As I already wrote in my other post: I believe that strong negotiating skills are a great advantage for an indirect procurement professional but not necessarily a must that goes first when assessing the performance or planning professional development. Lately, I’ve been frequently seeing negotiating skills quoted among top requirements for indirect procurement positions. Usually, it sounds something like “strong negotiating skills/tough negotiator position or experience in effective multi-stage negotiations required”.
Still, the question remains — what for? Are you looking for a sales person? Let’s refresh our knowledge of the main goals and tasks of the Procurement function. They are: find the best supplier at the given moment that will provide goods and services required by a customer at best price and on best terms and fulfill its obligations in full and on time. And the whole process shall be transparent, prompt and fair.
In order to deliver on every requirement listed above, no extraordinary negotiating skills are required, as in majority of cases your position will be weaker than one of your potential supplier. Why? Every time you meet with a supplier (attending a presentation, discussing terms or finalising an agreement) you interact with a “sales force” whose goals are on the other side of the spectrum from your values and expectations as Procurement. Supplier’s sales teams conduct negotiations not on a tender-to-tender basis, but every day and sometimes every hour. They know their goods and services to every tiniest detail and are well aware of their margin and market position. The moment you contact any supplier with a request, be sure they did their homework well and won’t let you get ahead of them in talks. A procurement professional may use negotiations format in his/her everyday operations only up to a 5% extent. Given that and the huge experience accumulated by the other party, priorities are crystal clear.
As strange as it sounds, but the best way to win in price negotiations is to take no part in them. Let your suppliers negotiate with each other competing for your contract (e.g. via an e-auction). But even in this strategy we often end up sitting down with short-listed winners and thus immediately lose to them by giving a 50% success chance advantage. Don’t we? In any case, supplier does have a stronger position in any negotiation.
Certainly, negotiations with suppliers are sometimes useful and important. Still, if we look at the process from another side and borrow several instruments to support the general tender strategy, it would boost the effectiveness of our negotiating efforts. It’s wrong to assume that negotiations before signing a contract are to agree on the price or better terms (not changing them significantly). When talking to a supplier, a procurement specialist should sell a business opportunity that would enhance supplier’s position by shooting viable reasons why this tender/contract is the best thing that ever happened to a supplier and their business and how this contract would help them get to a new level. How do you like that? In my everyday work I often resort to several approaches described further.
I’d like to start with results: how do we assess the results of our negotiations? If we managed to get a discount or improvement of terms and the supplier is still open to discussion… For instance: I used to agree with one of the largest suppliers of the bank a general 5% discount and then I successfully increased that discount by 1% every year. On one side, it was a good result. On the other hand, I didn’t understand that I was losing more than winning in these negotiations: I didn’t realise that the discount could’ve been bigger from the very start. Until you hear the final NO, it is still profitable for a supplier. Here comes the question: how does one determine and ensure the best balance between price and potential in negotiations?
Be as strong as a car dealer in selling your contract
Sales often operate with a sales funnel concept. When an opportunity arises (e.g. supplier receives a tender invitation), supplier’s sales team runs an assessment to determine the chances to win the contract, given the current environment. Sales teams regularly review their project portfolio with management to identify new developments or additional opportunities in client or services area. And our final goal is to take the first line in their funnel, become the icing on the cake for supplier’s sales team and management. Once we achieve that, our tender becomes a number one priority for suppliers’ management. Thus, sales teams don’t only aspire to win the tender but also pursue a new goal — perform better in the eyes of the management. And this is the situation when sales are ready to do their best to kill two birds. This is what we call “supplier motivation”. Once, I had quite a big tender for the purchase of CISCO hardware and initially no e-auctions were envisaged as prices, offered by top-rated distributors, were fixed. After a brief discussion with a supplier who had a lower rating in CISCO, we decided to conduct an e-auction. We appreciated the persistence of that aspiring supplier and enthusiasm of their sales team. So, an auction with 4 suppliers was held. And the results were a sheer astonishment: while 3 largest players were ready to negotiate within the 10% corridor (final offering at 9.5% discount), the “challenger” managed to offer a 14% discount to the fixed price. When we asked them why they placed the best bid, they said they’d seen an opportunity in our tender to upgrade their status and thus secure better conditions on further sales. And no tough negotiations involved… Even the best negotiating techniques could’ve delivered not more than 10% in this case.
We want to buy. They want to sell. So why compete?
One of the funny aspects, still very typical, though, is that we perceive Procurement and Suppliers as rivals, so to say, on opposite sides of the trench. Half of trainings on effective negotiations tell you where to sit from the window, where to look, how to use your body language and establish your psychological supremacy wearing cuff links or even bring NLP techniques into play. I won’t lie, it can give you a potential advantage in the short-term but outside the negotiations room it will bring harm. Let’s address it from another angle: Procurement always builds trust-based relations or partner relations inside their team or company, we are always there for the business and our internal customers. And our relations with Suppliers shouldn’t be different from our internal approach. In the end of the day, we are on the same team and work for the same goal. There’s no need to set ourselves for competition where one is always a loser. As I wrote in my other posts, if you follow this approach, your suppliers are very likely to start sharing their internal secrets or tricks with you they wouldn’t have disclosed otherwise.
Still, don’t read this recommendation as a direct instruction to disclose your information to suppliers. Just change the format and your approach to supplier management. Ask yourself: would you feel comfortable using this communication format with your colleagues and internal customers instead of third parties? Once, I conducted a mini-poll involving 10 suppliers, asking them what they would improve in their customers’ behaviour. And their responses were more or less the same: speed of response, fairness of response and provision of more detailed information. I believe, these requirements are acting-as-a-team requirements.
From my side, I added the following note to my email signature: I’m happy to answer your queries via imessage/whatsapp. And know what, this communication channel is being used quite actively.
Don’t forget: it’s not the first come, first served principle in negotiations
To sum it up, I’d like to remind you that very rarely suppliers quote their best price first. And there are reason for that:
- Often RFx has a very generalised scope that can be used only for estimations not for detailed planning. And this uncertainty is exactly the area which creates room for (sometimes unwanted) manoeuvre
- Supplier expects further negotiations where he can offer a discount in a declarative and not to be unnoticed manner
- Supplier is not sure about Customer’s intentions (whether there is a strong intention to buy goods/services)
- Supplier believes he has a status of a regular vendor with vast experience, personal connections and other advantages and acts thinking why not go for a higher margin.
And back on track! Strong negotiation skills are a great plus to the professional, timely and balanced approach to procurement excellence but not a primary prerequisite in the industry.
That’s why negotiations skills requirements in procurement job ads have to be replaced with requirement for excellent communication skills.
18-04-2017
@olegremizov