Special Report: The fine art of negotiations
Purchasing's exclusive look at negotiations from both the buyer's and the supplier's side of the table.
By David Hannon -- Purchasing, 6/18/2009 2:00:00 AM
Get the suppliers' side.
News flash: Suppliers prepare for negotiations too
Buyers: Be Prepared!
When it comes to preparing for an important negotiation, the goal is clear and the goal is simple: No surprises. Purchasing professionals want to know what they can expect, when they can expect it and why during a negotiation. And that means a lot of research.
"You have to know the same or more about the sourcing category than the person you're buying from," says William Hatzichristos, director of corporate procurement for the NY Mets in Flushing, N.Y. "And if you don't know it—you better learn it. If you don't you won't have a successful sourcing opportunity."
For example, Hatzichristos says, a few years ago the Mets wanted to replace their existing scoreboard lighting system at the old Shea Stadium with an LED-based one. "Not only did I know very little about LEDs, but I knew very little about the scoreboard and how it worked," he says, adding that it had not been an issue he'd had to deal with until then. So first, he went and visited the other stadiums that used LED-lit scoreboards and asked a lot of questions. Next, he met with and grilled suppliers both in the U.S. and China about the technology and what it was capable of. All of which took place long before a bid process was even initiated.
"That research helped me write a much clearer scope of work for that project, which in turn led to a very successful negotiation and contract signing," he says.
Shawn Stevens, vice president of global procurement at the OneCare Company, a manufacturer and distributor of houseware products in Alpharetta, Ga., is also someone that doesn't like surprises. One of the first things he does in preparing for a negotiation is establish where his company sits on the supplier's list of priorities. If he represents 1% of the supplier's business, the negotiation may be very different than if he is one of their top five accounts.
"When I'm heading into a negotiation, I'm basically trying to predict what a supplier is going to tell me," he says. And to do that he needs to know the supplier's cost drivers and what those cost drivers are doing at any given time, as well as the business and cost history between the two firms.
"And then on my side, I have to develop alternatives or responses to what I expect them to come at me with. So we can look at it from a total cost and find a win for both sides."
 “You have to know the same or more about the sourcing category than the person you’re buying from. And if you don’t know it—you better learn it.”—William Hatzichristos, director of corporate procurement for the NY Mets |
Stevens says that leading up to a big negotiation, he reads a lot about the supply area and the suppliers involved in the negotiation. He has news alerts set up so that any time one of his suppliers is mentioned in a news article, he hears about it. But he much prefers to hear news direct from the supplier, rather than reading it in the news, especially leading up to a negotiation.
"I try to instill in suppliers the principle of 'bad news first,'" he says. "If there's a problem let me know about it early. I'm going to find out eventually, but if you tell me early I can deal with it more effectively."
Stevens also points out that using third-party data during negotiations helps keep negotiations fact-based, so leading into a negotiation, he's usually pulling as much data as possible on a spend area.
Walk right in, sit right down
Without a doubt, most buyers prefer to negotiate face to face. In fact, some insist on it. Despite the ever-expanding list of technologies and devices available today, buyers want to be able to see their suppliers at the negotiating table.
"I am a strong proponent of in-person meetings because there's so much more that goes on during an in-person conversation," says Hatzichristos. "Phone calls are fine at the RFI stage, but when it gets down to post-bid submittal phase nothing replaces face-to-face meetings. You can't watch body language and eye movements on the phone and you can't detect emotion in an e-mail."
In some cases of smaller spend areas, where it's not cost-effective to travel to a supplier who may be located off-shore, Hatzichristos says he tries to deal with the supplier's U.S.-based representatives face-to-face.
Stevens says even beyond negotiations, he tries to have in-person quarterly business reviews with suppliers. In some cases it means visiting their sites, in others it means they come to him. Recently, in preparing for a major product line launch, Stevens went to China and met with several suppliers for face-to-face negotiations. And even though the travel expenses can seem significant, the savings garnered are well worth the trip, he says.
"I find that if you're there they take you more seriously," he says. "We have a sourcing team in Hong Kong that does great work, but when we bring in the vice president from the U.S., it just has a greater effect."
Along those lines, the business culture of the supplier's region certainly plays a bigger part in negotiations today than in the past. Stevens says sometimes learning a few words in the supplier's native language can send a strong message of partnership.
But while business culture plays a bigger role in negotiations with overseas suppliers, both Stevens and Hatzichristos caution not to alter the negotiation strategy or process too much to suit suppliers in various regions. Doing so, they say, will fail to produce a fair bid comparison.
"You don't want to offer up a concession to a supplier in one region that you didn't in the others," Hatzichristos says.
Build your negotiating team
One key task in preparing for negotiations is selecting the right people to negotiate. It's not as easy at it seems.
Some sales background is useful for a negotiator, says Hatzichristos, as buyers are in some ways "selling" the suppliers on their business during a negotiation. But for pure negotiating skills, it often comes down to personality and the proof of what they've done in the past.
"I will ask candidates during a job interview for specific examples of large sourcing projects they've done in the past, what the outcome was and what they did to get there to get a feel for what kind of negotiator they are," he says.
Stevens says he fully expects when he makes a job offer to a strong negotiator to see some pushback or request for changes. "If they accept the first offer from us, they're likely not going to be a very good negotiator with our suppliers," he says. "It's not just about salary—I may expect them to request a change to benefits or something that shows they are able to go the extra mile in a negotiation."
