We negotiate on a daily basis.
We negotiate contracts, terms, and specifications in our professional lives and we negotiate dinner plans, curfews, and allowances in our private lives. Sometimes negotiations are small and sometimes they hold a bit more value or impact.
It’s a natural emotion to desire a favorable outcome within negotiations. You want to come out of any negotiation feeling accomplished about what was agreed upon. You put time, energy, focus, and emotion into a negotiation, so naturally, you want to come out feeling as if you’ve done a good job, get a good price, or ‘won’. But, there are two sides to every negotiation table. This means that your feeling of ‘winning’ a negotiation shouldn’t come at the expense of another’s ‘loss’.
Emerging procurement theory suggests that creating win-win situations within buyer and supplier agreements are the best ways to create long-lasting, engaging, creative, collaborative, and innovative partnerships.
The HBR Article titled ‘A New Approach to Contracts’, published in 2018 utilizes the agreement between Dell & FedEx to illustrate how a buyer-supplier relationship and agreement can turn a partnership sour quickly.
A “100-page-plus document was filled with “supplier shall” statements that detailed FedEx’s obligations and outlined dozens of metrics for how Dell would measure success. For nearly a decade, FedEx met all its contractual obligations — but neither party was happy in the relationship. Dell felt that FedEx was not proactive in driving continuous improvement and innovative solutions; FedEx was frustrated by onerous requirements that wasted resources and forced it to operate within a restrictive statement of work. Dell’s attempts to lower costs, including bidding out the work three times during the eight-year relationship, ate into FedEx’s profits.
By the eighth year, the parties were at the breaking point. Each lacked trust and confidence in the other, yet neither could afford to end the relationship. Dell’s cost of switching to another company would be high, and FedEx would have trouble replacing the revenue and profits the contract generated. It was a lose-lose scenario” (HBR 2019).
FedEx simply became Fed Up (pun intended) with the terms & conditions of the agreement, and the collaboration never proved to be fruitful for either party involved.
You may think to yourself, ‘Jeez, how silly of those two companies. Couldn’t they have simply tried to realign, renegotiate, and find a format within the agreement that would create a win-win scenario?’. As we read this passage from the sideline with disdain in our field of vision, we know deep down that all procurement organizations have supplier contracts & relationships that are mirror-images of the collaboration that FedEx & Dell experienced during the early 2000s.
Language like ‘supplier shall’ and pre-defined performance/penalty metrics are classic terms within buyer-supplier agreements. Many agreements are negotiated with an aim to take collateral within the scope of work, from the very beginning of a partnership, to manage risk, align expectations, and enhance profit margins. The rigid edges of this double-edged agreement may seem like a nice shiny means of protection but can end up cutting deep into your supplier relationship just as easily as it can safeguard your interests.
Co-authors of the article David Frydlinger, Oliver Hart, and Kate Vitasek suggest that “the remedy is to adopt a totally different kind of arrangement: a formal relational contract that specifies mutual goals and establishes governance structures to keep the parties’ expectations and interests aligned over the long term. Designed from the outset to foster trust and collaboration, this legally enforceable contract is especially useful for highly complex relationships in which it is impossible to predict every what-if scenario.”
The world is evolving, procurement is evolving, buyer-supplier relationships are evolving and so should the ways that we negotiate & contract. The way I see it; profits aren’t very profitable if they’re made at the expense of people or the planet.
We’re entering into a new age of negotiation and agreements; what’s in it for me is evolving into what’s in it for WE.
Importance of Supplier Collaboration
Just as negotiation tactics are moving from ‘what’s in it for me’ to ‘what’s in it for we’, suppliers are moving from ‘vendors’ to ‘partners’.
You know this as much as I do, but it’s important to sometimes say the obvious out loud; Suppliers are Collaborators.
A value chain is a harmonious engine of various moving pieces that would stop dead in its tracks without a solid foundation of supplier relationships & collaboration.
“The Boston Consulting Group and the Procurement Leaders Network in early 2013 showed that while most companies pursue some sort of collaboration with their suppliers, only about two in every five programs follow standardized approaches. As a result, most programs focus narrowly on operational efficiency, leaving opportunities like shared innovation, speed to market, and improved quality unexplored and their associated benefits unrealized” (BCG 2013).
