Tuesday, February 1, 2011

Negotiation Bargaining Zones

In a number of books on negotiation the authors speak about negotiation settlement ranges.  The assumption is that both parties have their desired positions and a walk away position. In the Suppliers case they will never go below a certain amount and Buyer will never go above a certain amount. So the premise is the bargaining zone for the negotiation will be where the Buyer's and Supplier's ranges overlap. This is how it looks graphically.

This is a great concept in theory, in practice it’s not very useful as in most negotiations you are not dealing with a single issue such as price alone, you are dealing with many issues that affect the cost of the relationship and your life cycle cost.

The simple fact is Buyer’s may be willing to pay more than what they consider to be their worst case price if they see additional value. The may also pay more if they need what the Supplier is selling and simply don’t have an alternative where they can walk away. Similarly, Suppliers have been known to sell for less than their worst case if they see additional value from the sale or they need the business and can’t walk away. This means that depending upon the circumstances of each of the parties at the time of the negotiation and the leverage each party has, their best and worst cases will change and so will the “bargaining zone.”

Even on strict price negotiations who you buy from will impact the bargaining zone. For example if you buy from a Supplier subsidiary their bargaining zone will be impacted by what they had to pay to purchase the product at the transfer price from the Supplier and what overhead and profit they need to make for that subsidiary. If you purchase a product from a distributor their bargaining zone is going to be impacted by the deal they have with the OEM. Most distributor relationships fall into two price models. A common type is the distributor is given a discount off the Suppliers list price, so their worst case selling price be based upon that discount plus what they need to make to cover their overhead and profit.  The other distributor model is more of a price protection approach has target selling prices and they get their discounts and margins by staying close to the target selling price, so their bargaining zone may be very small.

As a Buyer going into a negotiation, its important to establish your goals and what your walk away point would be as that sets your own bargaining zone. Its also important to track and consider the impact of each concession on the total cost of the relationship. Where you really get value you may agree to pay more than planned. If the Supplier clearly wants to provide you less under the contract you want to make sure that each time that is proposed you have the expectation that you will pay less as a result.

When should you try to uncover the Supplier’s bargaining zone? Normally I wouldn’t care about the Supplier’s bargaining zone as their responses as part of the negotiation would indicate where it will be. If I felt it appropriate I could include a target price as part of a RFP to serve as an anchor for negotiations. The key is to never head too far down the path with the Supplier (especially if the circumstances could lock you into using them), before you know whether or not the potential deal will be acceptable. I’ve seen too many Buyers have to settle for bad deals simply because they had either invested to much into the relationship to walk away or because they simply did not have the time to start over with another supplier.

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.

Negotiator Attitude

I was once asked to help train an individual who wanted to change careers from the Human Resources field to Procurement. I started by giving him the most basic advice that every person should have, especially negotiators. Suppliers and people in general don’t walk around giving you things. If you want something you need to ask for it.  The second part of the advice was “It costs you nothing to ask and the worst they can say is no.”

Many times people are too polite or too hung up thinking about what they feel could happen; how they would be perceived; or how other person would respond.  If you want to be a negotiator, you need to get by those hang-ups and make sure that you ask for what you need and want. Sure the Supplier may say no the first time. As a negotiator its your job to convince them why no isn’t the answer if they want the business.  

This advice is the basis why hagglers are frequently successful in their purchases. They ask and it doesn’t bother them that they get a no because there will be times when they do get a yes or when it opens the door to a negotiation where they can be successful.

I talked to John (the trainee) recently.  He was doing fine and after losing his wife several years ago was in a new relationship. He explained how the new relationship came about.  He had known a local woman that he liked and wanted to ask out. He reminded me that  I told him as part of that training years ago: “It costs you nothing to ask and the worst they can say is no”.  So he asked her out. She said no, but she did offer introduce him to a friend that she thought would be a good match. He went out with the friend and that’s how the relationship started. If he didn’t ask, he never would have been introduced to the other woman. The woman he initially asked also probably would never have thought of introducing him to her friend.  By asking it set the ball in motion.

If you want something ask for it.  It costs nothing to ask and the worst they can say is no. You may get a no, but as in John’s case sometimes no isn’t all that bad as it can lead you in another direction. I’ve had suppliers that I thought would say no to bidding on certain work and still asked them. They said no, but referred me to another Supplier that worked out fine, maybe even better than them. Even if they say no you can still use it as an opportunity to learn and solicit their thoughts or opinions on key areas.

Negotiator Errors

There are a huge number of potential mistakes that a negotiator can make in the negotiation process.  Here’s just a few high level ones:

For strategy and tactics:
  • Not identifying the relative leverage of the parties
  • Not selecting the appropriate negotiation strategy for the leverage
  • Not selecting the appropriate tactics for the strategy.

In planning:
  • Not doing sufficient research on the Supplier, their operation, how they manage their business, what they will want and need out of the negotiation and what information you can use in the negotiation.
  • Not creating a negotation plan to work from

Leading up to the Negotiation
  • Not setting the right expectations with the Supplier
  • Not effectively managing communication so information that shouldn’t be disclosed is disclosed to the Supplier that impacts your leverage.
  • Not managing the perception of competition (if that is available)

In the negotiation
  • Not managing the negotiation and your team.
  • Focusing on people, problems, or past history rather than the real issues.
  • Not probing to understand the real issue or concern of the Supplier.
  • Not being attentive and listening to the Supplier for any clues they may provide.
  • Not effectively selling your position.
  • Not keeping track of concessions and their impact to the Price you want to pay. or your total cost.
  • Not using the leverage you have.
  • Not using information you know about the Supplier to your advantage.
  • Ineffectively communicating your needs or showing conviction in those needs.
  • Acting or communicating in a way that creates barriers to the communication where other party has negative emotions about the negotiator,  has a lack of respect, distrusts, of feels they have a lack of sensitivity to their issues.
  • Letting negotiations drag on so you lose the leverage of the power you had or other options.
  • Repeatedly asking the same question or the same question phrased differently in hopes of a different answer.
  • Not saying No when no is an appropriate response.
  • Not clarifying what was agreed to ensure there was agreement and documenting what was agreed.
  • Not feeling you can re-open things that were already agreed if something has changed.