However, good negotiating is a learned skill and there are many opportunities for buyers to improve their skills in this area. Hatzichristos says the local ISM chapter has been very useful, while Stevens points to the Karrass Negotiating Seminars as a very good resource.
"There's nothing better than actually sitting in on negotiations and watching veterans at work," he says.
"I have a list of negotiating books (see sidebar below) I recommend and when I hire someone into my organization I give them that list and tell them if they haven't read those books to start reading them," Stevens says.
PURCHASING.COM EXCLUSIVE NEGOTIATING TIPS
Following is an extensive list of negotiating tips provided in a survey of members of the International Association for Contract and Commercial Management.
1. Goals: Always have the opening, target and bottom line determined.
2. Budget: You might refer to a budget but you never tell what the budget actually is.
3. Competition:
-Present the negotiation as one that has competition.
-If it is a sole source situation consider presenting as a “make” in house solution
-Or that the purchase will not go forward if it does not meet certain cost and risk goals
4. Compensation: Ask the salesperson how he or she is compensated. What is he or she personally motivated to reduce and what is he less likely to reduce?
5. Quarterly Goals: Is the company selling to you on a quarter revenue system? When is their end of quarter end of fiscal year? Can you move the negotiation as close to those dates as possible?
6. Higher Authority: You would love to accept their offer but you need higher authority to approve it.
7. Waiting Game: Let them wait. Don’t call right back.
8. Contract Templates: When out for RFP attach your contract templates and ask them to either accept or redline with their exceptions. Let them know their response is being weighted and rated against other suppliers.
9. Know the goals you want to achieve:
-The priorities among those goals,
-Potential multi-goal packages, and
-The possible tradeoffs among goals
10. Use tools and templates for consistent outcomes. Use forms, checklists, formal information gathering (e.g. business case), workshops, exercises (e.g. team building, self assessment), analysis tools (e.g. CNA)
11. Employ creative and analytical thinking. Test assumptions, establish facts, explore possibilities (link requirements, RFP evaluation)
12. Be a change manager (i.e. prepare and adjust for change). Record baselines, review progress, assess new or emerging trends/conditions (link change management, terms & conditions)
13. Externalize your best practice behaviors. Are the vendors doing these things, how do I test or observe? What strengths, weaknesses, threats, and opportunities does this create?
14. The Center for Dispute Resolution at Pepperdine University proposes four basic rules for negotiators:
• Begin reasonably.
• Retaliate whenever the other party is unreasonable.
• Communicate clearly and constantly.
• Forgive, but never forget.
15. Physical/logistical Considerations. Creating an environment conducive to a negotiated agreement is also important (again, the counter to this is to recognize when the environment, either by design or lack of thought, is not conducive to a good agreement).
-Make sure the room is arranged so that no one’s chair is at the head of the table, unless a facilitator or arbitrator
-Don’t have anyone sit or stand in front of the door (barrier to exit)
-Dress conservatively; avoid loud colors, especially red or orange
-Use a low, moderate tone of voice; have someone honest advise you of tones you maybe adopt that seem abrasive, impatient or condescending
-Make sure the room is comfortable – sufficient space, seating, not too warm, cold, noisy or drafty.
-Try to have the parties sit together, facing the ‘problem’ in the form of a whiteboard, chart etc., rather than facing each other. Objectify the issue and separate it from the participants.
16. The Last Gap: It is the last step necessary to reach an agreement between the negotiating parties. Often that last gap or last increment emerges after long and exhausting negotiations that have led to agreement on all issues but one. There are many options for crossing the Last Gap:
• Talk/try to convince
• Split difference
• Expanding the pie by subdividing the last gap
• Expanding the pie by an add-on offer “What if I moved on”
• Refer to a third party umpire
• Chance flip coin or draw from a hat (if the outcome really doesn’t much matter to you)
• Transfer the last gap to a third party
• Conditional offers and placating incremental fears –“What if I could convince our side to...? How would you respond?”
• Pause and speak to others, obtain advice
• Pause and schedule time for a specific offer
Got a tip to add? Send it to Dave Hannon at dhannon@reedbusiness.com\
Tips from readers:
From a semiconductor commodity manager on the West Coast:
"KNOW YOUR WALK AWAY POINT. At some point if you know your bottom line needs are not going to be met you need to determine what you can live with and more importantly what you cannot live with and be willing to walk away if need be. Too often the entire process breaks down for lack of this information with no resolution for either side."
From a purchasing manager in North Carolina:
"Along the same lines as #6, Higher Authority, make sure you are negotiating with someone who has the authority to make the deal. You do not want the Higher Authority tactic used against you. Also, do not offer your target price first (similar to #2 on your list) and do not be the first to chop the difference. If for example price is the last hurdle and the two sides are proposing $70 and $100 respectively, you will usually end up closer to your offer of $70 if the first counter offer is from the seller at $90 and then you counter that at $75 rather than you countering first at $80 and them countering at $95. 'Chop the chop.'"
From a senior director of buying in Saudi Arabia:
"Don't underestimate the power of SILENCE. The proper use of silence during the process of negotiation confuses your opponents and in most cases they end up revealing much more information than they would if you haven't used this tactic. A pregnant pause as it is rightfully called is really a very powerful and dangerous weapon that each and every one of us has. The trick is to know how and when to use it. On the other hand, to counter another party's use of the tactic, you can just keep silent too, or perhaps, say: "If you have nothing more to say, I guess we should end our meeting."
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