Tuesday, February 1, 2011

Negotiation Strategies

General negotiation strategies can be zero sum, win-win or problem solving.

Zero Sum is based on the assumption that there is a single universe to be carved up in which for you to get a piece of the pie, the Supplier must give that up. For you to avoid a risk, the Supplier must assume it. For you to reduce your price, the Supplier must reduce their profit. In Zero Sum negotiations you:
o   Find the Supplier’s minimum they will accept
o   Negotiate toward their minimum
o   Manage the perception of your acceptable position
The primary use of Zero Sum negotiations is basic buying or selling relationships.

Win-Win or Problem Solving. The assumption in win-win or problem solving strategy is that you are not limited to a zero sum, what you are looking for is something that is acceptable to both parties. It could include different factors than zero sum negotiations. In win-win or problem solving you:
o   Separate people from problems and move from positions to needs.
o   Establish objective criteria for discussion
o   Try to invent options for mutual gain
o   Problem solve to produce positive result
The Primary use for these strategies are in relationship building, or where Supplier’s has more leverage in the relationship than the Buyer. Books by people that have been involved in the Harvard Negotiation Project* are good to read on problem solving approaches. Roger Fisher and William L. Uhry are authors from the Harvard Negotiation Project that focused on this in their book  "Getting to Yes: Negotiating Agreement Without Giving In".  They also coined a the acronym "BATNA" that stands for Best Alternative To Negotiated Agreement" that you frequently find being used in articles and books on negotiation.

Having spent most of my career involved in Procurement Contracting, when I hear someone talk about BATNA, I sometimes feel like I live on a different planet than them. Maybe it’s because Suppliers spend huge amounts of money trying to create products that are custom or unique so they don’t have to compete because they want to win. Maybe it’s because I’ve seen Suppliers rush to be first to market to get designed into their customer’s products so it’s difficult and costly to switch Suppliers because they want to win. Maybe it’s because I’ve had to deal with Suppliers who have leadership positions in their market and simply don’t care to reach a BATNA or make it a win / win. Maybe it’s because I’ve dealt with a number of Supplier’s that could care less about value creation and only care about making that sale in that period. I suppose that there are Suppliers where you could come up with a win /win solution but most of the time I’ve hear the phrase used,  the context is they want the Buyer to make a concession for their win, but they only want to have you think that you are getting a win. I suppose that there are Suppliers where you can come up with a BATNA to help move from positions to help solve your problems.  I understand the concept of expanding the pie so each party can get their share, but in most procurement settings you may not be able to expand the pie or you simply may not want to expand the pie with that supplier. In procurement what you negotiate prices and responsibilities for costs and risk. Risks, when they materialize, become costs so the entire negotiation is all about cost and profitability of the parties. So in many cases for one to win, the other party must get less. Sometimes you have to force suppliers into wanting to do problem solving. Sometime you won’t be successful. It all depends upon their perception of leverage in the relationship and whether they need or want your business.

Win / Win and Batna are good concepts to understand, but you need to understand other approaches for situations where the Supplier can’t or won’t cooperate with you. When using a Zero Sum approach, one way to improve your chances of success is in having the Supplier perceive more business in the future. For example, the carrot of potential future business and expanded relationships can provide incentive for a Supplier to make concessions they wouldn’t ordinarily make. Good negotiators will always try to imply that if this negotiation is favorably concluded more business will follow and the concessions required today are more like the ante to get into the bigger game.

Tools that you can use whether you are in a zero sum or win-win situation are:

Another way to look at terms in negotiation is what is the benchmark with all other Suppliers? If they have agreed to your terms shouldn’t that be the same benchmark with this Supplier. Place the burden on them to prove to you why it should be different, not just they want it different. When you have competition or alternatives, use that as leverage to get them to agree and highlight the impact on their competitiveness should they fail to agree.

For most contract terms, you can provide them with a reasonable, logical, explanation of why you need what you need and the problem you have that they need to help you solve. The more you can show that what you are asking for is reasonable and is addressing a real need or problem, the more acceptable they may be to your position. If something creates a barrier to your purchase, show them the problem and have them help solve it if they want the business.

Almost every term can be directly related to cost. Use total cost so for any changes they request, show them the cost impact of those changes. Tell them if that if they want that change, how much it will impact the price you are willing to pay. If they give you less, you will pay less and position it on a worst case scenario to drive up the potential cost impact that needs to be offset. The alternative to this is to link things together so if they want X they need to give you Y. Sometimes this can get you more value that what you are giving up.

Link terms together as many inter-relate. For example, if the Supplier want to have absolute control and flexibility over their product, product changes, and process changes with no approval by the Buyer, explain that the cost of that flexibility is for them to share in a much larger percentage of the cost if problems occur. If they don’t to pay those higher costs, they need to give you the controls you need to assume the risk and costs.

When the Supplier has previously agreed to what you are asking for but isn’t agreeing this time, highlight the fact that they had agreed to what you are asking for in the past and, if necessary, force them to provide an explanation of why it must be different this time around.

Always be prepared to say no and when there is competition or alternatives, remind them that a condition of getting your business is agreement on certain terms, some of which are non-negotiable 

The negotiation strategy you select will be based upon the relationship you are trying to establish. Is it one time, or are you building an on-going relationship? The tactics you select will be based upon the leverage you have.
1.     Purpose of tactic:
·       What is the message you want to send or the expectation you want to set?
2.     Available choices of tactics:
·       Not all tactics apply to all points.
3.     Risk in using specific tactics(s):
·       Avoid backing yourself into a corner or having the Supplier walk away.
4.     Individual comfort in using specific tactic:
·       The more skilled you are, the more tactics you will be comfortable with
5.     The ability to combine or link tactics to drive more forceful arguments or show more conviction to your position

For tactics to work best there must be something that shows the “need to concede” to win the business and nothing does that better than competition. The Supplier must see strength in your conviction. You may also need to convince them that what you are asking for is needed, fair, reasonable and above all else you need to convince them that the concession is required for them to win and they need to be motivated to win.

*Harvard University’s the Harvard Negotiation Project is a research project that works on negotiation problems and improved negotiation and mediation. As a spin off of the Project, a number of books have been written on negotiation. In most, the focus is on win-win negotiations. While this approach may work well in a mediation, in normal Procurement negotiations you seldom have the time to take this type of approach and your needs may not be flexible enough to allow you to move to a common ground. In many negotiations the problem solving that you do is by probing to understand what their problem or their concern is to determine if its real. Not all concerns are real. Many concerns may arise because of communication problems or not understanding what you need or want. If it's real, then you consider what, if anything, you can or want to propose to seek reaching agreement.  You may not be able to offer them what they feel they want or need and it's best to learn that as early as possible in the negotiation.

I recommend reading books by individuals that have been part of the Harvard Negotiation Project especially if you will be involved in negotiating the formation of long term strategic relationships. If a Supplier has significant leverage and they don't need your business, odds are high that they won't agree to work to solve your problems.

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