Negotiation “Anchors”

In many books on negotiation the authors discuss “anchors”, which simply means a point at which the negotiation of that issue or point starts from. For example when price is the only thing being negotiated there is always discussion about who should make the first offer as the offer serves as an anchor. For example, if the Buyer makes the first offer and it's too high, that serves as a form of anchor, making it difficult to negotiate something lower. If the Supplier makes the first offer, that serves also as an anchor as it make it difficult for them to increase it.

In contracts the providing the Supplier with your agreement where you ask them to prepare their bid or proposal against those terms and to state all assumptions or exceptions is also creating an anchor. By providing it, it makes it difficult for the Buyer to ask for something better in the negotiation than what you included unless the circumstances have changed.  In responding, it also creates an anchor for the Supplier.  As their price quoted has been based upon the documents and their assumptions and exceptions, any time they want to give you less, you use that to either reject it (if it wasn’t brought up in the assumptions or exceptions) or you can use it demand a lower price simply because they want you to provide either less value, or have you assume more risk or cost in the relationship.

Anchors are fine in concept, but most negotiations aren’t about only one issue. I have a simple rule that I follow in contract negotiations. That rule is  “nothing is agreed until everything is agreed”.  This is to protect against perceived anchors so if something comes up during the negotiation that would require a change or re-setting an anchor, that’s what will be done.  Negotiation is all about getting value and for you to give up something of value you should be getting something of value in return. Since negotiation of contract terms are almost all about cost and risk, the simple fact is every time a Supplier wants to transfer the cost or risk to you, you should be either telling them no or be telling them how much their price will need to be reduced for you to agree and what additional terms or changes to the contract terms will be required for your agreement.  

Negotiation Stages

In some books on negotiation I’ve seen negotiation phases described as being seven simple steps:

1.     Pre-planning

2.     Initial contact.

3.     Detailed planning of goals, strategies and tactics

4.     Initial negotiating session

5.     Follow on sessions

6.     Agreement is reached

7.     Implement

The important thing to understand is that negotiation is not a single point in time activity. It occurs in one form or another throughout all phases of the relationship. There are three important things you need to remember:

·       How well you manage all the activities leading up to the formal negotiation will have a major impact on how successful you’ll be in the negotiation and whether your tactics will work.

·       How well you manage all the activities following the formal negotiation will determine how much of the value you negotiated you’ll actually keep.

·       Anything left un-managed will always cost more.

I have a slightly different view of the phases of negotiation that basically tie to the life cycle of the Product or Service. Those phases of negotiation include:

1. Conceptual Planning
2. Product or Service Development
3. Marketing and prospecting
4. Pre-qualification by Buyer
5. Bid. Quote, Proposal Stage
6. Review of Suppliers bid or proposal
7. Planning / Preparation
8. Initial Negotiation Session
9. Follow on sessions
10. Agreement is reached and signed
11. Mobilization
12. Performance
13. Changes 
14. Close out
15. Warranty 
16. Claims

Let’s look at the negotiation activity that is occurring in each phase.

1. In conceptual planning companies set a number of goals to try to win in the market. They will have a target market segment or customer base they want to sell to. They will have a target price for the product both initially and over time. They will establish a target cost for the item that is needed to achieve the desired product margin at the target pricing. They will also establish when cost reductions or further enhancements are required to either maintain the price or maintain the margin level as the price is reduced. As part of the process they also will look for ways to distinguish their product in the marketplace. Companies may try to add new or unique features or functionality as the main differentiator for their product. Other companies may focus on offering reduced functionality so they can reduce the cost and focus on a different, lower end market segment. Some companies may offer an item that has a number of unique features that are targeted toward a specific application or industry, to focus on that specific niche market. This is the time when companies plan on what market clusters to target and what will be their differentiator. Companies add functionality to attract customers, but also to protect their pricing. If they have a unique feature that customers need or want, and the customer values the benefits that those features will provide, what the Supplier has effectively done is create their own market in which they can charge a premium over other Suppliers that don’t have the same features and benefits.

