Wednesday, February 2, 2011

Negotiation Preparation - Establish the Team Rules

If you will be working with a team in a negotiation, it is essential to spend time focusing on team behavior, team roles and team interaction. If you don’t manage the team, they can either directly or inadvertently say something that can have a negative impact on the negotiation and your results.

When you decide the negotiation needs to have a team assembled, you need to decide who the team members will be based on their technical skills, negotiation expertise, and Interpersonal skills. Many times someone with the right technical skills may not be a perfect fit either because of their lack of experience in negotiations or their interpersonal skills. You need to identify the number of team members and their roles. Bigger is definitely not better as the potential problems and coordination issues increase the more team members you have.

Part of establishing the team is establishing the communication process and flows for the team (as you want no surprises).  It includes how information they uncover needs to be documented and shared within the team. You prepare for the negotiation as a team. You make it clear the roles of each of the team members. You make it clear how you intend to manage the negotiation and which of the potential negotiation strategies you will use.

Brainstorming and role playing as a team are two very useful techniques for planning a negotiation.
       Brainstorming allows the team to utilize the experiences to help you think through your position and develop creative solutions to negotiating problems. 
       Role playing can be extremely useful in establishing your position and avoid potential mistakes during the negotiation. As part of role playing you may script what you want certain team members to say.

For each member of the team, in addition to their role, you also need to establish what they are accountable to deliver as part of the team throughout the process.  During the actual negotiation you need to schedule frequent breaks to solicit feedback, especially if the negotiation breaks into separate meetings to understand what the team members may have discovered.

As there can frequently be conflicting interests between individual team members it’s important to instill the attitude that what’s most important is not individual positions or goals, what’s important is what in the best interest of your company. Sometimes that’s a tough pill for someone to swallow, but if they aren’t prepared to be a team player you simply don’t want or need that person on your team.  I’ve had to tell people that they were not welcome to attend a negotiation because they wanted to work their agenda that would have killed the deal. Frequently I would get a call from their Manager and would need to explain the significant difference between the value we would get if we were able to close the deal versus what we would lose if we held firm to the position their employee had been advocating. When its explained like that, it would usually end the discussion.


The one of best ways to insure that you have a successful negotiation is to make sure that you have control over the Negotiating Team and that the team is operating under one set of rules by which the Negotiation will be conducted. The following represents a set of basic rules that I generated over time after learning each of them the hard way. Most of these are straight common sense, but sometimes common sense does not exist in all individuals. Depending upon the team members, and the relationship with the Supplier, you may want to develop your own set of rules for the negotiation.

1.     Negotiations or meetings with a Supplier are not a forum for discussing internal disagreements, conflicts, etc., They are not the place to challenge what another team member has said. If something is said that you disagree with, make a note of it and discuss or resolve it off line. If the item is critical to the discussion at hand, pass a note to the lead negotiator asking that you take a break to caucus.

2.     References to the way you do business should only be mentioned when necessary and when they can be given in a positive manner. If you have nothing positive to say about it, don't comment on it.

3.     Never disclose an area where you can't measure the Supplier's performance. If you can't measure their performance we may be able to do so in the future. We may wish to make a concession in this area for another concession from them. If they know we can't measure them they will also know that it is really no concession and the concessions they offer will be comparable.

4.     Never agree to anything immediately. At first look a proposal may seem very enticing. However, when all the ramifications are considered it may not be such a deal or we may be able to do better.

5.     Don't accept "standards or policies" as final. Companies publish standards and quote policies for customers who are not wise enough to negotiate around them.

6.     Never re-enforce a Supplier's objection. If you agree with them keep it to yourself.

7.     Don't make any concessions until you know all the demands. A normal negotiating tactic is nibbling, a little here, a little there. Each of these seem harmless but the total effect will surprise you.

8.     Keep track of all the concessions that they are asking for and weigh them from both your and the Supplier's perspective. What may appear to be nothing for you to give away may be a substantial gain for the Supplier and as such you should use it to get a concession of equal value.

9.     If you are unsure of what you heard the Supplier say, seek to clarify it by re-phrasing it. A number of times your impression will not equal their impression and it's best to clarify it as early on as possible.

10.  When the team breaks off into sub-groups or in subsequent meetings or phone calls remember that the rules still apply. The old saying was "loose lips sink ships" applies here. Suppliers will try to probe individual team members to get information that will assist them in their dealings. Volunteer only that which is necessary.