It’s important to expand your horizons and get creative within supplier collaborations. But this also requires a groundwork for identification & segmentation of your supplier base to see who are your strategic partners horizontally in the organization cross-categorically.
Supplier collaboration isn’t a novel area of focus. Early-adopters & innovators of their time have long reaped the benefits of expanding on supplier collaboration initiatives. “In 1989, when Chrysler was fighting for its life, its president of operations, Bob Lutz, and its vice president of procurement, Tom Stallkamp, brought in 25 of the company’s biggest suppliers and asked for their help in reducing costs. “All I want is your brainpower, not your margins,” Lutz told the suppliers. Buyer-supplier collaboration caught on at Chrysler, thanks to the company’s willingness to share the benefits, and in the ensuing decade, the program (called SCORE, for Supplier Cost Reduction Effort) produced billions in savings” (BCG 2013).
Sometimes the easiest way to allocate savings & profits is to bring suppliers into the conversation rather than cutting suppliers out of the equation.
Time, Money, or Things.
When it’s all said and done, negotiations and buyer-supplier agreements always come down to 3 areas of discussion and concession:
Time, money, or things.
Negotiations are opportunities to reach a consensus between a buyer and supplier. There is no consensus without compromise, and in negotiations parties often need to give and take.
What are your rules of engagement as a procurement team within negotiations? Do you negotiate to receive saving/cost reduction opportunities at the expense of your suppliers?
Understanding where there are opportunities for compromise, rather than entering with preconceived notions of a necessity for compromise will put you in negotiations where parties are looking to amicably find solutions within the framework of the agreement rather than trying to achieve a victory.
Agreements always include three primary areas for negotiation:
- Time: How much time can be conceded/promised? (OTD/OTIF, Consultancy, Implementation, Lead Time, Project Length, etc.)
- Money: What’s the cost & what can be discounted? (Price Point, Discounts, Freebies, Trials, Add-ons, etc.)
- Things: Which commodity can be offered? (More Volume, Additional Services, etc.)
As a buyer & supplier within a new age of negotiation, finding a middle ground, conceding & agreeing within the areas above should be a top priority in all negotiations, because shared value is the best kind of value creation.
Enhanced Negotiation Intelligence
Enhanced digital capabilities & technology have enabled procurement professionals to bid & negotiate with a whole new level of transparency and visibility into supplier offerings.
A more intelligent age of negotiation is upon us, and it’s important that technology becomes a means to not only negotiate smarter but to procure more responsibly.
Solutions such as Kodiak Rating and others enable merit-based negotiation power; allowing users to gain supplier ratings & analytics to negotiate based upon real compliance and supplier performance. Reward those who award you with service and are well-aligned with working towards a common goal.
Best-of-breed solutions like BidOps and others exist within the space of cognitive/AI-driven negotiation and sourcing.
Application of AI technology within bidding & negotiation gives your procurement teams cognitive capabilities to suggest pricing and timing within negotiations with suppliers.
As the saying goes, 2 heads are always better than one. Mixing Machine Intelligence with Human intelligence = strong category competency and negotiation experience with fact-based bidding trends.
Never leave your head at home.
In a world that’s going digital, we mustn't forget the most important intelligence;
That’s right… You
No technology, or machine, will ever be able to compute with the same level of human and emotional intelligence as you and the members of your procurement team.
In a new age of negotiation, it’s important that we embrace the soft skills associated with procurement. Analysis, technological competency, and hard skills are increasingly important in an increasingly digital world, but procurement and sourcing aren’t only about the figures; as we all know.
Buying boils down to two sides of the negotiation table, and the two people sitting on each side. A buyer and a seller. Negotiation, communication, and collaboration skills have been, and will always be the common denominator to procurement success.
Now, and forever.
So, what’s in it for WE?
This publication is brought to you by author Sam Jenks, but also in part by Kodiak Rating — A Supplier Relationship Management SaaS functioning out of Stockholm, Sweden. Kodiak Community intends to challenge traditional business practices with innovative thinking and creation.