Tuesday, February 22, 2011

Negotiating Concessions

To be successful in negotiating concessions requires;

·       The Supplier must want or need your business. If they don’t want or need it, they will want to do it on their terms, not yours.
·       The Supplier must believe there is competition they have to beat. If there is no perception of competition, there is no threat of losing the business to a competitor. Competition is what that drives a Supplier to make concessions. Expectations of competition must be set early so the salesperson sets the same expectations with their management.  If their management thinks it’s an easy win, they won’t support concessions.
·       The Supplier must perceive an immediate benefit. They are in no rush to concede today for business in the future. Supplier’s who are generally represented by their sales team concede to meet their immediate needs like revenue, quotas, bonuses.
·       The Buyer’s team must support the competitive nature of the activity. Comments showing lack of competition or preference will impact success.
·       The Buyer’s team must show conviction in their positions. Everyone must show the conviction in getting the concession. If Suppliers perceive they get the business without a specific concession they won’t make it.
·       The Negotiator must be able to successfully explain why it’s needed and the impact to the Supplier if it isn’t met in terms the Supplier can quickly understand and relate. Good explanations will:
o   Highlight the immediate impact on their competitive position (The threat of losing the business);
o   The potential impact the position has on current or future business and volumes (The threat of getting less business)
o   The Total cost impact that would require additional price reductions (Tie pricing to terms
 To get concessions you need to know how to persuade the other party to agree.

Persuasion In Negotiation
There are four primary elements in every form of persuasion: the source, the message, the channel and the receiver. (From “Persuasive Business Proposals” by Tom Sant)
  • The Source. The key with the source is it must be credible.
  • The Message. The message must be tailored to the needs and circumstances just like a sales person will tailor their sales presentation depending on who they are presenting to. The message comes in two parts
    • What is the problem or need?
    • What makes it worth solving?
The things that make the problem worth solving is usually either the potential  loss of business or the ability to increase business.
  • The Channel. The channel is the method by which you deliver the message.
  • The Receiver. The receiver must be able to receive, understand and process the message in a way that will get action and be one that is able to look at the big picture.

Here’s an example of persuasion in negotiating a price reduction:

The Source may be a highly respected consultant or benchmark study that would be readily accepted by the Supplier as credible.

The Message would be the Supplier isn’t competitive (The Problem).
What makes the problem worth solving could be described as likely results:
At the current price their volumes will be reduced or they won’t get the business.  
If they offer a reduced price they will keep and possibly increase their volumes.

The channel for the message would be conversations with the Supplier about future business. In those discussions you begin to set the expectation of the need for a price reduction. You could provide your credible information in advance to reaffirm the expectation. Most parties do not like or respond well to surprises during the negotiations, so its not recommended to wait until the negotiation to provide the message. The exception is in situations where there is newly discovered information.

This leaves the Receiver. Many times Procurement negotiators don’t do a good job of managing the Receiver part of persuasion. To be successful the receiver must be able to receive, understand and process the message in a way that will get action and also be one that is able to look at the big picture. If you deal with too low a level within the Supplier’s organization, there is a strong likelihood that the individual you are dealing with cannot make the needed concessions. Most sales people at lower levels are armed with a standard playbook they are told to manage to, and anything different requires higher level of management approval. They may not see or even care about the big picture unless they are personally impacted or benefit. For example, if they already made their sales quota for the period, they may not want to push their management for the exceptions you need, because it simply doesn’t do anything for them. Your deal, the annuity stream that it may represent may be of little importance to them simply because they look only at what’s important to them personally. In managing the receiver, it is important that if you don’t feel that you are being heard or adequately represented to the Supplier’s upper levels of management, always request an escalation to be heard at the next higher level within the Supplier’s organization. Understand that there will always be levels whose job it is to tell you no, and you need to get around them to decision makers that can look at the potential revenue and risks and look at it from the bigger picture and be able to weigh it on how it fits into the overall scheme of things. I’ve seen things that were treated as major issues at lower levels in a Supplier’s organization vanish when you deal at the right level. The key it to make sure you’re selective in escalating issues and only bringing forward what’s really important. Don’t waste their time on what they will view as miniscule or nuisance points.  

The other frequent problem in managing the receiver is if the negotiator hasn’t set the right expectations along the way. Setting the right expectations early on is very important with the Receiver. Frequently the receiver will also need to report to and set expectations with their management on the business. If you don’t set an early expectation of what you need, they will not have relayed that issue or problem to their management as an obstacle they need to overcome. If your position in the negotiation then conflicts with the expectations they have set with their management, it creates a problem for them with their management. It may be easier for salespeople to say that they lost a deal than it is for them to have to go back to their management to admit they had misread their customer and additional unplanned concessions are required. The point at which you sit down at the negotiating table should not be the first time a Supplier has heard a specific issue or goal. Set the expectations of what you want and need early and often. If they know it’s a problem in advance they can deal with it. If it comes to them as a surprise at the negotiating table, the odds of getting it will be reduced. The more frequent and earlier you can channel your expectations and needs to the receiver, and the higher up you go in their organization, the more likely you will be in achieving your goals.

It is in the persuasion activity that you use the tactics that are available to you based upon the circumstances and leverage you have..

Negotiation - Thoughts on Acceptance

Acceptance is an important concept in purchase contracts. Except for fraud, it is the point at which you can no longer return the product as defective and get a refund and must look for all protection under the warranty provisions. Acceptance may also be the activity that triggers when Buyer’s responsibility for payment commences or when the warranty period starts.

