Tuesday, October 11, 2011

Principled Negotiations and Pareto Optimal Curves

In the concept of principled negotiations that was first discussed by Fisher and Ury in their books Getting to Yes, the key concept of being able to have a principled negotiation is the ability to “expand the pie” so you can focus on each party’s interests.In graphically showing the two options (win-lose versus win-win) win-lose is pictured as a ninety degree triangle. The top of the horizontal axis shows the Buyer winning all and the Supplier getting no win. The end of the horizontal shows the reverse with the supplier winning all. The diagonal axis sows that for someone to win, the other must take less.

Now picture that same triangle with a half circle placed on top of that The outer boundaries of that half circle are established by what’s called the pareto optimal curve which is the statistical maximum curve that is expected could be achieved.The area within the half circle is now the principled negotiation zone where both can get more. The concept is if you are able to expand the negotiation to include that other areas its possible to move the negotiation from a win-lose negotiation to a win-win where both parties can meet their interests.

I’ve never been convinced that principled negotiations really work in most procurement and while everyone in procurement should understand the concept, they also need to know how to negotiate in a traditional win-lose model. From a procurement perspective, how realistic is it to expect to be able to expand the pie to move into win-win negotiations? If you can't principled negotiations won't work. Let's put the idea of expanding the pie into a procurement perspective;

Most companies are best in class in maybe one product or one line of business. I don’t know any that are best in class with all lines of business and all products or services. So the first question is do you want to expand the business you have with the Supplier into those products or lines of business where they are not best in class?

You could potentially expand the pie by giving a supplier a larger percentage of your business. There are certain costs or risks associated with doing that. What happens if there is a problem with their supply and you don’t have an immediate alternative you can use?

You could potentially buy more of their best in class products to expand the pie, but what impact will that have on your ability to leverage your other suppliers? You may wind up getting more from the one but losing with the other.

There will be times when what you are buying is all that you need or want so there is no
opportunity to offer anything more than a good faith promises to use them in the future.
Most suppliers that I know need to see a benefit to them today before they will agree to give you a concession. If you can’t commit to that future business, any concession they might provide will be less.

On major deals you may be able to expand the pie, but that frequently complicates the negotiation not with the supplier but with the internal stakeholders that may be impacted and who will always focus on their interests. Officers of the company that can look at what’s best for the company without being weighed down by individual group’s interests usually have a better chance to use principled negotiations than procurement people.

The one area where I’ve seen win-win or principled negotiations work in procurement is when
both companies have a common goal of teaming together to win a customer’s business. Even there it can be difficult. For example if a supplier has a product or service that the customer wants or has specified and that supplier knows it, the negotiation between the prime contractor and the supplier may be a win-lose negotiation as they know they have the business. So unless the prime can offer them something that relates to another project where the supplier doesn’t have, but wants that business, its hard to expand the pie and get into principled negotiations.

The one aspect of principled negotiations that every procurement person can learn from is the advice to focus on interests, not positions. Part of any negotiation is being able to reason or explain with your counterpart what your interests are and why you have the position you have. Most of the time that will open a dialog where since they now understand the issue or the problem they can look at their position and view it against their real interests.

Want to learn more? The companion book "Negotiating Procurement Contracts - The Knowledge to Negotiate" is now available on Amazon.com. A hotlink to Amazon.com
Is at the top of the post.

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