Negotiation. There’s a battle ahead and I’m going to be the winner. Is that really what it’s about?
A little anecdote to get us going. A few years ago I was involved with a company who claimed to have the best procurement team in the country. Confident, self-assured, almost cocky – they can get the best discounts. So I joined them as they negotiated for a piece of machinery with a large multi-national supplier. Sure enough by the end of the 2 weeks process they had secured an impressive 30% discount with a potential further rebate for a repeat order. Impressive stuff I thought. Fortunately, I knew the supplier reasonably well, as I’d dealt with them before, and a few weeks later I asked him about the negotiation and why they’d agreed to such a discount when they’d never offered me anything like that. “Simple”, he said “Their buyers pride themselves on the size of discount and because we want to deliver that for them, we start off with a much higher price.”
So lesson number 1: The size of discount is immaterial – it’s the end price that matters. So now that’s cleared up, how do I get the best price ?
And now to anecdote number 2. I was working for a company a few years ago with a large spend on food materials. The buying team would conduct a tender process, inviting a few suppliers to submit tenders for a 6-12 month contract. With only a small team, longer term contracts were more efficient than buying spot on a regular basis and it gave more certainty to the budget. Mid-way through one of the contracts the Managing Director received a phone call from an alternative supplier(B) who offered lower prices than were being paid – about 10% lower. The MD asked for a written offer, then stormed into the Procurement Manager’s office, waving the paper offer in the air, accusing him of gross incompetence. He insisted on this new price and forced the Procurement Manager to either re-negotiate with the existing supplier or switch to the new one. With a contract in place, however, there was little room to move and the best he could do was a 2% discount as a gesture of goodwill. A few weeks later the Procurement Manager was relieved of his duties. The new man came in and within a couple of months it was time re-tender time. Supplier B participated but this time his prices were much higher and he failed to win the contract. I asked Supplier B about what had gone on and he said “Our sales struggled to keep pace with production last year and we had a surplus of stock with no buyers. So we offered large discounts to make sure we weren’t left with a write off. It’s not something we’d plan to do, so when it comes to a tender we’d never offer those discounts”. A case of an MD who didn’t really understand the arena and an unlucky Procurement Manager.
So lesson number 2: Prices change for a variety of reasons and a snapshot doesn’t tell the whole story. Prices reflect the supply and demand position of an industry as a whole at that time. However, there can be lower prices available as a result of inefficient management by suppliers. Similarly spot prices can also be much higher if supply is tight because the suppliers know you are desperate. The question is do you want security of supply and price through a contract or are you willing to take the risk with spot prices.
The final anecdote and the one that really makes the difference. Over ten years ago, I was lead negotiator in a services contract and spent a good 2 weeks going back and forth with the potential suppliers. Analysing, discussing and re-analysing. We made good progress but it was all a bit confrontational with my Company looking for the lowest price/best service and the suppliers looking for the highest margin they could make. Eventually we made our selection and called a meeting with the “winner” who happened to be our existing supplier. We arrived at their office and waited in reception. I stood up and started to read the various bits of company news on the notice board when something caught my eye. It was a summary P&L lying on the reception desk. I know it’s not strictly ethical, but here it was in front of me and a quick glance ensued. Within a second I knew I was being ripped off. The supplier had fed me a pack of lies about their cost base. A few minutes later the meeting was called and in we went. I didn’t say anything about what I’d seen but instead decided this was the meeting to inform the supplier they had not been successful. It went down like a lead balloon and not something the supplier’s big boss, who’d made a special trip to attend, was expecting.
A couple of months later I met up with the supplier and asked him why he’d lied. He said “We were making good money on your contract and my job was to slightly improve that margin. We didn’t think there was any risk we’d lose as we knew our competitors were at a disadvantage because we already had the contract and there was a cost to change”. Then he came back with “I assume leaving us cost you more, so how did you manage to justify the additional cost to change to your Company?” Truth was I was in a difficult situation because when I walked out of that meeting I knew I couldn’t go back to my Company with a higher cost – they’d laugh at me. At the same time I couldn’t give the contract to a supplier I didn’t trust. So when I got back to my car I made a call to the Supplier who was in second place and asked to see him. I drove straight round and basically laid out my position to him. I was totally and completely honest about my own personal position – not the Company – but me. His reaction was to do exactly the same – he said exactly what he could and couldn’t do. So I promised him the contract was his if he could do 3 things. Firstly get his prices to the right level. Secondly meet the cost to change. Thirdly provide a commitment that the 2 companies would work openly together on initiatives to reduce costs and improve service so that next time the contract was up for renewal, there would be no alternative that could beat their quote. I received a phone call the next day and the deal was done – that initial contract was worth £10 million and it was still rolling on 15 years later.
Lesson 3: Good negotiation is not a contest. It is about honesty. Both the supplier and the buyer knowing what their companies need and what they personally need. Lay down those needs on the table, starting with the personal then the company and work together to satisfy those needs. Unfortunately, we are ingrained to believe that our adversary is trying to take advantage of us. And guess what ? Sometimes they will, so you have to be aware that they might “play” at being honest. But if you can bring yourself to be honest and open, both parties can start to work at solutions that are right for everyone. This is how true partnership relationships start.