11.  If the team breaks off into sub-groups use that time to do as much probing about the Supplier’s operation as possible. Just as they will try to get information from us we should try to get information from them.

Negotiation Preparation - Internal Information Gathering

The first step in the Procurement process is internal information gathering that should be done with the requestor, users, subject matter experts, etc. to determine what is required. Similar to contract commitments you are looking for answers to the 4W’s and an H questions: Who, What, Where, When and How.

The goal of internal information gathering is to define the scope of the transaction, describe the elements that contribute to delivering that scope, and establish the conditions under which the Product or Services will be provided or conducted, tested, and accepted. For major contracts information gathering is extremely important. What you learn as part of the information gathering phase can impact what you look for in a supplier, how your qualify them, the bid approach, contract type and contract terms that may be required.

For a large purchase the types of information gathering would include:

Definition of the Project Scope: The boundaries that define the depth and breadth of the purchase, including functionality. In many cases this would be done by the specification.

Volumes of purchases expected. This should include estimates of both current and future volumes
Key Assumptions: environments or conditions under which the scope of work is defined and the estimates were determined.

Supplier Responsibilities: These are the tasks the Supplier will perform (or assist on) to develop or provide the deliverable product or service and any specific activity (or task), that you want to require and the Completion Criteria for those tasks.

Buyer Responsibilities: This would include activities (tasks) or deliverables which the Buyer must provide, perform (or assist on), to enable the Supplier to fulfill its responsibilities.

Deliverables: These are the Materials produced during the project by the Supplier, and delivered to the Buyer. For example do they provide you with samples or prototypes?

Acceptance criteria. Acceptance criteria are the detailed, objective, measurable conditions, which if stated in an Agreement, must be met by the Supplier in order to accept deliverable Materials provided by Supplier

Completion Criteria for “project-based” SOWs. These are objective criteria by which overall project completion is measured.

Schedule: This could included the total time allowed,  major checkpoints or phase milestones. In discussing schedule you could also discuss schedule requirements for managing critical risks or interruption to the business.  For example when I purchased debit card processing services for a Bank one of the key schedule requirements was a prohibition on any system changes during the peak shopping periods leading up to the Christmas holidays as that was the period during which they had the most transaction and made the most money.

Cost Estimate. How much do they expect to pay? Are there any benchmarks?

Flexibility. How firm are the requirements? How flexible is the schedule

Deliverable Materials Guidelines. How you want things delivered. This could mean things like the number of copies for a report, the media type for Software, etc.

How the performance will be managed and who will manage it? The amount of resources that are available for managing an activity can affect the type of contract you need. For example, you don’t want to do a time and materials relationship unless you have the resources to manage it. What escalation processes are required in the event of a problem? Are there any Project management requirements needed to help manage the performance of the work such as project review meetings?

Recommended, preferred, and portential Suppliers.  Do they know of suppliers that they feel can do the work?

Alternative Suppliers, Products or Services. This can help identify potential leverage from competition.

Risk Management Performance Management Needs
You would also ask whether the agreement will needs any performance or risk management terms such as:
  • Approval of Project Personnel, or changes to Personnel
  • Approval of Suppliers, Lower Tier Subcontractors
  • Audit or Examination of Books and Records requirements
  • Background Investigations
  • Change of Control Rights
  • Conflict of Interest restrictions for key personnel
  • Coordination of Work requirements
  • Stricter Confidentiality Requirements
  • Management Escalation Procedures
  • Escrow requirements
  • Inspection of Facilities rights
  • Additional Insurance Requirements such as
    • Professional Liability and Errors and Omissions
    • Employee Dishonesty and Computer Fraud Insurance
  • Key Employee Restrictions

In addition you might also solicit information such as
  • The financial impact if the supplier failed to perform (for use in determining potential Liquidated Damages.
  • Whether there may be competition with others using the same supplier requiring a Most Favored Customer commitment
  • Future needs to determine if you need multi-year Price Protection or purchase options
  • Whether there is any need to make derivative works (for discussions on ownership and license rights)
  • What type of payment mechanism works (Progress or milestone payments, retainage.
  • If there is a concern about Recruiting/Hiring of Employees.
  • Response Time / Performance Criteria
  • Risk of Loss (different from normal delivery terms)
  • Any special Safety & Security requirements that may be needed
  • If the work will be done on the Buyer’s or Customer’s site,
    • Temporary Use of Facilities
    • Temporary Use of Machines

As the last part of information gathering I would ask:
What, if any, prior communications or discussions they have had with any of the Suppliers? 
The simple reason to ask that is to understand what the Supplier(s) may have learned about your company’s specific needs, schedule, preferences etc. All are things that may provide them with an indication on their competitive position which can take leverage away from you in the negotiation.  If you know, you can be better prepared to deal with it.

