Thursday, January 27, 2011

Power – Things that impact your power

Negotiating contract terms that represent a higher cost or risk for a Supplier provides a great example of power at work. Your probability of getting the Supplier to accept such terms will be impacted by a number of different factors that impact your power such as:

 Are there competitive products or alternatives available?
If the answer is no, you have little chance unless they really need or want to do business with you for some other reason.
 General Marketplace Requirements
The risks a Supplier will assume will be dependent upon what’s demanded by the marketplaces they sell into and Suppliers may sell the same products into multiple marketplaces which have entirely different issues and risks. The more markets they can sell into with less risk than what you’re asking, the less your leverage. Marketplace leverage is also impacted by the supply/demand position of the Supplier. If there is sufficient demand in other markets where there is less risk, your odds are even less. If they have excess capacity across all markets, your odds increase.
 Is Their Competition Providing It?
If they are, your chance is better as you have both competition and the potential for real loss of the business. If they aren’t, your probability is significantly reduced because they won’t feel threatened about losing the business.
 Supply / Demand Position
The risks a Supplier will assume in a buyer’s market of excess capacity are more than what they will assume in a market of excess demand. No one wants to accept additional risk or cost unless they have to. If there’s excess demand you probably won’t get what you want. If there’s excess demand plus other customers or markets don’t require it, your chance decreases. If there’s excess Supply other factors will come into play in the decision.
 Volume / Price Sensitivity  
If the Supplier can significantly increase market share by minor adjustments to price, they can cheaply offset the loss of your business and if they can do that cheaper than what it could cost them to assume the risk, you probably won’t get it.
 Customer Value
If it’s similar to what other customers require your odds are better. If there are limited customers for the product or service (so they can’t avoid the issue by selling to someone else) you have better leverage. The bigger and better the potential customer you will be for them in terms of other risks, reputation, advantages from the relationship, the more leverage you should have. If you aren’t dealing in significant volumes making your business worth pursuing or keeping, your odds are significantly reduced. Customer leverage only works well when you also have advantages in both marketplace and supply/demand leverage.
 Sales Channel
Sales channels can negate leverage. If the Supplier sell direct to all customers, your other leverage may work. If they sell only to major customers, and you don’t fit those requirements your chances are significantly reduced. If they only sell through 3rd party channels you have even less leverage. You may have leverage with the 3rd party Channel or between multiple Channels selling the product, but usually the 3rd party Channel doesn’t assume significant risks on their own and many times the sales channel can’t cover the risk on their own. For many issues, you really need the Supplier’s commitments and resources to manage the risk.
 Will The Supplier See An Immediate Benefit?
If they will, your odds get better. If they don’t your odds are further reduced. They only way they’ll give something is if they’re getting something they want or they’re forced to.
You’ll have less leverage if the Supplier is sole sourced or designed into your solution. The degree of the loss of that leverage will depend upon the ease of changing Suppliers. You can be locked in by nothing more than having passed the window of opportunity to change Suppliers without impacting your schedules.
 Ease Of Changing Suppliers
If the cost of replacing the Supplier  is high, or the ROI period or benefit of replacing the supplier is small, or it requires a significant commitment of limited resources (design or  engineering),  you’ll have limited leverage. When it’s fast, easy and cheap to change Suppliers, you’ll have more leverage. Where you stand versus the point of no return will further impact the ease of change.
 Magnitude, Precedent and Uniqueness
If what you are asking for is new, unique or represents a significant expansion of their risk, there are two factors a Supplier will consider even if you have significant leverage. One is whether they want to start the precedent, because of the impact it could have on other business. The other is whether it makes sense as an investment decision. If it becomes an investment decision, they will weigh the value of your business against the incremental cost and risk. The lower the incremental value your business provides them versus other customers, or the higher the potential magnitude or the risk of your business against others, the less likely you’ll get what you want. Suppliers will walk away from business that doesn’t make sense to them and if acquiring new customers can be done by simply cutting pricing to grab additional market share, they’ll weigh that cost against the cost and risk of what you want. If it’s cheaper for them to discount pricing your leverage is less.
 What’s Really At Risk
A small supplier who has few assets may be willing to sign up for all types of liability. It’s like the lyric from a Bob Dylan song “when you’ve got nothing, you’ve got nothing to lose”. The problem is that since they have little to lose, they don’t offer much protection against the risk to the Buyer. Major Suppliers with significant assets could provide the necessary protection, but they are more cautious and less willing to accept risk. Large suppliers will only make significant concessions on risk if they really need or want your business.
 Supplier’s Expectations
If the expectations about the need for the item weren’t set in advance, your odds of getting it will be less as they won’t have set internal expectations with their management that it was needed to win the business.
 Need or Want
How much the Supplier needs or wants of your business is really the overwhelming thing that determines how much all your other sources of potential leverage are really worth. If they don’t need your business, or it doesn’t matter much to them if they lose it, they’ll probably never even consider whether the investment required to get your business makes sense. They must really need or want your business to have leverage to get concessions.
 Following the above logic, you have the greatest ability to get what you want when:
  1. You have set the expectation of what’s needed from the beginning
  2. What you are asking for is demanded by the marketplace
  3. There is excess Supplier capacity
  4. The Supplier’s ability to replace your business by simply dropping price is limited
  5. You’re a customer they need or want
  6. You’re a direct customer
  7. You’re not locked into them and you have ease of changing Suppliers
  8. The amount and value of your business warrants the acceptance of the risk
Anything that impacts any one of the factors can dramatically reduce your leverage. For example once a market goes into allocation your leverage drops dramatically as the Supplier has enough demand from others to not be driven to accept less or give you more. They have less concern about losing your business because your demand can be easily replaced by another. In fact, they may even make more money selling to others. They don’t have to compete because everyone is getting more business than they can manage. The more short term their focus is, the greater the impact and the less they see an immediate benefit to them, the less willing they’ll be to provide you with what you want.

Just because all the factors may not be in your favor doesn’t mean you shouldn’t ask. You can never predict what Suppliers will or won’t agree upon. Things can happen, such a a major cancellation by another customer, that can potentially change the leverage. In preparing for a negotiation I would use these factors to establish realistic goals and expectations for negotiations so you don’t spend substantial time negotiating points which have a slight likelihood of success. I would also use them to set realistic expectations with your management and internal customers of what likely outcome will be. If you can do better they’ll be pleasantly surprised. If the leverage scale its heavily tilted in favor of the Supplier, you should consider shorter term agreements or other means by which you can escape from the agreement and avoid being locked in by Suppliers. You also need to on the watch for Suppliers that have significant point-in-time leverage who will try to lock customers into terms that will be more favorable to them when the market changes.

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