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We negotiate every day. But a new era of negotiation is upon us.
We negotiate contracts, terms, and specifications in our professional lives, and we negotiate meal plans, curfews, and allowances in our personal lives. Sometimes negotiations are small and sometimes they have a little more value or impact.
Desiring a favorable outcome in negotiations is a natural emotion. You want to emerge from every negotiation feeling like what was agreed upon. You invest time, energy, focus, and emotion in a negotiation, so naturally you want to feel like you did a good job, got a good price, or “won.”
But every negotiating table has two sides. This means that your feeling of “winning” one negotiation should not come at the expense of “losing” someone else.
The emerging sourcing theory suggests that creating win-win situations within buyer and supplier agreements is the best way to build long-term, engaging, creative, collaborative, and innovative partnerships.
The HBR article titled “A New Approach to Contracts,” published in 2018, uses the agreement between Dell and FedEx to illustrate how a buyer-supplier relationship and agreement can quickly sour a partnership.
A “100+ page document” was filled with “suppliers should” statements that detailed FedEx’s obligations and outlined dozens of metrics Dell would measure success. For nearly a decade, FedEx honored all of its contractual obligations — but neither party was happy in the relationship.
Dell felt that FedEx was not proactive in promoting continuous improvement and innovative solutions; FedEx was frustrated with onerous requirements that wasted resources and forced the company to work within a restrictive statement of work. Dell’s attempts to cut costs, including tendering the work three times during the eight-year relationship, eroded FedEx’s profits.
In the eighth year, the parties were at their breaking point. Each lacked trust and trust in the other, but neither could afford to end the relationship. Dell’s cost of moving to another company would be high, and FedEx would struggle to replace the revenue and profits from the contract. It was a lose-lose scenario” (HBR 2019).
FedEx just got fed up (pun intended) with the terms of the agreement, and the collaboration didn’t prove fruitful for either party involved.
you might think“Gosh, how silly of those two companies. Couldn’t they have just tried to realign, renegotiate and find a format within the agreement that would create a win-win scenario?’. As we read this passage with disdain in view from the sidelines, we know deep down that all procurement organizations have supplier contracts and relationships that are reflections of the collaboration FedEx and Dell experienced in the early 2000’s.
Words like “supplier must” and predefined performance/penalty metrics are classic terms in buyer-supplier agreements. Many agreements are negotiated with the aim of taking collateral at work from the start of a partnership to manage risk, align expectations and increase profit margins.
The rigid edges of this double-edged agreement might seem like a nice shiny protective device, but they can end up digging into your supplier relationship just as deeply as they can protect your interests.
Article co-authors David Frydlinger, Oliver Hart, and Kate Vitasek suggest that “the cure is to adopt an entirely different type of arrangement: a formal relationship contract that sets shared goals and establishes governance structures to meet expectations and To protect the interests of the parties in the long term.
Designed from the ground up to foster trust and collaboration, this legally enforceable contract is particularly useful for highly complex relationships where it is impossible to predict every what-if scenario.”
The world is evolving, sourcing is evolving, buyer-supplier relationships are evolving and so should the way we negotiate and contract. How I see it; Profits are not very profitable if they are made at the expense of people or the planet.
We are entering a new age of negotiation and agreement; What’s in it for me develops into what’s in it for WE.
Importance of supplier collaboration
As negotiation tactics change from “What’s in it for me” to “What’s in it for us”, suppliers move from “suppliers” to “partners”.
You know this as well as I do, but it’s important to sometimes state the obvious out loud; Suppliers are employees.
A value chain is a harmonious engine of different moving parts that would remain stationary without a solid foundation for supplier relationships and collaboration.
“The Boston Consulting Group and the Procurement Leaders Network showed in early 2013 that while most companies seek some form of collaboration with their suppliers, only about two out of five programs follow a standardized approach. As a result, most programs narrowly focus on operational efficiencies, leaving opportunities such as co-innovation, speed to market, and improved quality unexplored and the associated benefits unrealized” (BCG 2013).
