Thursday, January 27, 2011

Power - Assessing The Power In The Relationship

Part of preparation for any negotiation is assessing your and the Supplier’s power. Herb Cohen’s (“You Can Negotiate Anything”) list of Powers is a good starting point.

What power of competition do we have? Is it open, or do we want or need them? The more they think there is still competition (real or perceived), the better your chance for getting what you want. What is their power of position and do they know it? If we want or need them, do they know it? If they do, what is our strategy to overcome this? The fact that they know that you want or need what they have to sell makes it a little more difficult to negotiate, but you need to think of what other power can you use to get what you want. E.g. Is it the promise of future business or the threat of no future business, or commitment you will make to purchase more.

What power of authority will we both use? How will we overcome their authority? Suppliers use legitimacy such as published price lists, standard discounts, standard terms, anti-trust laws and everything else available to keep you from negotiating the best deal possible. The best way to overcome authority is to have competition and remind them of their competition. Cherry pick the best from each Supplier and try to get all the others to give you the same thing.

What power of precedent will be both parties use? How will we get what we want and explain away the rest as being different for this particular deal? In a long term relationship one of the things that you have to overcome is the stupid things that your predecessor or others may have agreed to. Explain why the circumstances are different. Remind them of what the competition will do to get them to change. Tell them “if you do things the way you’ve always done them you will get what you’ve always gotten”. Let them know that if they want a larger or closer relationship things need to change.

What power of commitment can I use? The greatest power of commitment is the promise of future business (either real or perceived).

What power of knowledge does each of us have? If they have done a good job at “back door selling” they will know what you need and where they and their competition stand. The time to start managing that is in the earliest stages of the relationship. Otherwise it is like trying to “close the gate after the horses have already left the corral”. Conversely, if you do a good job in pre-qualifying the Supplier, touring the facility, probing their people about what they do and who they do it for, and check references of people who are doing business with them, you can understand what their hot buttons are, what is negotiable, what they need, what their backlog is etc., etc.  

What power of risk taking can we offer? The greatest power of risk taking is to understand what the risks are, where they have built contingencies into their pricing to cover them and then decide which of those you may accept and manage and which they should continue to manage.

What power of time does each of us have? How much do they know about when you need something and why you need it then? The less they know the better. The more they know the more they may be able to determine exactly how much competition there really is.  The more you know about things which motivate them like the end of selling periods, end of fiscal years which may be motivation to close the deal the more you may ask for.

What power of investment does each of us have? This comes into play usually when there was a large up-front cost to get to this point in the relationship such as a very expensive response to your bid or request for proposal. It also comes into play when you want to close. Sales people make commitments to their management about the amount of business they will deliver and when. The more they have invested and the more they have told their management of the likelihood of a win, the more you can play on what the invested.

What power of size do we have? Make no mistake about it. Being big and offering the advantages of a big company can provide give you power. If you are with a big company you can always dangle the carrot of potential large amounts of business to get concessions. Smaller companies frequently are intoxicated with what the potential may be rather than what the real business is.

What power of money do we have? It also helps to understand their financial status. If they have cash flow problems, can you offer things to get greater concessions from them? E.g. shorter payment period or pay for certain investments. Conversely, if they have substantial funds, can you use them to have them be the banker in the relationship by financing / amortizing certain major investments.

What power of leadership or prestige do we have? If you are a leader in the industry and companies will follow your decisions you probably have both the power of expertise and identification as they will want to do business with you for the value it provides them with other customers

The power of precedent can by either what you have agreed with them in the past or what you have agreed with others. When you can show them that others have agreed it becomes the combined power of competition, precedence and legitimacy for your position.

The power of rewarding or punishing works best when there is competition and you can change the volumes you provide them based upon how they respond. If they give you what you need they are rewarded by keeping or growing the business, if they don’t they are punished by losing the business. One of the best ways to let a Supplier know you are serious is change the amount of business they get.

The Power of Investment doesn’t need to be financial, it can be something as simple as you investment of time and the impact that has on your options. If a Supplier has delayed coming to agreement to a point where you have no other option than to either use them or face a major schedule impact, you’ve probably given them a form of power of investment. Always have a walk away date to help you retain your competitive leverage.

While there are a number of types of Power, the most important factor to consider in determining Power is their motivation and motivation can change quickly. The simple fact is the more motivated they are because they need or want your business, the more of these powers you will have. If it makes no difference to them whether they get your business or not, you may have very limited power even if you’re a large purchaser. Motivation can shift rapidly, sometimes with the occurrence of a single event. A disaster at a major production facility can immediately change a market from excess capacity to allocation and their motivation and each party’s power will change immediately. A sales person making a large sale to another customer can change how they feel about your sale. You need to be aware of things that could change the Supplier’s motivation and the longer it takes to come to agreement the more changes there can be that impact their motivation. Someone once said that “the time to negotiate replacing a roof is not what its raining and the roof is leaking”. If you have the power you need, move to close your contract or purchase as quickly as possible before the power changes. Power can change easily and one of those shifts is what I call “the point of no return”.

For anyone that negotiates I would recommend reading Herb Cohen's book.

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