Monday, July 18, 2011

When is a walk away on a negotiation justified?

While walking away from the negotiating table is a tactic,  I wanted to share thoughts about when you should really walk away from a supplier. From a procurement perspective you weigh the needs you have and the value the supplier brings to the table against the costs and risk of both the deal and of dealing with that specific supplier. The less the need or the less the unique value they provide, the more I would consider walking away if the terms are out of balance from a cost/risk perspective.  

Risk varies based upon a number of factors.  Here are a few that I would consider:
1.     Who is the customer?  Is the purchase for internal use or for re-sale to a customer where the impact of a problem could be greater?
2.     The type of product or service. Specific commodities have inherent risks.
3.     The supplier history and reputation. Many suppliers may stand behind their products in the event of a problem but may not agree to contract terms that force them to.
4.     How the product or service will be used.  For example the same electronic component could be used in a computer tablet or in a medical life support system. The difference in potential liability is huge.
5.     The sourcing strategy.  Will it be single or multiple sourced.
6.     How do the contract terms protect against the potential costs or risks.
7.     The supplier's financial strength. Contract promises are of little value unless the supplier has the financial resources to stand behind them.

Risks can also have mitigating factors. For example, where a product stands in its product life cycle can be a mitigating factor for some risks. The number of alternatives you have and how long it would take to migrate and how costly that migration would be will vary the risk. What the business will do to manage the risk in the future would also be a mitigating factor. For example bringing in a high-risk supplier would be less or a concern if the business committed to develop or qualify an alternative source.
Procurement has the responsibility to highlight the business risks.  When there is only one option my opinion is the final decision to walk away needs to be made by the individual that has profit and loss responsibility for the business. If they decide to accept the risk, it will be an informed decision where they know the risks they are accepting.  They will also know the costs associated with mitigating the risk such as second sourcing.  Manage the risk has a cost associated with it and that cost will impact the profitability of their business.

If the supplier wants me to accept risks that only they can manage, the only time I wouldn’t walk away would be if 1) I needed them, and 2) I had no other option, and 3) the business owner agreed to accept the risk.