In the Product and Service Development Phase in addition to developing the product or service they will identify how they intend to sell and win against the competition developing sales and marketing strategies. In doing so they identify their value proposition - why the customer should want to buy their product of service. They will also do competitive positioning of their product against the potential competitors to double check the pricing strategy and understand what items they need to stress to get a competitive advantage. They will thoroughly understand their competitor’s products so they can effectively position their product against the competitor and identify the shortcomings the competitor’s product has against theirs. The development phase is also the time when decisions are also made on sales channels for the product. Is the product to be sold to Original Equipment Manufacturers (OEMs), Value Added Resellers (VARs), distribution, super retailers, or direct sales? For each channel they will establish a list price, discount structure, sales terms, sales promotions, and incentives. The channels strategy established by the Supplier will, in most cases, determine what channel you will need to buy their product or service from unless you have substantial leverage and volumes to deal direct. The channels strategy will may limit the potential discounts you can negotiate and the terms you will receive because of the limitations the channels have from the Supplier.

The Marketing and Prospecting phase frequently occurs when the sales person is attempting identify customers. Most sales activities are an attempt to discover what needs or problems you have so they can show how their product or service will solve them. In this phase the Supplier will be looking for information that they can use to help make the sale but it will also be to gather information that can be used against you in the negotiation.  For example, if they discover that you need or really want certain features of their product or service that their competition doesn’t have, that will decrease the your competitive leverage.

The pre-qualification phase is when the Buyer starts to attempt to learn as much as possible about the Supplier and Supplier’s product or service as part of preparation for the Bid or RFP phase, what terms may be needed in the contract, and to learn things about the Supplier that can be used against them in negotiating the agreement.

The Bid, Quote, Proposal phase is the point in the process where you are attempting to define exactly what you need to be delivered and what terms you want the supplier to make their bid or proposal against.

In the review of Supplier’s bid or proposal phase you check for mistakes, and you may use that to understand what they have proposed, review and exceptions or assumptions made and review any proposed changes. Seeking clarification can drive changes.  

The planning and preparation phase is where you identify your team, establish the rules for the negotiation, seek to identify who would be representing them in the negotiation. Its also where you would finalize you plan which would include identifying the negotiation strategy you intend to use, the tactics you plan and ensuring that you have the needed information available to be able to:

·       Say no, and explain why (if necessary)

·       Reason with them on why they need to change.

·       Explain the problem their position is creating that requires change.

·       Prove to them that what you are asking for is fair, reasonable and offered by others.

Steps 8 and 9 are when all the strategies and tactics are used to try to achieve success in the negotiation. 

Step 10 is where you need to be prepared against additional demands by management as a condition of signing the agreement creating a secondary negotiation. That is a tactic that can be used on both sides.

Step 11 that I call mobilization is different from implement. This is usually the time prior to implementation where there may be additional negotiation where the Supplier wants to propose changes to what may have been specified, who they proposed as the team, etc.  This is where you need to protect against what is called “bait and switch”. The key in this phase is making sure that you get equal value for any change the Supplier may want.  For example, when I did construction contracting we would as part of the bid require the Supplier to identify all the subcontractors and major equipment suppliers that they intended to use. Contractors didn’t like that because once they would get the contract they would want to “shop the job” to get the lowest price subcontractor they could get.  So mobilization negotiations would always involve their desire to use a different subcontractor or equipment supplier to improve their margin versus our either requiring that the proposed one be used or that we get appropriate reductions to the cost or changes to the agreement if we didn’t consider the proposed one to be equal.  

Step 12 Performance the negotiations that occur involve managing performance to ensure that you get the committed performance.  The majority of this would also be called contract administration where you document problems, look for commitments to solve problems, escalate problems to management, and use legal options when necessary if you are not getting the committed performance such as sending cure notices for breach or even opting to terminate the agreement.

Step 13 Changes is the negotiation of changes to the scope of the agreement and is a new negotiation. To ensure that you have control over what must be agreed and how much it will cost, you may need your initial agreement to establish what changes the parties agree will be done and a formula for establishing the cost.

