Negotiating your way to Procurement success
In a two part advisory post for Spend Matters, Christo Zeller, Principal at Efficio discusses how changing mindsets and processes before and during negotiations can reduce costs and improve service and supplier satisfaction.
Picture the following scenario: a supplier has just left a negotiation session having just been told they are uncompetitive. Effectively their cost is too high or capability not high enough. How do you think this supplier is feeling? Discouraged, demotivated, uninformed?
Actually they feel the opposite. So what caused this unfamiliar reaction?
Profound changes in sourcing execution
Procurement leaders are becoming far more strategic in their sourcing execution. Negotiation has not been immune to change. If negotiating with suppliers, Procurement leaders are focusing on two areas of change:
1. Change the mindset
Traditional negotiation was often viewed with a confrontational mindset. This mindset needs to change. Leading negotiation is characterised by being collaborative (despite the process often being competitive). Give more to get more – for example, “Supplier, your cost is too high. Here is why and this is what you can focus on to get the total cost lower/service level higher sustainably.”
The mindset is relevant to private and public/OJEU imposed scenarios, as well as both competitive and non-competitive situations. By no means is this advocating ‘going soft’. The collaboration always needs to be around rigorous fact.
2. Change the process
Traditional negotiations have focused on giving little away and problem solving together in a room and/or with as little time as possible. Leading negotiations do the complete opposite. They provide
lots of facts and allow suppliers to problem solve away from the room with sufficient time.
It’s all about doing the ordinary in an extraordinary way. So what makes a leading negotiation less ordinary?
Having the business providing commercial feedback or visibly endorsing the feedback is highly powerful.
All good negotiations involve a great deal of preparation. A leading negotiation involves preparation from the category strategy phase (that is, part of a rigorous strategic sourcing process): essentially planning for the negotiation from before the supplier request went out, as opposed to when receiving the first supplier response.
For example, if you need to provide detailed feedback to a supplier from an RFP process, the structure of the RFP (for example, commercial pricing structure) will determine the level of granular feedback that can be provided to the supplier. This is something business stakeholders often fail to understand.
They believe Procurement are great negotiators that can be involved late in a sourcing process. Without the right tools/information at their disposal even the greatest negotiators may be less effective.
b. Cross-functional process
Leading negotiations are typically a result of a highly effective cross-functional strategic sourcing process. The cross functional nature of the process needs to continue into the negotiations, with Procurement and the business side by side and in unison. You do not want to give the message that only Procurement is involved in the negotiation: it limits leverage. A one-team approach needs to be evident to suppliers. Having the business providing commercial feedback or visibly endorsing the feedback is highly powerful.
c. Less focus on characters
While there will always be room for the larger characters, there is less and less reliance on them. Leading negotiations are about using facts and feedback. These effectively become the strong characters in the room. You will be surprised how many successful negotiations have been delivered by personalities we traditionally would not classify as ‘strong negotiators’. The detailed preparation that goes in upfront also reduces the reliance on ‘off-the-cuff’ characters.
d. Granular fact-based feedback
Leading negotiations are all about granular fact-based feedback, which allows the supplier to take the information on board and see how they can take action. This is all about “telling suppliers their total cost is too high, service level is not adequate and how they can improve”.
The most impactful feedback is when it involves a view of a supplier’s relative competitiveness. Effectively we are providing suppliers with a highly relevant competitor market analysis at a point in time. It never fails to amaze how different a supplier’s view of the market can be to how they compare relative to their competition in a live proposal process
The most impactful feedback is when it involves a view of a supplier’s relative competitiveness.
Naturally, the feedback you give suppliers will depend on whether you are conducting a competitive (RFP) process or not. With an RFP process there is an abundance of relative competitiveness information that can be provided.
With a non-competitive process you would be feeding back ‘should-cost’ information/service levels, benchmark information, total cost/service analyses, and so on.
It goes without saying that the utmost degree of confidentiality must be maintained when presenting supplier feedback. This can easily be achieved: for example, anonymizing the names, grouping top suppliers into a best-in-class range, providing a % range of how much suppliers are off the best in class bids.
It’s granular feedback that tells the supplier the price is too high, but also provides them with insight as to how they could make their proposal more competitive.
Having a feedback presentation allows the negotiation team to remain on track and keep the content fact-based.
e. The right tools
To keep the negotiation fact-based, there should be a formal feedback presentation. This presentation contains all the messages that need to be delivered to the supplier.
Having a presentation allows the negotiation team to remain on track and keep the content fact-based. It also gives representatives of the supplier team the ability to take the information away, share it with colleagues who may not have been able to attend, and not lose any messages in translation.
f. Time to problem-solve
Why would we want to compromise the impact of a negotiation by not allowing suppliers the right amount of time to respond? Suppliers are provided with a large amount of feedback, which may require them to take some more time to address adequately. It’s not as simple as a supplier just shaving off margins. They may need to respond by looking at ways of improvement in their own supply chain, which requires slightly more time. Getting them to commit to something in the session is generally not good practice.
As a supplier I was recently on the receiving end of what I would classify as a bad negotiation. The only people in the room were Procurement despite this being a major business initiative. There was no formal presentation conveyed back with any facts to help improve the proposal or take back to HQ.
Inadequate time was given to provide a comprehensive response. Did the buyer have the information available to do this? Certainly yes. Had they done this, the negotiation would have been far more effective.
Train the athlete
Picture the supplier as an athlete that needs to improve his performance. We (the procurement practitioners) are the trainer/coach. We determine which data to collect to improve performance. For example, how did previous races break up into splits/intervals? Where was the athlete slower than the competition? We analyze and share this data with the athlete and jointly look at ways to improve the non-competitive splits/intervals, which leads to improved overall performance.
Just as with changing ‘mindsets’, the leading ‘approach’ is relevant to private and public/OJEU imposed scenarios, as well as both competitive and non-competitive situations. Because of the fact-based nature of the feedback, it also traverses different countries/cultures
What suppliers think
Throughout many detailed fact-based negotiations, there is always one familiar theme: the feedback has always been highly positive from both the suppliers who have been successful and also from suppliers who have not been successful.
In almost all individual processes you will receive unsolicited supplier feedback on how much better the negotiation process was (to traditional RFP negotiation) and how much they welcome the transparency and feedback.
This can be best summarised by a supplier who was not successful in a pitch but felt the need to share their experiences about the sourcing process through an article in a leading marketing agency industry publication.
Often suppliers in the marketing agency space can be quite apprehensive and unflattering about their procurement experiences. But this is what they had to say:
I feel compelled by the experience to share my views on the bid process, especially in light of the fact that the digital world is seeing a massive increase in the number of pitches… the bid team took the time to give us detailed feedback on our proposals and presentations, provide analysis of strengths and weaknesses, and in-depth information of their perception of us as an agency… We enjoyed the experience enormously and we feel we have learnt a great deal as a result. The RFP team should be very proud of themselves and the work they carried out.
Click here to view the post on Spend Matters.