There is never such a thing as an easy deal. Negotiating the best value out of a supplier interaction presents innate challenges. Suppliers will naturally steer the conversation so that they will either maintain the status quo or reduce the risk to their business. Consequently, that direction does not typically benefit the buyer. For Procurement, negotiations are crucial for engaging suppliers, demonstrating expertise, and achieving results. Some of the major issues faced by companies while negotiating with their supply base are:
Utilizing LeverageFrancis Bacon once said, “Knowledge is power.” Market intelligence will prove vital to assessing vendors against their competitors throughout the supply base. Buyers can gain market intelligence by researching market trends, business developments, key drivers, and future opportunities within relevant categories. By investigating (and then citing) that market knowledge, buyers will demonstrate their worth in deriving value and deciding on the right supplier in negotiation. Quantitively, benchmark information from previous go-to-market engagements or available resources can pressure suppliers to reevaluate their pricing should they be out-of-line from their competition. By considering the supplier against the entire market, the buyer now shifts the conversation. The supplier is no longer essential, but potential.
In turn, data can also empower your negotiations. The use of previous performance and usage history must be evident to both parties. Suppliers live and breathe accounts receivable; their access to usage history is more straightforward than it is for the buyer. Lacking that visibility will reduce your clout over your vendors. Demonstrating value from spend and usage information empowers buyers to drive down negotiations to a price deal. How much one can use for savings targets will be developed from the baseline information gathered; it would be unreasonable to come up with a savings figure or value adds without considering the underlying business in place. Buyers that present their awareness on usage can then leverage their business as an advantage to strike a deal.
Managing TimelinesEveryone at the table knows that time is money; time is an investment that is difficult to measure, but it is often priceless when spent or wasted. Not all business negotiations will be straightforward or simple. Some agreements will end up drawn-out, arduous, or altogether tedious. Furthermore, some negotiations take place under less-than-ideal circumstances such as during a geopolitical event or a strike. These situations force Procurement to negotiate under pressure, and as a result, those negotiations could end in poor concessions or irrelevant gains. Buyers must be diligent with their time to strategically handle unforeseeable risks and events that might pop up throughout the timeline.
One pressure in managing time is maintaining deadlines. Procrastination is inherent to human behavior, and suppliers are not above being human. Supplier involvement must be managed carefully to ensure that they remain approachable for the buyer to establish deadlines. One effective tactic is providing meaningful reminders either through phone calls or emails. Maintaining communication will demonstrate a commitment on the buyer’s part, and therefore, encourage suppliers to remain attentive. Some other means are through previously signed service-level agreements to maintain open communication channels and appointments which narrow the focus of the supplier onto the buyer’s project alone.
The other pressure in time management is handling time costs. Time is a non-renewable resource for both parties, but for the buyer that initiated the negotiation, time will be an even more apparent limitation. As negotiations proceed, the availability of time drains, and parties may succumb to the pressure of time. When given a poor concession, the buyer may be forced to act on that deal as soon as possible by the supplier or drawn out through lengthy conversations. Unfortunately, these are tactics used to check the time management of buyers. Remember, though, that time is a shared resource, too. The longer both parties spend in negotiations, the more likely it is that both parties will need to make concessions. One method of utilizing time management in negotiations is allowing for an acceptance period after an initial proposal that will allow time for both parties to review and possibly accept within a long enough period. Overall, buyers should invest time to go through the entire negotiation process, but they should be aware of the pressure that results from poor time management and that suppliers might take advantage of their temptation to close out a deal.
Maintaining RelationshipsNegotiations are not smoothly paved roads to success, and some suppliers will consider negotiations a risk to their business and the partnership in place. Some will become distant or even hostile at the idea of reaching a more favorable agreement. This is most apparent in negotiations with incumbent suppliers who may feel that negotiations have resulted due to possible lack of quality, service, or account management. Therefore, a challenge for many buyers is to come out of negotiations with positive business amenity between the buyer and supplier.
In a sense, Procurement and Sales are two sides of the same coin: both seek to maximize the value from a negotiation for their party. By illustrating negotiations as a collaborative process rather than a pricing exercise, buyers can alter the context of the engagement. The tone of the negotiation will need to be addressed before or during the arrangement. Negotiations that are conversational in nature tend to result in relaxed suppliers who are amenable to making concessions. Likewise, formal negotiations can result in exact, measurable savings with absolute adjustments. Finding the right attitude to approach the supplier will depend on multiple factors such as type of industry, business differential, past relationships, and more. In conclusion, establishing open communication by emphasizing the positive outcomes of the engagement while effectively leading the nature of the deal will make suppliers more accessible for the future.
Playing HardballIf everything else fails, asserting your position, canceling the current relationship, or excluding the supplier from future business opportunities may be the only rational answers. These negotiation points should be used as a last resort, for they are aggressive tactics that could undermine the entire negotiation. Understandably, being difficult to work with is not usually a well-balanced or rational response. It can, however, be used strategically to deflect or discredit the value proposition from a supplier. Procurement shines when it controls all aspects of the deal, including who appears on the negotiation table. By limiting access to the business, buyers can reduce the risk of being undermined or superseded in the procurement process.
One challenging instance is where the power of balance has drastically shifted away from buyers toward the suppliers. This is typical in a monopolistic market where one dominant, national supplier secures the entire market. With one sole, viable option, that supplier will understand that changing suppliers will be difficult for without extensive change management or especially innovative strategies. In this instance, buyers arrive at the negotiation table without much leverage. Therefore, being firm will be essential in challenging the reinforced position of that supplier. Because of the lack of leverage, every assertion will matter.
Achieving SavingsAt the end of the day, procurement is focused on one result above all others: achieving savings. Negotiations are happening the moment the buyer engages with the supplier. Although the buyer can aim to sharpen the pencil until every chip of savings is achieved from the very start, procurement believes the most salient focus will be maximizing value and ROI throughout the negotiation process. Negotiations are complex initiatives that include managing the bargaining chips, project timeline, supplier relationships, and positions of the buyers as we have seen. Although negotiations are meant to be a collaborative process, it is a conduit to channel savings in the right direction if the buyer adopts the right methods.
Therefore, simply demanding or requesting savings will conclude with little to no outcome for buyers. However, negotiations will not be effective if Procurement does not keep savings in mind throughout the process. Being reluctant or hesitant to negotiate will never return the savings opportunity imagined. Ultimately, savings are a key marker for success at the end of negotiations, but the biggest takeaway from engaging in negotiations to achieve savings is that it stands on buyer integrity and a commitment to yielding price adjustments.