The cornerstone of success in negotiations is making certain that you enter into the negotiations having the maximum amount of leverage possible. I can’t tell you how many times I encountered the situation where a Senior V.P. would call me in to negotiate with a Supplier they had “selected”, telling me to get the best deal. That’s a little like going to war without a gun, as when the Supplier knew they had been selected or were preferred, a large amount of leverage was lost as a result. What management had failed to do was use the most important tactic, which is to set the right expectations that help retain leverage. You do that by providing the four key messages as part of the process leading up to the negotiation. Those messages are:
They will be part of a competitive process, (or there are other alternative you will consider).
Both price and the total cost of the relationship must be competitive to win the business.
You don’t need them; other Suppliers, products or alternative will suffice.
Agreeing to the right terms and performance commitments is critical to getting the business.
Setting of expectations is something that is done by Suppliers throughout their selling process in a number of ways. They have list prices, they can provide standard or industry contracts, they will have published discount structures, they may have ROI models showing the value, and they can recite company policies and practices, provide testimonials etc., all of these are intended to set and manage the Buyer’s expectations to fit within what they want to offer. For Buyer’s to maintain leverage they must set the 4 messages and everyone on the team must re-affirm them. One loose link in the chain that does not fully support the validity of those expectations will significantly reduce the leverage. If a Supplier knows that you need, want, or prefer them, they know that they may not be in a competitive situation. There are three things needed to drive concessions. 1) The Supplier must need or want your business, 2) There must be competition or significant leverage and 3) The Supplier must have uncertainty about winning the business. The more they need and want your business and the more uncertainty they have, the more they may be willing to concede to win your business.
For tactics to be successful you need leverage. Half of leverage is situational and will vary from purchase to purchase depending upon the circumstances. For you to have situational leverage the Supplier must want or need what you have to offer. The other half of leverage is in setting and managing the right expectations. Use every meeting to re-affirm expectations. The involvement of all the other members of the team in setting and managing expectations is critical. To Suppliers the Procurement function is looked upon as the gatekeeper or revenue prevention team that they need to get around to find the real decision maker to make the sale. If anything conflicts with the expectations you are trying to set, it will severely damage the negotiation.
My number 1 tactic is to set and manage expectations. Without it, all the rest of your tactics may not be able to be used or their real value may be severely diminished.
The following tactics and behaviors are my favorites to use in a negotiation. You can learn more about many of them in books by Dr. Chester Karrass and Herb Cohen.
The second most important tactic is the power of competition. Competition creates uncertainty. Uncertainty drives the need for concessions to win the business. Even if you don’t have true competition, always try to create the illusion of competition so the Supplier will believe that there is competition. There are a number of ways for a Buyer to show actual competition or create the illusion of competition. To show actual competition there is nothing better than qualifying multiple Suppliers and then let them know there is competition. You could have multiple Suppliers under contract and determine the percent of the business they receive by their competitiveness so they are forced to compete to keep or increase their volumes. To send the message that they need to be more competitive, don’t give them any business for the next period. You can schedule a bidder’s conference where you invite all prospective Suppliers to ask questions about the program, requirements, etc., so they will see the actual competition. You can take them to places in your facility where it will be highly visible that you are using their competition. I’ve posted performance metrics in lobbies or conference rooms when I wanted to show competition and highlight the need for improvement by some Suppliers. When you don’t have or want competition, you can always try to create the illusion of competition, but that requires that your entire team support the illusion. If you can get the team to act that way, there are a number of ways to help bolster the impression of competition. Team members can use well placed comments about qualifying or considering other companies to create doubt in the Supplier. You can have brochures, letters, proposals, or the competitor’s product placed in placed in plain view of the Supplier’s sales person. You can schedule meetings with a competitor that will be discovered by their sales person. You can be talking about something completely different, but they don’t need to know that. You could even use the competitor’s product as the specification and ask for bids on an “or equal” basis.
What you can’t do is create a situation where it is easy for the Supplier to see through the illusion, as all that does is give the Supplier more leverage. For example, if you were going to use the approach where you ask for competitive bids to try to show competition, you can’t have the specifications be so restrictive that they can quickly determine they are the only ones who meet those requirements. If you need those unique requirements you can ask for bids on something less and then negotiate the addition of those requirements. For example, if you had a requirement for service across a broad area and only one Supplier had the capability to do that, instead of asking for bids for the entire service area you would break to requirements into pieces that could be bid by others, and ask the Supplier who you want to bid against each of the individual areas and also give you a bid for the combined areas. This would give the illusion of competition for each of the smaller areas that impact how they will price the pricing on the combined areas.
