Tuesday, February 22, 2011

Negotiating Concessions

To be successful in negotiating concessions requires;

·       The Supplier must want or need your business. If they don’t want or need it, they will want to do it on their terms, not yours.
·       The Supplier must believe there is competition they have to beat. If there is no perception of competition, there is no threat of losing the business to a competitor. Competition is what that drives a Supplier to make concessions. Expectations of competition must be set early so the salesperson sets the same expectations with their management.  If their management thinks it’s an easy win, they won’t support concessions.
·       The Supplier must perceive an immediate benefit. They are in no rush to concede today for business in the future. Supplier’s who are generally represented by their sales team concede to meet their immediate needs like revenue, quotas, bonuses.
·       The Buyer’s team must support the competitive nature of the activity. Comments showing lack of competition or preference will impact success.
·       The Buyer’s team must show conviction in their positions. Everyone must show the conviction in getting the concession. If Suppliers perceive they get the business without a specific concession they won’t make it.
·       The Negotiator must be able to successfully explain why it’s needed and the impact to the Supplier if it isn’t met in terms the Supplier can quickly understand and relate. Good explanations will:
o   Highlight the immediate impact on their competitive position (The threat of losing the business);
o   The potential impact the position has on current or future business and volumes (The threat of getting less business)
o   The Total cost impact that would require additional price reductions (Tie pricing to terms
 To get concessions you need to know how to persuade the other party to agree.

Persuasion In Negotiation
There are four primary elements in every form of persuasion: the source, the message, the channel and the receiver. (From “Persuasive Business Proposals” by Tom Sant)
  • The Source. The key with the source is it must be credible.
  • The Message. The message must be tailored to the needs and circumstances just like a sales person will tailor their sales presentation depending on who they are presenting to. The message comes in two parts
    • What is the problem or need?
    • What makes it worth solving?
The things that make the problem worth solving is usually either the potential  loss of business or the ability to increase business.
  • The Channel. The channel is the method by which you deliver the message.
  • The Receiver. The receiver must be able to receive, understand and process the message in a way that will get action and be one that is able to look at the big picture.

Here’s an example of persuasion in negotiating a price reduction:

The Source may be a highly respected consultant or benchmark study that would be readily accepted by the Supplier as credible.

The Message would be the Supplier isn’t competitive (The Problem).
What makes the problem worth solving could be described as likely results:
At the current price their volumes will be reduced or they won’t get the business.  
If they offer a reduced price they will keep and possibly increase their volumes.

The channel for the message would be conversations with the Supplier about future business. In those discussions you begin to set the expectation of the need for a price reduction. You could provide your credible information in advance to reaffirm the expectation. Most parties do not like or respond well to surprises during the negotiations, so its not recommended to wait until the negotiation to provide the message. The exception is in situations where there is newly discovered information.

This leaves the Receiver. Many times Procurement negotiators don’t do a good job of managing the Receiver part of persuasion. To be successful the receiver must be able to receive, understand and process the message in a way that will get action and also be one that is able to look at the big picture. If you deal with too low a level within the Supplier’s organization, there is a strong likelihood that the individual you are dealing with cannot make the needed concessions. Most sales people at lower levels are armed with a standard playbook they are told to manage to, and anything different requires higher level of management approval. They may not see or even care about the big picture unless they are personally impacted or benefit. For example, if they already made their sales quota for the period, they may not want to push their management for the exceptions you need, because it simply doesn’t do anything for them. Your deal, the annuity stream that it may represent may be of little importance to them simply because they look only at what’s important to them personally. In managing the receiver, it is important that if you don’t feel that you are being heard or adequately represented to the Supplier’s upper levels of management, always request an escalation to be heard at the next higher level within the Supplier’s organization. Understand that there will always be levels whose job it is to tell you no, and you need to get around them to decision makers that can look at the potential revenue and risks and look at it from the bigger picture and be able to weigh it on how it fits into the overall scheme of things. I’ve seen things that were treated as major issues at lower levels in a Supplier’s organization vanish when you deal at the right level. The key it to make sure you’re selective in escalating issues and only bringing forward what’s really important. Don’t waste their time on what they will view as miniscule or nuisance points.  

The other frequent problem in managing the receiver is if the negotiator hasn’t set the right expectations along the way. Setting the right expectations early on is very important with the Receiver. Frequently the receiver will also need to report to and set expectations with their management on the business. If you don’t set an early expectation of what you need, they will not have relayed that issue or problem to their management as an obstacle they need to overcome. If your position in the negotiation then conflicts with the expectations they have set with their management, it creates a problem for them with their management. It may be easier for salespeople to say that they lost a deal than it is for them to have to go back to their management to admit they had misread their customer and additional unplanned concessions are required. The point at which you sit down at the negotiating table should not be the first time a Supplier has heard a specific issue or goal. Set the expectations of what you want and need early and often. If they know it’s a problem in advance they can deal with it. If it comes to them as a surprise at the negotiating table, the odds of getting it will be reduced. The more frequent and earlier you can channel your expectations and needs to the receiver, and the higher up you go in their organization, the more likely you will be in achieving your goals.

It is in the persuasion activity that you use the tactics that are available to you based upon the circumstances and leverage you have..

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