Step 14 Close out negotiations is making sure that all deliverables that have been promised have in fact been delivered and are acceptable before you consider the work to be complete and agree to make final payment for the product or service.

Step 15 Warranty negotiations are simply making sure that the Supplier meets their warranty commitments. In this you would document problems, look for commitments to solve problems, escalate problems to management, and use legal options when necessary if you are not getting the committed performance such as sending cure notices for breach. In this phase your primary remedy would be money damages for breach of the agreement in failing to provide the committed warranty performance.

Step 16 Claims.  This phase of negotiations may be to deal with Supplier claims for additional compensation based upon things like Buyer caused delays, Buyer instructions, compensation for changes where the price had not been agreed.  For some types of contracts where cost of performance may vary based upon the physical conditions found, you can have claims for additional costs based upon what’s called “differing site conditions”. In these the specification or other document would have described what to assume in the bid or what to expect and the actual conditions were different.

Negotiation Preparation - Assessing the Supplier's Negotiation Team

Editor's Note. If you searched for "Negotiation Preparation" you may have come to this page.  This entire blog is about learning the information you need to negotiate. There five pages on different negotiation preparation topics.

In Selling, sales people are trained to try to get to the decision maker to find out the problems, needs and preferences of the Buying company because in addition to helping make the sale it also provides critical information that they can use to plan for any negotiation. If you can successfully manage and control those discussions with the goal of maintaining competitive leverage going into the negotiations, its important to quickly size up the opposition for the negotiation. One of the best ways to do that is to simply ask who from the Supplier's side will be attending the negotiation and what their position is within the company.  Many times the real decision maker may not be the individual that leads the negotiation. For example if you ever negotiated with the Japanese you would find that the negotiation may be led by the individual on their team that has the best English language skills while the real decision maker may sit back and quietly observe and then communicate with their team during breaks.

One of the key questions you always need to ask is whether the parties representing the Supplier are able to come to agreement and make decisions. Many times Companies will try to send teams that can’t make decisions, needing to bring everything back to their “stakeholders” or needing to get approval from some invisible third party. There are two ways you can deal with this. You can require the decision makers to be at the negotiating table so you can have first hand, unfiltered discussions of the issues with them. This is the preferred approach. The second approach is to work with them but with a different set of ground rules and expectations. This is where I will simply state that since the decision makers aren’t in attendance, we are proceeding under the understanding is that “nothing is agreed until everything is agreed”. If they comeback from their stakeholders with a position I don’t like or that will impact other things that may have been previously agreed, I reserve the right to re-open those points or concessions that had been previously made.

In negotiations where there will be lawyers, you always want to identify whom the key business leader is that you can talk to, explain the problem, describe the impact or the impact a position will have on winning the business.  In most companies the final decision about which risks to take get decided by the Business. The lawyers are there to give them advice and counsel but many may see their role as one of avoiding all potential risk to their Company.  I’ve described lawyers as being part of the “Revenue Prevention Team” to a Supplier’s Business Manager and have told them that if their lawyer continued to act in the same manner we obviously would not come to agreement. Many times faced with the potential loss of business, the Business Manager will take a more active role in managing and controlling the lawyer or may propose having a simple Business to Business discussion to reach agreement.

Another aspect of assessing the opposition is to look at the Supplier’s team to understand the role they are playing, what their vested interests are and who may be allies on particular issues. The sales person may be in your corner, especially if the need or want to make the sale. Engineering or technical people who may want to work with your team or work on the product or service may be allies. Supplier financial representatives on their negotiating team are almost never be on your side as they focus on the potential cost or risk. Supplier service or quality personnel on a negotiating team may be allies or they may simply be able to be used to help make or sell a point tied to their area. They are usually the least experienced of the Supplier’s team in negotiations and are more likely to provide you with a real, unfiltered answer.

One of the things that can help build rapport with the individual Supplier negotiation team members is to talk to them in their language. Financial people like numbers and formulas. Service people like talking about service issues and problems. Quality people like talking about their quality programs. Sales people always want to talk about the current and potential future business. Speaking to them in terms they understand makes them easier to discuss business with. If you can’t do that on your own, have someone on your team that can.