January/February 2010, eSide Supply Management Vol. 3, No. 1
How to achieve a mutually beneficial outcome using strategic concession management.
The notion of "splitting the pie down the middle" is, in fact, a lose/lose proposition during a negotiation. Why? Because neither side truly achieves its objectives.
For supply management professionals, the key to reaching a true win/win outcome is to understand what each party wants from the negotiation and have a supporting process in place to achieve those goals without sacrificing total-cost objectives. Doing this requires a methodology for gathering the necessary information, as well as a corresponding framework for analyzing the results and making decisions.
The most critical — and often overlooked — part of a negotiation is the prenegotiation session. This is when the most important communication happens, expectations are set and the foundation for a successful negotiation is established. Use this opportunity to ask the supplier what it needs to gain from the negotiation to consider it a success. Ideally, this should be an express and separate agenda item addressed during the first half of the meeting to demonstrate its importance. Through completion of this agenda item, you can master a lost art in negotiation: effective listening. People are far more apt to agree to something if they feel their position on the topic has been heard, understood and internalized. Heeding this aspect of human behavior plays a major role in successful negotiation.
Ask questions such as, "How do you define success for this deal?" or "What will it take for you to feel good about the negotiation outcome?" Don't assume you know the answer; expect to be surprised. The most important part of this exercise is active listening, as the supplier needs to feel it has been heard. Above all, don't interrupt the supplier, don't express disagreement (verbally or nonverbally) and don't invalidate what is being said. Keep in mind that listening to the supplier's needs and requirements doesn't obligate you to fulfill them. Also, be sure to document the core components of what the supplier is saying as needs and requirements are conveyed.
Once the supplier has answered the question to your satisfaction, "play back" what you think the supplier said, in your own words. This clearly shows the supplier that its position has been heard. When playing back what was heard, reference the notes you took. This demonstrates you paid attention to the details.
Another benefit of this exercise is that it gives you a punch list of concessionary items you heard and can reference during the negotiation. For instance, if the supplier places significant value on early payment, payments before the end of key fiscal periods or being able to use the purchasing company's name in advertisements, you might be able to offer these concessions as they might be of little cost to your company, yet offer tremendous value to the supplier.
With this data in hand, you can develop a strategic methodology for concession management that optimizes win/win and total-cost objectives. This process entails revisiting and categorizing the list of supplier success criteria that was developed during the supplier prenegotiation session. These criteria are then assessed to determine which are of the greatest benefit for negotiation concessions.
A cardinal rule in negotiation is that no concession should be made without receiving something of value in return. The following example methodology and format may be used to assess these potential concessions for use in actual negotiations:
As this matrix demonstrates, relative values are assigned to total cost impact of the criteria, as well as perceived supplier value for each item. By subtracting total cost impact from perceived supplier value, a net concession value can be defined. Items with high net-concession values offer you the greatest return during a negotiation. These concessions should then be mapped back to key negotiating objectives and used to obtain success with the most difficult negotiation items.
Not all supplier success criteria should be fulfilled. For example, in the matrix above, you might decide only to use those areas with net concession values of 2.5 or greater. Ranking the success criteria by net concession value lets you draw a line that defines what success criteria will be used as a negotiation concession (above the line) and what success criteria will not (below the line).
Using this methodology serves three purposes: 1) the supplier will be more inclined to move from its original negotiating position, 2) you gain an improved understanding of the supplier's needs and requirements, and 3) you have a ranked list of powerful net value concessionary items you can use attain the most difficult total-cost objectives during the negotiation.
But most important, this methodology sets the stage for truly win/win negotiations. In the end, the supplier achieves its key success criteria, and you're better able to achieve your company's desired total-cost objectives.
Omid Ghamami has more than a decade of experience negotiating multimillion-dollar contracts and managing regional and global purchasing departments with Intel Corp. He is the president and chief consultant of Purchasing Advantage, a purchasing course and seminar solutions provider. To contact this author, please send an e-mail to email@example.com.
For more negotiation strategies, visit the ISM articles database.
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