Thursday, January 27, 2011

Power - The Point Of No Return

In aviation there’s a term called “the point of no return”. It’s the point in the flight beyond which the remaining fuel is insufficient for a return to the starting point. Once you pass the point of no return, you have no option but to continue on your current course. A similar point of no return also exists in many negotiations. It’s the point in the negotiation process where you must continue on your current course of action and try to close with that Supplier. It’s the point when starting the process over with another party may no longer be feasible. It could be driven by simply economics where you have too many sunk costs to walk away or it could occur when other alternatives become no longer available. More frequently it will occur when changing directions or Suppliers is simply not acceptable because of the impact that would have on activities that are dependent on that purchase such as project or development schedules, implementation plans, etc.  

When Herb Cohen talks about the Power of Investment its similar to the point of no return. The power of investment comes from the sunk costs or sunk effort that a party doesn’t want to walk away from. It could also mean the fact that you’ve invested so much in this Supplier that you have limited your options, and that’s significant leverage the other party can use against you.

Timing impacts the viability of other alternatives and also can create a form of point of no return. The point of no return places you in the position of having to choose from two less than desirable alternatives. One is to contine to try to resolve it with the Supplier which may mean to accept less or give more to the Supplier to close the agreement because you’ve lost leverage. The other is to walk away from that relationship, and have to deal with the impact is has. The more investments you’ve made in the relationship,  the more difficult it may be to walk away from those because a change in direction with cause other costs or problems and may require more investments on top of those already made.

As a Buyer its important to manage the point of no return in your negotiations as it can significantly impact your leverage. The more you have invested in creating the relationship with the Supplier, or the fewer acceptable alternatives you have if you don’t reach agreement, the less leverage you will have. The larger the impact to you of not reaching agreement, in comparison to the impact to the Supplier, the less leverage you will have. The point of no return can totally negate any competitive leverage you may have initially had and turn the negotiations into a quasi sole source negotation simply because you effectively have no other alternatives available without adding more cost or impacting schedules.

They key is to manage the closure of the negotitions in a manner where it maintains the most leverage for you. If a point of no return situations can occur, you need to manage the closure of the contract quickly where you still have maximum leverage and still have other options. If you won’t be impacted by the delay but the Supplier will be continuing to make investments of time and resources, don’t be in a rush to close as the more they have invested, the closer they are to being at the point of no return where it may be better for them to give you what you want than to wallk away from the business. When there are delays to the negotiation being caused by the Supplier, always consider the potential impact of those delays on your leverage and what their motivation may be. If they will put you at  leverage disadvantage, Don’t let them occur. If you can’t control them, consider starting a parallel activity to continue to keep your competitive leverage. Once time or circumstances has you locked into them, you’re at a disadvantage. I’d never threaten to walk away unless we were prepared to do it. If you are prepared to walk away and deal with the impact you no longer have a point of no return and simply telling them that you are prepared to walk away then shifts the leverage back to you and forces the Supplier into having to alternatives that are less desirable to them. They can simply walk away and loose all they’ve invested, or they can attempt to meet your needs to salvage the sale.  

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