•Getting designers together

•Committing budgets



7. Post-mortem Even after the negotiation has concluded, the buyer must maintain confidentiality and continue to condition the supplier.

For example, it is inadvisable to let the supplier know that they won the business easily as next time they will not give as many

concessions.

There should be an internal review of the negotiation process:

how well the team kept to the brief (feedback from the observer is helpful for this)

the use of ploys and micro-skills and their effectiveness whether the range was breached and, if so, why

•Stating that the budget expires at year end so the deal must be done now or never

•Revealing that a purchase order can be placed today

•Magnifying the fear of losing, which is far greater than the desire to win

•Saying 'Take it or leave it as there are many other interested parties'

•Using silence to allow time for doubt to develop

•Re-emphasising the importance and potential value of the account

•Hinting at future prospects if phase 1 is successful

Buyer

•Acting as though agreement has already been reached (e.g. on price or delivery): 'All we need to do now is...'

•Pressing for confirmation: 'So you have everything now, don't you?'

•Not responding to the question 'What do we need to do?'

•Playing on guilt: 'We have spent many months... can't afford to spend any more time unless a firm commitment is made'

•Instilling fear of shortage: 'I must impress that our capacity is quickly disappearing as there are many interested parties'

•Throwing in a last-minute sweetener: 'Well, if we can do it today, I can...'

•Using third-party selling: 'Look at what these other clients achieved'

Supplier



how well the supplier’s arguments were anticipated

the time taken to complete negotiations how satisfactory is the final agreement.

No two negotiations are the same, having different dynamics in terms of people, time, place, needs, sentiment, desire, fear,

willingness, skill, competitiveness. However, principles can be used for learning; for example, team roles and character strengths.

8. Bonding

Negotiation can be fraught, tense and arduous, but having completed the task there should be a period of bonding:

building bridges, developing trust, creating on-going dialogue and discovering other areas of common interest. This paves the way for an enduring buyer–supplier relationship and may bypass the need to negotiate for additional services or refinements.

The negotiation is a necessary step in order to begin the relationship, and its ending is sometimes a relief. Win/lose (destroy the opposition) approaches to negotiation leave little room for good will afterwards and therefore are often unhelpful.

The relationship does not start well if the win/lose philosophy is pushed to the limit and, if the buyer takes too much advantage of temporal market power, the supplier may not offer added

value over the term of the contract, which sometimes is worth more than the original contract sum. In fact, a supplier that has been pushed too far will make up the difference in price somehow, perhaps through minimal performance or quality.

A more forgiving or experienced buyer will gain valuable access to product innovation, service improvements and cost reductions.

Notes

Buyers tend to have more supply chains to manage than the supplier’s Account Manager, so planning is essential

to achieve focus. People and behaviours are key dynamics. Range setting and BATNA determination are essential

activities.

Confidence is self-perpetuating and likes/dislikes of oneself and the supplier help in the negotiation (according to Brian Roet).

negotiation

Documents

negotiation meeting

aspects of negotiation

dynamics of negotiation

summary negotiation

cost analysis

vulnerability analysis

transition analysis

portfolio analysis