What you gather during the internal information gathering activity should do several things. First it should provide you with key information that is needed to prepare the RFP or Bid documents.  Second the better you understand what your users need or want the more prepared you will be for the negotiation in terms of analyzing what may or may not be acceptable.

Negotiation Preparation - Reviewing Agreement Red-Lines

When you see a redline change to an agreement made by the Supplier, the first thing you need to do is understand the impact of the proposed change.
            a. Does it impact your costs?
            b. Does it increase your risks?
            c. Will it impact performance or your ability to manage performance?

For proposed changes that have a cost impact ask these questions”:
a) Is this a cost you can manage?
b) Is this a cost the Supplier can manage?
c) Is this a cost that neither can manage fully?
d) Who is best prepared to manage the cost?
            e) If you accept the cost responsibility:
1. What additional terms do you need to manage the cost?
2. What investments do you need to make to manage the cost?
3.  What concessions of equal or greater value would you want from the Supplier to agree to manage it?
For proposed changes with a risk impact ask these questions:
a)  Is this a risk you can manage?
b)  Is this a risk the Supplier can manage?
c)  Is this a risk neither can manage fully?
d) Who is best prepared to manage the risk?
e) If you accept the risk:
1) What additional terms do you need to manage the risk?
2) What investments do you need to make to manage the risk?
3) What concessions of equal or greater value would you want from the Supplier to agree to manage assume managing it?

For any changes that would impact performance or the ability to manage performance ask:
a) What will be the cost impact of accepting the different performance commitment?
b) What risks can occur with the different performance commitment?
c) Before you accept the change consider:
1) What additional terms do you need to manage the performance?
2) What investments do we need to make to manage the performance ?
3) What concessions of equal or greater value do you want from the Supplier to agree to manage it?

For all changes you also need to consider how the proposed change to that one section
will impact any other sections that may be tied to or be dependent upon that section.
A simple example of this is when you change the delivery term. That change may impact
a number of other terms.
  1. Payment is frequently tied to delivery.
  2. The warranty term is frequently tied to delivery.
  3. Rights of acceptance and rejection may be tied to delivery.
  4. Responsibility for costs and risk of loss depends the delivery term.

Negotiation Preparation - Reviewing Supplier Proposals

In reviewing the Supplier’s proposals in preparing for the negotiation there are a number of steps you should take. The actions you take may be different depending upon the procurement policies you must follow.  For example, in public procurement if you discovered a mistake in a Supplier’s bid the only options you may offer them is to either stand by their bid or withdraw the bid. In private settings you may have broader options, especially if the Suppliers know that it is not intended to be final and that additional negotiation can be expected. The key is treating all Suppliers fairly. So in the example of a mistake in bid, instead you might allow the Supplier to correct the mistake and at the same time ask the other suppliers whether they want to update their bid.

1.  Make sure all questions are answered.  If they weren’t go back to get them answered or find out why they did not answer them.
2. Check to see if all items requested were in fact provided and provided in the format requested. For example, if you requested a breakdown of the price, did they provide it?
3. Check the bid or proposal for errors in math. Check all extensions of pricing at the volumes quoted and all additions to make sure there has been no mistake.
4. Document any bid exceptions taken.
5. Document any contract exceptions taken.
6. Document any assumptions included.
7. Document any other requirements or other issues include in their proposal

If the Supplier is potentially under consideration for the negotiation, review the exceptions, assumptions and other requirements or issues with them to fully understand what they have proposed and why. For example are they opposed to making a commitment in general, or do they object to the specific requirement, would they agree to a slightly different requirement. How you do that is important. You don’t want to signal the fact that they may be the primary supplier under consideration.  So its best to explain that you are in the process of clarifying proposals with all Suppliers. When you do that, and you review the exceptions, assumptions or issues with them, they can interpret those as needing to be favorable or they will be either disqualified or be at a disadvantage versus the competition.  Many times it can make a number of the problems simply go away especially if they want or need your business.  I’ve also been known to tell Suppliers how much of an impact certain things will have on our cost to do business with them, providing them with the underlying message that for them to win the business on those terms they will need their price to be that much lower than their competition. When you add a price tag to their issues it can help make issues go away. Sales organizations aren’t measured on the terms that get finally agreed and they have leeway to take certain risks. They do get measured based on the margins they achieve and may be more willing to give up an issue rather than be forced to reduce the price in order to remain competitive.

