Sunday, April 22, 2012

What to do when negotiating with a better negotiator,

The first thing to remember is the reason why you are having the negotiation in the first place is because both sides felt that have something to gain that will be lost if no agreement is reached.

If you can afford the delay consider bringing someone else into the negotiation to help you. I once was negotiating with a Japanese supplier that had brought a team of six people to the negotiation. As the negotiation progressed their team had significant discussions in Japanese and then the individual who was most fluent in English but who was not the decision maker would respond. Instead of negotiating with one party, I was negotiating against the team. I took a break, checked with my manager who told me that one of managers from our Japanese procurement office was in town. We asked him to participate in the negotiation and that changed the entire dynamics of the negotiation. The talking among the supplier’s team ended as I had someone at the table that would understand what was said. I would then explain what we needed and why to my Japanese counterpart who would then address that in Japanese to the true decision maker. I still did the negotiating but he helped me be successful.

If you don’t understand what the negotiator is proposing or the impact, always defer your response until you can discuss it with someone that will understand and can explain what it means, and what the impact will be. Don’t get pushed into agreeing to things you don’t understand.

If you prepared well, you should have established your goals and minimums. Never agree to anything less than your minimum. Keep track of all the concessions you make and their cost impact to demand a price reduction.

If what they want will add to your cost or risk, identify that and say no.

If they need or want the business they will need to get your agreement. If they insist on getting what they proposed and that would make it a bad deal for you, you need to be prepared to walk away.

As the failure to come to agreement may be caused by the parties not effectively communicating, before you walk away take the time to clearly define exactly what the issue or point is that is the deal breaker that is causing you to walk away. Write that down. Share that with both your counterpart and with the Buyer or Supplier’s management team. The reason for that is simple. Many times the negotiator, especially of they represent or are part of sales, may be trying to make it a win for them. They may be limited in what they can agree to. They may not know what the company will agree to or how much they need or want the business. Taking the matter out of the negotiator’s hands and making management aware of it allows the other party to make it strictly as a business decision.

How to use the “funder” in negotiations

In major sales, a supplier’s sales person will try to identify the type of buyer they are dealing with. In most major procurement activities there are at least five buying influences.
1. The funder. Their focus is price, performance and return on investment (ROI)
2.The user. This is someone who will actually use the product or service. Their focus is on making their job easier.
3. The champion for the purchase. This individual may advocate the purchase as part of solving a problem or improving performance. Their focus is on making the problem go away or getting improvements
4.The technical influence. They can have veto power over a decision on technical grounds. Their focus is on the technical fit of the purchase
5.The procurement person.

For the sales person to be successful they need to know who will be making the decision and how to focus on them, as each will be looking for different results. My preference is to always keep “the funder” away from the sales people until I want to involve them. The reason for that is in the supplier’s dealing with the users, the champion or the technical influence, the supplier will begin to form an opinion about how they perceive their and other suppliers chances of getting the business. The more they know you need or want them the less competitive they feel they need to be. This has a negative impact on the procurement person’s ability to negotiate price.

This is where “the funder” can be used to assist in the negotiation of the price and can help level the playing field. While a supplier may know that they have a solution that is preferred against other suppliers, what they don’t know is all the other problems or investments “the funder” has to consider in terms of whether to fund this purchase. “The funder” will look upon the purchase from a strictly financial results perspective. How does it fit within their available budget? How does it compare with all the other investments they need to make? What is the ROI from this purchase versus other investments?

“The funder” can send the message that if the supplier wants to make the sale, and have him or her invest in solving this problem versus other investments they need to make, the supplier needs to provide them with a better ROI. To improve the ROI the supplier has only two options and both of them are good for the buyer. They can provide more at the same price, such as extended warranty or other services or they can reduce the price. When a buyer tells a supplier they need to lower their price the supplier knows that’s the buyer’s job and they may still not lose the business if everyone else on the decision team wants that solution. When the funder tells a supplier they need to improve their ROI or risk losing the sale it’s a different message. If the funder doesn’t agree, the odds are high that they will lose the sale.

How much do you owe?

My wife received a bill from one of her suppliers. The bill was for the entire contract price even though no work was performed. Her company had breached their obligations to provide materials so work could be done. She asked me what did they owe the company? Could the Supplier invoice the full amount? Clearly there was a breach of the agreement. The agreement itself included no limitation of liability provision and the governing law was English law. Payments were due in consideration of the supplier’s services of which none were provided.

The supplier clearly has the right to terminate the agreement and claim damages. The question here is what damages could they claim and could they claim the entire amount of the contract?

Since no work was scheduled and then cancelled there was no impact on their personnel expense. Since work was not performed, no cost or liabilities were incurred on the work. I concluded the supplier suffered no direct, indirect or consequential damages. As there was no limitation of liability precluding claims for lost profits, I determined that they could claims lost profits. There is a significant difference between what the lost profits would be and the full amount of the contract. My opinion was that the difference between the amount of the lost profits and the full amount of the contract would be considered a penalty and would not be allowable under English Law. A penalty is when one party would be unjustly enriched at the expense of the other party. In this the supplier had invoiced for work they simply had not performed. Since they incurred no costs, getting paid for costs they didn’t incur would be unjust enrichment.

Suppliers may invoice for things they clearly aren’t owed. Always consider what they are contractually entitled to.