Wednesday, August 3, 2011

The impact of customer relationships on successful negotiations

Frequently a major focus of procurement operations is the generation of cost savings. In dealing with a number of purchasing groups I frequently hear comments that they are either having trouble getting access to key people in the internal customer base or are unable to effectively influence their decisions. When the purchasing organization focuses heavily on cost reduction you frequently create a classic problem with internal customers. The Buyer’s goal is cost reduction. The internal customer's goals and measurements are frequently based upon issues such as revenue, profit, operating margin, schedule, quality, image, etc. Cost savings is not one of their primary goals or measurements. Their perspective on cost is frequently one of opportunity cost where the cost they pay will be only a fraction of the potential return from the investment.

It is important to build strong customer relationships. They will determine the extent of your involvement in the earliest phases of a program where you can make the most impact. As negotiations require a team effort to set and manage expectations, they can help or hurt your ability to be successful. Getting the customer to change their direction or expectations requires a form of negotiation. In negotiation training you are taught to consider both sides of the equation and to try to understand what the value and impact a particular concession or demand is to the other party. Getting customers to work with buyers to help achieve cost savings requires that the buyer gain the same understanding. If the buyer fails to make the effort to learn what the internal customers value, their motivation and the potential impact performance has on their business, and take that into account if their cost savings activity, they will probably alienate the customer.

Human nature dictates that people will make changes primarily for two reasons, pleasure or pain. If they will be perceived in a greater stature, be rewarded, or get recognition for the decision, the change will be made to get the pleasure of that recognition. The other motivation is pain. Changes are made if they are in pain and it will continue or, they can reasonably foresee that they will be in pain if they don’t make the change. A marketing manager once explained to me that if there was any money left in her marketing budget at the end of the year she would feel that she failed to do her job. The money in her budget was to promote the product to its maximum and if it wasn’t spent, then the product hadn’t been promoted to its maximum. Many internal customers have a similar view. Frequently their attitude is that if the company wants to cut costs, they would simply cut their budgets. The cultural conflict between the buyer trying to drive cost savings and the internal customer who may be threatened by the potential of a different supplier or a different scope of product or service clearly exists. That conflict will be heightened the more internal customer’s performance and success is closely tied to the supplier's performance. It's just human nature to try to control the factors that affect your success.

Even when the solution proposed by the buyer may be equal or even better you may still run into additional conflicts. For example I knew a number of MIS Managers that had a strong preference for purchasing IBM systems. Several told me “no one was ever fired for buying IBM products". They knew that the potential exists that if they bought someone else's product and there was a problem, their manage would question them why they didn’t buy an IBM product. The other, stronger conflict of occurs when the item to be purchased or the recommended supplier was identified by senior management or by a consultant or expert in the field that senior management hired to solve a problem. In those situations the internal customers will have the opinion that they won't be fired if they buy what senior management or the consultant tells them they should buy and who they should buy it from. When something is driven from the top down you are asking the internal customer to make a decision that could be be political suicide, and that seldom gets a positive response.

After working with a number of sales, marketing, product design and other creative people I learned that there are three ways to drive cost savings, especially in more subjective purchases. One approach is to try to react to what has been provided to you and then try to get that purchased in the best manner or find an alternative source that will be lower cost. That frequently requires significant confrontation, as you will almost always be brought into the process late. To try to drive cost savings you frequently need to try to change the course that the activity has taken. Since you are the only one being measured on savings you have little support from the internal customer who sees your cost savings activity as a potential problem to them and their success.

A second approach to drive savings is to build credibility within the customer organization so that you become a resource that is brought in at the earliest possible stages. When you are able to do that you can then use influence to help drive the right strategy from the beginning. This will always provide the higher return, but to do so requires that you be able to understand their business, their goals, concerns and be able to work with them to insure that you get value and help them meet their goals. The more that they feel that you are working with them to support their needs and their goals and the more they respect you for what you can contribute, the greater your influence and your ability to save.

The third approach is to not talk about it in terms of cost savings per se and to focus the discussion on how getting greater value will help the internal customer. To the marketing manager you would explain that what you want is to ensure that first they get value in what they purchase and, of course if there was any benefit from that it would be available to them to use for additional marketing programs.

In procurement if you want cost savings, you need to be part sales person. You need to make sure that you understand the internal customer’s goals, motivations and pressures. The more you understand them and their needs, the more you can approach the situation like as a salesperson. Show them that you understand their needs and what you want to do is help them get what they want. Then use that opportunity to sell them on an alternative that will meet their needs and allow them to get greater value out of their budget.

Zig Ziglar is a top sales consultant who has been successful writing books and lecturing sales people on how to sell. One of the phrases he uses is very appropriate for Procurement:
“You can get anything you want as long as you help them get what they want”.