Another reason for making sure that you fully understand what the Supplier’s issues or problems are is it takes time to schedule and complete a negotiation, especially a major negotiation. The last thing you want to do is find out late in the process that there is a significant disconnect between the parties.  When that happens the alternatives are usually all bad. You can start over with another supplier and have a significant impact to your schedule, or you can be forced to accept less to not impact the schedule. Further the more they know you are locked into them, the less willing they will be to make concessions.

Negotiation Planning And Preparation

Negotiation planning for a major negotiation consists of a number of steps. In smaller negotiations you would use many of the same things to prepare
1. Identify your assumptions:
  • Their team
    • Who will be on their team,
    • What is their expertise?
    • What are their interests and motivation?
    • What authority do they have?
    • Who will make the final decision?
  • Their response to the Bid or Proposal:
  • What do they want?
  • What do they need?
  • How aggressive are they? Does it show that they need or want this contract? To what extent?
  • The leverage
  • What leverage do we have?
  • What leverage do they think we have?
  • What leverage do they think they have?
  • Is there something we can do to shift the leverage?
  • Their positions
  • Which are the most important for them? Why?
  • Which do we think they would be willing to give up?
  • Are there things that we can offer or change to convince them to change their positions?
  • What are the risks and costs involved?
  • Are these risks or costs they can manage? 
2. Your Knowledge
  • What value do we place on the issues?
  • What value do we think they are placing on the same issues?
  • Is there a significant difference between the two that presents opportunity?
  •  What do we know about the Supplier’s company, product, process, or competition that we can use to sell them?
  • What have we learned about them from their proposal, bid, assumptions, red-line response to the agreement and exceptions?
  • What is the priority and schedule of the purchase?
  • What options are available?
  • What policies, laws, principles can be used?
  • What are the real-life constraints (shortage of time, money, resources)?
  • How can you use any of the Suppliers weaknesses?
  • What are the Supplier’s perceived goals and needs? Can you use those?

3. Strategy and Tactics
  • What strategy and tactics do we think will work?
  • What is going to be the best way to convince them?

4. Plan
  • Frame your negotiation and positions:
  • Summarize your Goals and Minimums for each point.
  • Identify the general negotiation strategy that is appropriate for each point. (Zero-Sum, Win-win, problem solving),
  • Identify specific negotiation strategies for individual issues or sections.
  • How do you want to sell them, what will you use?
  • Select the tactics you want to use for each issue.
  • If you plan to say no, have the reason why identified.
  • If you plan to convince them to agree, have the reasons and examples why.
  • If you wan to convince them that what you are asking for is fair and reasonable, have the benchmarks to prove it.
  • If you want to identify it as a problem they need to overcome, be prepared to describe the problem.
  • If you want to use the impact their position has on the negotiation, make sure that you are prepared to walk away if they won’t agree.
  • Have all information about what they do, said , or represented available to hold them accountable to those.

5. Structure the Negotiation Agenda.
There is no one best way in which arrange all the issues that you must negotiate.  Some people recommend starting with simpler issues to get the other party use to agreeing. That’s fine when you have substantial time to negotiate or to change to an alternative Supplier if you don’t reach agreement. I tend to negotiate the most contenscious issues first for both time management and to quickly force a decision. My rationale is that if the parties aren’t able to come to agreement on those items that may be deal breakers, it makes no sense investing a large amount of time having to simply walk away. If I need to be negotiating with another Supplier, I want to do that as quickly as possible.  When something is critical from a schedule perspective, you may want to have parallel negotiations with multiple suppliers. What works best will depend upon how much time you have available and your circumstances. Here are a few suggestions on structuring the agenda:

  • If their bid or quoted price is close to being acceptable, you should negotiate the final pricing last. If you do it earlier you leave yourself open to the Supplier saying that their price “didn’t include this” so if you want it, they need to adjust their price. If their price is substantially off from where you need it to be you could negotiate that first, with the caveat that you reserve the right to negotiate further based upon what is agreed. With that approach if they are never going to have a price that’s acceptable, you don’t have to waste time negotiating contract  terms with them.