Even if there is no specific competition against their product or service, you can also introduce competition they have against other investments they may be competing against for funding on an ROI basis. We’ll talk a little more about this when we discuss the “CIO Crank” tactic.
Just as Buyers what to create the expectation of competition to reduce the price, Supplier may want to create an illusion of demand or change to prepare you to pay more where they introduce Competition on demand as a tactic. This is done in a number of ways:
Ø Suppliers may talk about an upswing in demand that will start to create shortages.
Ø They can announce longer lead times due in part to the increasing demand.
Ø They may discuss actions of their competitors such as exiting the business, moving to a net generation, which will imply a shortage of material in the market.
Ø They may talk about increasing demand they are seeing from other businesses or industries that will impact the market.
Ø They may refuse to quote on lower volume requirements or establish minimum buy quantities.
Whether these are real or an illusion you may never know. What they are trying to do is create an expectation on your behalf that the market is changing and the supply/demand position on which your previous agreement or pricing was based is no longer valid. They are also preparing you for a price increase, as we all know that an excess of demand is always a way they try to drive prices up.
Buyers should use the concept of market demand, when it is in their favor, to negotiate better pricing from the Supplier. Buyer’s can talk about a down swing in market demand that will start to create excess capacity. They can talk about reduced lead times they are starting to see due in part to the reduced demand. They may discuss actions of the competitors such as entering the business, increasing their capacity, which will imply an excess of material in the market. They may talk about reduced demand they are seeing from other businesses or industries that will impact the market, especially where that other industry may have caused shortages that drove up pricing. The goal is to show your knowledge of the market and your knowledge that there will be excess supply and capacity in the competitive market. That sets the expectation that you expect a price reduction, as excess supply versus demand should always drive prices down. When there is a difference between what the Supplier offer and what the competition offers (where this Supplier provides something less), use that competitive situation to do a point by point comparison to highlight the diminished value they offer that needs to be offset with price reductions or changes in their commitments.
Use linkage. For example, link all the terms of the contract together so that nothing is agreed until everything is agreed. Link concessions so for the Supplier to get their concession, they must provide you with the concession you want. Use conditional proposals and language to get agreement. When it’s to you advantage, link sales and buying contracts with the same Supplier so you get the better buying terms. Link future business to today’s concessions. Link your agreement on pricing to other concessions or performance commitments. Link your acceptance to specific exceptions.
Learn how to say no. This can be done by providing them with either a direct, non-negotiable no to a position, or by providing them with an explanation and reason for the position so they clearly understand the problem and why you said no, or the problem they need to overcome to get your agreement. The more times you can provide them with a valid reason or explanation for your no, the more successful you’ll be. When you just say no, Negotiators will have the tendency of digging in and saying no themselves. When you get a no, don't give up pushing until you get a number of no's after you have phrased or asked it in different ways. Sometimes a no may be a sign they just don’t understand what you are asking for.
Look at issues from both perspectives. Know what things are worth to both sides. Know the benefits and advantages to both parties. Weigh every concession from both perspectives. Concessions that may seem minimal to you may be significant to them and vice versa.
Learn the art of skillfully asking questions. Questions are a great negotiating tool. You can use questions to lead them to a conclusion your want, to uncover the problem, to identify misunderstandings, wrong assumptions, and what the real problem is. Ask them why they need it? If you understand the real problem you can better deal with it.
Be a good listener. You never learn anything from talking but you can learn a lot from listening to what the other party says and the clues they give.
Assign a cost to all concessions they ask for and show them the impact their positions have on their overall competitiveness and their ability to win the business.
Use all the information you have about them to your advantage, especially their past performance or known problems. Use their specifications and representations against them. Use their marketing spin to force commitments. Use all the information you found about them from pre-qualification, interviews, audits, plant visits, reference checks, financial analysis, and all their shortcomings against them. Don’t use pre-qualification activities to only qualify the Supplier, use them to discover information that you can use in your negotiation. If they are a repeat Supplier, use any performance problems you had with them in the past as cost adders so they either need to reduce their cost to be competitive or they need to commit to eliminate those problems with this purchase. Use the information about them, their product, their process, and their problems against them. If you see a high amount of returns, be aggressive on negotiating quality and their covering the cost of quality problems. If you see a lot of excess capacity, demand more. Use every meeting to probe for information that will help in the negotiation.