The Supplier’s motivation under acceptance is to make the term short, for several reasons. Their primary concern is financial, as under most revenue accounting rules they can’t take credit for the sale as long as you can return the product. Once there is acceptance, you no longer have the right to return the product for a refund. Other motivations may be more sales motivated such as to ensure that the sale occurs so they get their revenue, commissions etc.

In negotiating acceptance the Buyer should always allow for a sufficient period for the product to be received and thoroughly tested to ensure compliance with the specifications or testing and acceptance according to the agreed acceptance procedure. If you were purchasing software or equipment you might, as part of the acceptance have a specific acceptance and test requirement that must be met so you can ensure that it is operating as promised under all conditions, loads, etc.. Since acceptance is usually expressed as a time period after delivery, in negotiating the time period for acceptance, you need to take into account the delivery point, any in-transit times and other supply chain times prior to your receipt and ability to test the product.

In acceptance terms production Buyer’s traditionally also want to reserve the right to reject products by lot. The rationale in negotiating this is simple. You paid the Supplier to ship you quality product meeting the specification. If a reasonable sampling of any shipment highlights a problem, you should be able to return the entire lot to the Supplier. Without lot rejection rights, you would be forced to screen out all of the bad products from the shipment at your cost, and then only return the actual bad parts. Since the Supplier wasn’t supposed to ship you bad products in the first place, why should you assume the added cost to screen out the good from the bad? If a Supplier doesn’t want to provide you with the right to reject by lot, offer them the alternative to pay you for all your costs associated with the screening. The only reason why you have to screen out the lot is because they had problems with their final inspection and allowed bad product to be shipped.

Suppliers may want to propose a no problem found or no defect found charge as a means of protecting them against Buyers that would reject a product lot simply to manage their inventory levels or to delay the payment.I would never agree to a No Problem Found charge unless the Supplier agreed to pay me for every time they shipped a bad product that had to be returned. Both companies should have quality control programs.The Supplier should have a quality control program to prevent defective product from being shipped to the Buyer. The Buyer should have a quality control program to prevent good product from being returned to the Supplier as defective. If the Supplier wants the Buyer to pay them every time the Buyer returns a good product as defective because of the costs they incur in inspecting and testing the product and finding that it is good, shouldn't the Buyer want the Suppler to pay them the costs the Buyer incurs when the Supplier ships defective product.Those Buyer costs could vary from simply testing and returning the product, in a situation where the buyer does no inspection could include the cost of re-work to remove the defective product the Buyer is building In both cases the party is incurring additional cost as a result of a problem with the other party's quality system.  

Negotiation - Thoughts on Confidentiality Obligations

When a party receives the confidential information of another company, it exposes the receiving party to potential claims from the disclosing party. There could be claims for breach of the confidentiality obligation should the confidential information be disclosed to a third party. You could also be subject to claims for misappropriation of trade secrets if you used the confidential information in an unauthorized manner.

To control the risk you should control:
·       What information the other party can provide. You control the information the other party can provide as the less information you receive, the less exposure you have. If you are the receiving party you want it to be limited in scope, and be only that information that was requested by you.
·       How it is provided. You are being made aware that the information is confidential so it will be properly managed
·       Who it must be provided to. Its best to have a single point of receipt so you can identify what has been provided.
·       What the requirements are to identify information as confidential.
o   For written or electronic documents how they must be marked.
o   For oral conversations, when and how their confidential nature must be identified and document.
·       What the specific confidentiality obligations are with respect to the information
o   The standard you need to use to manage the information.
o   Who it may be disclosed to without breaching the confidentiality obligation (such as Governmental Authorities); and
o   How long the information must be maintained as confidential.

As exceptions to the confidentiality obligations, you want to be absolved from inadvertent disclosures or for managing information that becomes public or is provided to you through another means. You also want to have a limited period during which you need to hold it as confidential. Most confidential information really only has a limited period in which it has value. For example, information about unannounced products should only need to be held as confidential until the product is announced. As technology changes, technical design information will also have limited value because it is either replaced with other technology or once it is for sale in the marketplace it may be easy to evaluate what the product does and how it does it.

Suppliers usually want broad coverage for their information and want the term to be long. In negotiating the term, use the product life cycle to keep it the term short. In negotiating the scope, limit the information to only that information for which you have an absolute need to know and limit it to only what you request, not what they want to give you. The more they give you the greater the potential exposure. The more technical the information the more you need to control the flow of information within your company so the Supplier’s ideas and concepts are kept separate from engineers and groups that may be developing alternative or competing products.

Highly sensitive information requires strict controls on the management of confidential information. I’ve worked in programs where there was a limited number of copies that could be maintained, All copies were controlled by a central administrator. Access to the information was limited to the program team who had a need to know and copies of the information could not leave the area or be copied. Individuals could only read the information.

As another way of managing against the risk of claims for misappropriation of trade secret information, some companies may include the right to use disclosed information in any manner within the company as long as it isn’t disclosed to a third party. Many Suppliers won’t agree to such broad use and frequently what may get negotiated is having the right to use information that is "retained in the minds" of individuals who were exposed to the information. If there is a retained information right there may also be an obligation to either return or certify the destruction of the information at some point in time so the receiving company will only have "retained information".