  • If you have significant confidence that you will be able to come to agreement on the major issues and the pricing will be acceptable, then starting with points where there will be less contention and work to more difficult one makes sense.

  • When other terms are dependent upon a different term you should negotiate that term first. For example many times the obligation to make payment and the warranty term are dependent upon the delivery and acceptance terms. For example Supplier’s may want warranties to start upon delivery of the product to the Buyer. If you agree to a delivery term that is ex-works the Suppliers dock in Asia and it takes 30 days for you to receive the material or equipment, you’ve already lost thirty days from the warranty. Similarly if the payment term is thirty days from the date of delivery, if you agreed to ex-works the Supplier’s dock in Asia, you may have to pay for it before you get it, can inspect it, or use it. So if you negotiate the delivery term first and agree upon ex-works, when it comes time to negotiating the warranty period instead of agreeing to 12 Months you could demand 13 months to take into account the period of time it will be in transit, Instead of agreeing to pay 30 days after shipment you could demand sixty days after shipment so that you have ample time to receive and inspect it to make sure it conforms with the specification.

  • There may be other terms that you want to link together and those should be negotiated at the same time.  For example I always like to link things like the Supplier’s requests to have flexibility to manage the activity however they see fit to what liability and costs they are willing to agree upon in the event they cause a problem. If they want flexibility to do whatever they want, they need to accept the potential cost and liability for the problems they cause. If they aren’t willing to be fully responsible, you need more control over what they can or can’t do to help you manage the risk.  Let me give you an example of what I mean.  You could have the supplier change their product. The changed product may still meet their specifications. The changed product may no longer work in your application and could cause major problems and costs. The only way to manage against that potential risk is to have control over changes to the product so you can test proposed changes to make sure they will work before the Supplier starts shipping the changed product to you.

  • It’s probably best to address all “legal” terms separate from business terms. This can allow different parties to attend the different sessions. You don’t waste your lawyer’s time while you discuss business issues and maybe it will keep their lawyer away from the table when you negotiate the business terms. Ask your lawyer which terms they consider to be legal terms that they must participate in the negotiation or must review and approve versus the business terms.  If you do this separation you can come to agreement in concept, and have the lawyers review and finalize the language. Where I have found this to be most useful is when one or both sides of the negotiation are represented by outside counsel who have the tendency to complicate discussions as a way of either showing that they are earning their fee or as a way to increase their fee.  I was once asked to step into a negotiation that had been going on for about six months with no visible end in sight. What I observed was outside counsels for both parties arguing about minutia that wasn’t important and would never occur. At the end of the first session I met with the Supplier’s V.P. and told him that the only ones that were winning in the negotiation were the outside law firms and we needed to take control of the negotiation. He and I would agree upon all the business terms we needed to close the deal and we would have the lawyers simply write it up. We did that in two days and then called in the lawyers to tell them that this was what we had agreed and it was their job to simply write it up and gave them two days to do it after which they would be no further fees paid. They weren’t happy as it ended a fairly lucrative assignment, but when they knew that anything over two days wouldn’t be paid for. They somehow were able to come to agreement within the timeframe. Since then every time I enter into a negotiation where a company is represented by an outside counsel I tell the Supplier that I want to deal with Internal Counsel or I want to be assurred that they will manage them as I don’t want them wasting my time simply to generate more billable hours. 

  • Another recommendation that I would make is if you have multiple documents that will make up your agreement always start with the one that has the highest precedence. That way you are dealing with issues from the highest priority downward and many times that can answer concerns or eliminate issues the Supplier may have in reading the lower priority document on its own.

One of the most important things to do in preparation for negotiations is to set and manage expectations with the Supplier. You want to set expectations in advance of the negotiation on what it’s going to take to win the business. If that hasn’t been done prior to the negotiation, you need to do it as soon as possible in the negotiations. The reason for doing this is so the negotiator on the other side has the ability to set those same expectations with their management and internal stakeholders, whose approval they may need for agreement.  What you don’t want to do is force your counterpart to have to go back to their management at the end of the negotiation having to explain what they needed to give and why. The sooner their management understands and buys into the fact that they may need to make those concessions the easier the negotiation may be.  I’ve seen negotiators on the Supplier’s side hold firm to a position and lose the business simply because they didn’t want to have to go back to their management to explain that they misread what it would take to win the business. Rather than put them in that position set the expectations so they can set expectations with their management.