The Supplier may have provided specifications and testimonials or made representations about their product or service and what it will do for you. When it comes time for the negotiation there is a subtle shift from these representations to the legal contract. When faced with this situation there are two approaches that can be taken. One approach is to document and include all those discussions and representations and include them as part of the contract and make them express warrantees. The other approach is to use them against the Supplier in negotiating the contract terms. Point out the substantial difference between their representations and what they are prepared to commit to and highlight the need to understand the reasons for the difference. If they’re not prepared to stand behind those representations the item is worth less or has less value to you and you should demand to have the price reduced. For example, a Supplier’s specifications may note that their product has a mean time between failures of 40,000 hours. The same Supplier may in their terms only offer a 90-day warranty period. In this situation you have a major discrepancy that you would highlight. 40,000 hours equals 4.56 years. If the product truly has a reliability of 4.56 years, a warranty of 90 days represents only 5% of its expected life without failure. Put the Supplier on the spot and ask them to explain the difference between the two. When there is no rational explanation (which there can’t be) push for either a change in the warranty period or a reduction in the price. It’s hard for the Supplier to dispute something they provided.
Tell them what it should cost. When possible, provide them a detailed cost analysis. Ask for a breakdown of their price. Review both rates and quantities used for appropriateness. Frequently a detailed breakdown will help identify areas where one of the parties has a different understanding of the work, the requirements and what’s needed and the clarification can help eliminate any un-necessary costs. Karrass would call this a Bogey tactics as you are basically telling them what you want to pay.
Divide and conquer. This applies to both issues and people. Nibble at them and seek numerous small concessions. Break costs and terms down to individual elements and negotiate each element. To get the maximum reduction, all elements need to be negotiated to be competitive. Seek an ally on their team and use them to help with your position. Usually sales can be an ally in dealing with their legal if they need or want the deal. When at an impasse go around your counterpart to a higher level. If your problem is with the individual, threaten to withdraw or demand new counterpart.
Tell them they have to do better and explain why in terms they understand and will see the impact of such as: price / volume elasticity; budget; approval levels; competition; your marketplace cost needs; competitive benchmark information. As we learned in the communication section for messages to be of value they need to understand and interpret your message in the same manner as you intended and it needs to be given to someone who has the authority to act. Don’t waste your time giving critical messages to low-level sales people.
Neutralize their unique features and benefits. In most product development the goal is to create unique features that will provide a clear benefit to customers. When a Supplier is successful in generating a unique feature, and the customer needs or wants those features, the Supplier knows that they really don’t have direct competition and either have their own market or can charge a premium over similar products without the unique feature. The more of their features they know are benefits to you, the less willing they will be to discount their price or negotiate their terms. The more information you provide a Supplier, the more the Supplier can determine if a feature is of value to you and provides you with a benefit. Avoid telling the Supplier anything that will help them understand their competitive position such as the competition, their status, acceptance of their solution, and especially the value or need placed on any unique features or benefits their product has. If they fully understand your need or the problems you want to resolve, it can give them an indication of whether there is real competition. Manage the information flow and provide them with information that has them perceive that there is strong competition (even if there isn't).
Ask what if? Many times the reason behind a Supplier’s position is unclear. If you ask “what if” you can begin to better understand what their issue or problem is so you can address it. It can also be used to understand some of their motivations behind their positions.
Show them what they’ll lose if they fail to come to agreement. Show them the annuity stream they will lose out on if they don’t close. The maintenance contracts, revisions, updates, spare parts, repairs, and follow on purchases. Show them the value of you as a customer - your position in the market, the future potential, how you match up against their other customers.
Show them where you have agreement. The best is when you can show where they have agreed in the past, which forces them to explain or differentiate the two situations. Show them how their competition has agreed. Make if a competitive issue.
Combine multiple tactics to provide additional credence for your arguments. For example, instead of just saying that they need to provide a better price, you can provide the reason why you feel they price is too high such as your detailed estimate. You can explain to them the impact that price level has on their ability to get the business or desired volumes by showing them price sensitivity information or the impact on your product sales based on the cost. You could further show competitive benchmark information to justify why it’s too high against the competition. What you want to do is provide them with credible reasons on why their position makes them non-competitive or the problem it creates in your buying from them. Be prepared to sell each of your points to establish your position. Don’t assume they know anything. Educate them so they understand the issue or problem. Give them good reasons to agree. Show how what you are asking for makes sense. Use examples and analogies so they clearly understand. Use visual presentations to get their attention and drive points home.
Use the Supplier’s needs and deadlines against them. Use the Supplier’s need for cash flow, end of the sales period pressures. Use the salespersons needs, deadlines, quotas, sales periods, commissions to help get what you want. The more they need your business, the more they will help.
Ask them to help solve the problem. Look for value engineering or other proposals to reduce cost. Seek alternative ways to provide you with what you want. Have them help you reduce the cost.