It’s important to broaden your horizons and get creative within working with suppliers. However, this also requires a basis for identifying and segmenting your supplier base to see who your strategic partners are horizontally in the organization and across categories.
Working with suppliers is not a new area of focus. Early adopters and innovators of their day have long reaped the benefits of expanding supplier collaboration initiatives.
“When Chrysler was fighting for his life in 1989, Bob Lutz, President of Operations, and Tom Stallkamp, Vice President of Procurement, brought in 25 of the company’s largest suppliers and asked for their help in cutting costs. “All I want is your intelligence, not your margin,” Lutz told suppliers. Buyer-supplier collaboration caught on at Chrysler, thanks to the company’s willingness to share the benefits, and over the following decade the program (named SCORE, for Supplier Cost Reduction Effort) yielded billions of dollars in savings” (BCG 2013). .
Sometimes the easiest way to allocate savings and profits is to bring suppliers into the conversation rather than eliminating suppliers from the equation.
time, money or things.
Ultimately, negotiations and buyer-supplier agreements always boil down to 3 areas of discussion and concession: time, money or things.
Negotiations are opportunities to reach consensus between buyer and supplier. Without compromise there is no consensus, and in negotiations the parties often have to give and take.
What are your rules of engagement as a procurement team when negotiating? Are you negotiating to obtain savings/cost reduction opportunities at the expense of your suppliers?
Understanding where there are opportunities for compromise, rather than entering with preconceived notions about the need for compromise, will lead you into negotiations where the parties are trying to find amicable solutions within the framework of the agreement, rather than attempting to achieve victory .
Agreements always include three main areas for negotiation:
- Time:How much time can be granted/committed? (OTD/OTIF, consulting, implementation, lead time, project duration etc.)
- Money:What are the costs and what can be discounted? (Price point, discounts, freebies, trials, add-ons, etc.)
- Things:What goods can be offered? (More volume, additional services, etc.)
As a buyer and supplier in a new negotiation age, finding a middle ground, concessions and agreements in the above areas should be the top priority in all negotiations because shared value is the best way to create value.
Improved negotiation intelligence
Enhanced digital skills and technology have enabled procurement professionals to bid and negotiate with a whole new level of transparency and visibility into supplier offerings.
A smarter negotiating age is upon us, and it is important that technology becomes a means to not only negotiate smarter, but also to source more responsibly.
Solutions like Kodiak Rating and others enable performance-based bargaining power; Users can get supplier ratings and analytics to negotiate based on real compliance and supplier performance. Reward those who reward you with service and work well towards a common goal.
Best-of-breed solutions like BidOps and others exist in the field of cognitive/AI-driven negotiation and procurement.
Applying AI technology to bidding and negotiation gives your procurement teams cognitive capabilities to propose prices and schedules when negotiating with suppliers.
As the saying goes, two heads are always better than one. Mixing machine intelligence with human intelligence = strong category expertise and negotiation experience with fact-based bidding trends.
Never leave your head at home.
In a digitized world, we must not forget the most important intelligence;
That’s right… you
No technology or machine will ever be able to calculate with the same human and emotional intelligence as you and the members of your procurement team.
In a new negotiation era, it is important that we embrace the soft skills related to procurement. Analysis, technological competence and hard skills are becoming increasingly important in an increasingly digital world, but sourcing and sourcing is not just about numbers; how we all know.
The purchase boils down to two sides of the negotiating table and the two people sitting on each side. A buyer and a seller. Negotiation, communication and collaboration skills have always been and still are the common denominator for success in procurement.
Now & Forever.
So what’s in it for WE in this new negotiation age?
The New Age of Negotiation article and permission to publish here provided by Sam Jenks at the Kodiak Hub. Originally published on Supply Chain Game Changer on May 12, 2021.
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