Several questions arise when it comes to negotiating. As one goes into a negotiation, there is one striking question that one needs to ask oneself: “Is the price the only subject for negotiation?”
The fourth article in SmartProcurement’s World-Class Procurement Practice series will discuss the need for Procurement professionals to not only limit their negotiations to price, but also the importance of negotiating for other deliverables so as to achieve the lowest total cost of ownership.
The series is based on Chartered Institute of Purchasing & Supply (CIPS) unit content and on recent research done by Commerce Edge Academy and is penned by Ronald Mlalazi (MCIPS), Commerce Edge Academy’s Education Manager.
This month’s article is based on Level 4, Unit 1, ‘Effective Negotiation in Purchasing and Supply’.
When negotiating for the ‘best fit’ the buyer ought to identify those elements of the deal that contribute to the lowest total cost of ownership. She must identify what the ‘best fit’ is and then ask herself “why negotiate?” and “what is it that I want to achieve?” Perhaps the price is the primary concern?
Price is an integral element within the tangible factors in negotiation, but the buyer also needs to find the balance of the best fit, which includes the other five rights of purchasing: quantity, quality, time and place.
There are also the intangible factors, the underlying psychological motivations that may directly influence the parties during the negotiations. For example, negotiations can also involve the technical know-how of the suppliers, competing for the capacity, competing for the A-team of engineers or specialists to work for your organisation and those projects related to your organisation.
Negotiators as it were, engage each other with their already entrenched positions, with unwillingness to give-and-take. If such positions are left unchecked, they will surely lead to stalled outcomes.
Supply negotiators use various tactics in order to influence outcomes, so buyers ought to be armed to the teeth if they are to achieve win-win outcomes. To achieve a ‘best fit’ in procurement, Purchasing professionals need to enhance their negotiation skills so that they can out-manoeuvre their counterparts and close deals that will lead to the lowest total cost of ownership for their organisations.
Negotiation, as defined by Prof. Roy J. Lewicki, in his book Essentials of Negotiation, refers to win-win situations leading to a mutually acceptable solution to a complex conflict, as opposed to bargaining, which is competitive in nature and is characterised by haggling.
Conflict arises where parties are focused on the same goal. As each party approaches its objective, negotiations become difficult. The deadlock zone is where both parties are likely to find common ground and their solution. A solution brought about by either logical persuasion or negotiation skills will be a ‘better fit’ to all parties than one arrived at under pressure and brute economic strength.
“Purchasers should have a winning mentality to get the best price and resources from vendors at the expense of rivals,” said Procurement coach Neil Deverill. Procurement in one organisation is competing head to head with procurement at other companies for the same suppliers.
Negotiation is both an art and a science. Successful negotiators are those with the ability strategically position themselves so as to become the most favoured by the suppliers. Therefore, buyers need to be ethically conscious, and present themselves professionally.
To achieve all this, negotiators need to be trained and skilled in order to effectively negotiate for a win-win outcome. As the parties go into negotiations, there is a need to have a clear strategy and a mandate to make decisions. A successful negotiator is one who:
• Focuses on common ground rather than differences.
• Tries to address needs and interests, not positions.
• Is committed to meeting the needs of all parties involved.
• Exchanges information and ideas.
• Does not go onto meetings with clenched fists.
• Invents options for mutual gain.
• Uses objective criteria for standards of performance.
• Committed to honesty and integrity.
• Can be trusted.
• Plans and prepares for meetings.
• Sets clear objectives and targets.
• Knows when to use certain strategies.
• Knows and understands suppliers and the supply market.
• Knows how to use financial knowledge to influence outcomes.
• Knows how to influence and close the deal.
• Knows how to turn a ‘no’ into ‘yes’.
• Understands negotiation behaviours.
In order for buyers to be successful negotiators, there are a number of tools and techniques that they can adopt and customize to their operations:
• SWOT analysis.
• Porter’s Five Forces framework.
• The PESTLE framework.
• Risk assessment.
• Persuasion Tools Model.
• Zone of Potential Agreement.
• Purchasing Portfolio Matrix.
• Supplier Preferencing Matrix.
Buyers have a significant responsibility to represent their organisations on the market as the best-in-class as world class organisations want to be associated with such organisations. That alone, can be used as a tool for negotiation.