Find the yes person. In Business there are people who are “No People” either because it is their job to say no, or because saying no and getting the customer to accept no will help them meet performance metrics upon which they are measured and rewarded. “Yes people” are those within a company who are above the level of the “no person” and are not measured in the same manner. They can look at the decision from a broader perspective as they have a broader base to be measured against. The sales person may be a “No Person” as making concessions to you will potentially affect their measurements or rewards. Sales people who are unwilling to make concessions frequently lose sales. If you deal higher in the organization you will be dealing with someone who can look at the concessions to you in perspective to all of the business they are responsible and this increases the chance you will have of getting what you need or want. When needed elevate issues to a higher level in your company, so it elevates them to a higher level on theirs.
Use all the power and leverage you have.
Herb Cohen in his book “You Can Negotiate Anything” does a great job of describing the powers:
· Use the power of your status or position in the marketplace.
· Use the power of legitimacy to get agreement on price and terms.
· Use the power of past precedent.
· Use the power of commitment.
· Use the power of knowledge
· Use the power of risk taking in terms of commitment.
· Use the power of effort or investment.
- Use the Power of Timing.
· Use the power of size or volume.
· Use the power of money.
· Use the value of you as a customer versus others.
· Use the position you have with them.
· Use their pain.
Don't make concessions until you know all the demands. Think of all concessions in terms of real money. Puff or overstate the value of your concessions.
Put a dollar value on all risks you assume. Risks are simply costs that will materialize if the event occurs. If they want you to assume a higher risk, demand a lower cost.
Include incentives, penalties, and measurements to drive the right behavior. If you want the Supplier to help with long term cost reductions, make sure that the terms you negotiate drive that behavior and don’t penalize the Supplier for doing what you want. E.g. If the Supplier’s overhead and profit is based on cost, if they help reduce the cost, it will reduce the contribution to overhead and profit which is a negative incentive for them to behave in the manner desired. Use terms that keep them from testing the boundaries. E.g. More frequent problems mean less tolerance, less time to respond, less time to recover, etc. Fewer problems mean more business, less management, etc.
Look at everything that has an impact on cost and for every area that is lacking in their product or service, push for a price reduction. Check:
Design for manufacturability (is it easily manufactured using automation). This will impact what production cost reductions are possible in the future, learning curves etc.
Design for service. Is it something that may be serviced quickly? This impacts your life cycle cost. Design for shipment. Is the design something that allows efficient use of packaging and distribution services? This impacts landed cost. Design for use. E.g. Operators, replacement of consumables. This impacts life cycle cost. Design for future change. Look at the ability to add capacity, upgrades, and new capability. This impacts life cycle cost and obsolescence.
Use the Total Cost of Ownership (“TCO”) (also referred to as Life Cycle Costs)
When Buyer’s use TCO in a negotiation it’s a tactic to drive down either the initial purchase price and/or the cost of follow on purchases under the argument that Supplier’s TCO is higher than their competition and to be competitive there must be a reduction in one or both. Suppliers also use TCO as a value based selling tool, where they attempt to show their product provides a lower TCO, so any initial price differences will be made up in the savings that accrue over the life of the product. It’s a way to try to differentiate their product from the competition to get the pricing they want and not compete head to head on price alone. In fact, if you went on line and searched for “Total Cost of Ownership” what you would find is a number of Suppliers websites with facts, figures, financial models, all to get you to look at the TCO as a way to either substantiate their value proposition and their pricing, or to differentiate themselves from their competition when they can’t or won’t do it on price alone. As with Life Cycle cost, most TCO models include the purchase cost, installation cost (if any), financing cost/ value of money, commissioning cost (if any), operating costs, cost of spare parts, consumables, repair and maintenance costs, productivity costs, risk cost and disposal costs. When a Supplier tries to introduce TCO, ways to counter it are: when you have a high value of money tell them that because that makes future savings worth significantly less or; you can use other factors like having an internal customer that’s strictly interested in price or has a budget problem. The goal is to significantly diminish the value of those future savings to keep the focus on price.
Use ROI Models when it’s to your advantage. Use anything that impacts your ROI for negotiating price concessions. Use anything that delays your getting ROI to get other concessions. For example a piece of software may provide a great ROI, but there can be substantial time to convert, install, train to begin to get the benefits. Use that delay in your starting to see an ROI to negotiate certain concessions like longer payment terms or progress payments or have that offset by other concessions like free training.
Educate them on the market for your product. Tell them what your customers want that they need to meet. Provide them with things like price/volume sensitivity analysis to show the impact cost their cost will have on volume.
Agree upon the scope and terms before you negotiate the final price. If you don’t you always leave yourself open to the Supplier arguing that the price wasn’t based on the scope or the term then requires an adjustment. Always understand what the offer includes or what it doesn’t include. A common Supplier tactic is to use add-ons to increase the effective price. One add-on that we see every day is “Plus shipping and handling”. Some companies will use shipping and handling as a way of making their product price look lower. Other companies use shipping and handling to get more from you. The only incremental cost to them is shipping. Handling is something that they have to do to sell the product and really shouldn’t be a separate charge. Another example of an add-on that I saw was a percentage charge on the cost of an item for “Crating the item for international shipment”. If you didn’t take a close look at what you were being charged, you would be paying far more that the value of the additional service performed. In the crating example, the real cost of crating was probably two percent of the cost of the item and the Supplier was trying to charge 10% which puts another 8% profit on their bottom line. Other examples of add-ons are to sell accessories or options separately that the Supplier knows that you will need or want. The price on those accessories or options is usually inflated. This is similar to a bait and switch. They offer you the basic item at a very competitive cost and then charge higher prices for the accessories or options that they know that you will want or need. If you have ever ordered a new car you have seen the add-on practice at work. The automobile manufacturer will have a low base price and then there are inflated costs for virtually every option. The easiest way to deal with add-ons is to research the basic item and all the items you would want added and then negotiate the complete purchase.
Don't assume anything. Don’t assume they know anything. Don’t assume they know what you want or why. When that’s to your advantage tell them. Be skeptical and ask them to prove it. Don't assume your opponent knows your weaknesses.
Use your contacts in the Supplier to open doors and get around the No people. Salespeople and their lawyers can be revenue prevention teams holding out, even if it means losing the business. If you are going to get a no, get it from as high as possible in the Supplier.
Identify the decision maker and negotiate at the right level. Virtually every Supplier has standard sales terms, sales policies and price lists and discount schedules. The sales person’s job is to make the sale using those standard terms, following the sales policies and sell at a price within the standard discount schedules. They will not have authority to make changes from those standards. When you push for something greater several dynamics occur. First, if you pushing for a lower price, the sales person may be measured based on allowances or profit margins, so there may be a reluctance to provide the reductions that may impact their metrics and compensation. At their level the dynamic will usually also be impacted by where they stand in meeting their sales quotas and what impact will that sale will have on their compensation. If they have already made their quota they may not be willing to negotiate anything. They may also need to get approval from a higher level of sales management depending upon the magnitude so it there must be some incentive to them to involve their management. The next level of sales management may also be measured on revenue, profit margins and the amount of allowances. So there will always be a trade-off that occurs in the sales person or the sales manager’s minds as to whether the value of the sale offsets both the impact to their compensation and involving their management to support those additional concessions. The same decision process will be made every time before escalating it for approval of the next higher level of management. The advantage an escalation process has for the Buyer is the higher up you move within the sales organization, the more that level is able to look at the sale in relation to all their other sales, and that lessens the impact of individual concessions. It’s at those higher levels in sales management where the real decision maker exists within the Supplier where key strategic account decisions will take precedence over the impact of the sale on metrics and compensation. If they feel that the sales is strategic or the customer has value that extends beyond the value of the sale itself, they may decide to agree to terms that are more favorable to the Buyer to get that strategic customer and the value they bring.
The Buyer’s goal should be to start the negotiation as high within the Supplier’s sales organization as possible to avoid the dynamics that occur in dealing with the lower level sales staff. The larger the volume you can offer and the more valued you will be perceived as a customer, the stronger your likelihood of being able to start at a higher level within their sales organization. If you don’t have the volumes and don’t have strategic value to the Supplier, the more likely you will be pushed into working through the lower level sales staff where the ability to get what you want becomes more difficult. If you are forced to start at that level and don’t get what you want to hear, you can always ask to elevate it with their management. If you’re not a strategic customer the escalation may be more of a courtesy than something that will help you get what you want. Where you wind up in the negotiation will be strongly impacted by the level where you started.
When all else fails or you have no leverage, look for a common ground. As the Rolling Stones say “You can’t always get what you want”, and when the differences between what you are asking for and what the Supplier wants to provide are substantial and there isn’t much movement by either party, then it may be time to turn the negotiation into a problem solving exercise where both parties look for common ground that they can agree upon. This requires the focus on issues, not individual negotiator or company positions. This is more like a form of mediation than negotiation where both parties have to give in substantially to meet the common ground. If everything else doesn’t work and you don’t have leverage this may be your best option. To learn more about problem solving as a negotiation strategy I’d recommend reading any books written by individuals that have been or are currently associated with the Harvard Negotiation Project.
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