You often hear the term “the bottom line,” which is typically about money. But, how do you know if your team is leaving money on the negotiating table?
You and your company are in the spotlight. There is significant pressure to deliver. The majority of the industry is facing the same situation—demand is exploding, and the supply chain is broken as your suppliers find themselves in the same position as their suppliers. Your procurement team, meanwhile, find themselves in a situation in which they don’t feel that they have the power to negotiate with their suppliers.
All of which says nothing about the pandemic, which is a conflict caused by external factors, and like any other conflict, our present-day circumstances fuel emotions that complicate the negotiation process. On both sides of the negotiating table, people might be anxious about the unknown, including their financial situation and their family getting sick. Then again, they may be overwhelmed by the amount of work they have to do or feel challenged to be emotionally capable of doing it well. Each side wants to win — and to prove themselves in the process.
Even before initiating the negotiation process, your procurement team finds itself in this highly volatile environment, where emotions are omnipresent. It certainly doesn’t sound like the best environment in which to conduct a successful negotiation.
What worked in the past, for your team, under “normal circumstances,” will likely not work in these conditions.
For most organizations, procurement’s raison d’être is controlling cost. As teams prepare for this negotiation, they will likely position price as their top priority. That will be a big mistake for two reasons. First off, in this environment where the demand outstrips the offer, the seller has far more power than the buyer around price. Secondly, by focusing on price, your procurement team will be missing an opportunity to deliver value to the organization. I would argue that, in this specific environment, price is secondary. What would be the impact on the organization if your team negotiated a reasonable price, but you couldn’t get the product on time, or if the raw material didn’t meet your quality requirements?
With all of the pressure from the government and the public interest, you don’t want to be in a position where people are asking questions and pointing fingers at you.
How do you know if your procurement team is maximizing value for your organization? This brings us back to a broader focus than just price. The way to maximize value for your organization comes down to these four variables: 1) On-time delivery, 2) quality product, 3) ability to scale up in the future, 4) price. Which of those are most critical for organizational success? It would likely play out like this: On-time delivery and quality of raw materials would be a must. The ability to scale up is essential, but it is not as critical as achieving the other two. A reasonable price would be great as well, but it is definitely not a deal-breaker.
To shift the power balance toward your side, your team needs to bring additional elements to the mix. It is essential to understand the notion of power. Your source of leverage originates from a combination of incentives (what you can do to entice the other side to say “yes”) and sanctions or threats (what you can do to them that they won’t like).
An incentive for the other party could be additional business, shorter payment terms, or current-contract extension without going through an RFP if negotiating with an existing vendor. The objective here is to find items that might be of interest to the other side.
A sanction for the other party might be longer payment terms, threatening to take business away (if it is a current vendor), or generating bad press via social media.
Procurement professionals tend to be more comfortable using sanctions or threats to get what they want. In addition, they use persuasion to have the other side agree with them and get what they want. This could work when the other side believes that you hold the power, but it definitely doesn’t work when they believe that you don’t hold the power. The use of sanctions or threats typically generates a negative impact on the relationship. During this crisis, it is risky for a procurement team to negotiate the best possible deal without considering the effect the negotiation could have on the relationship, as it could impact your business post-pandemic.
Exploring and using incentives is usually a more robust source of leverage, as people react more favorably to incentives than they do to sanctions or threats. Incentives fuel the creation of value for both parties and help to build trust.
Finally, more than ever, your people need to be flexible with their approach or strategy. Should the negotiation be conducted in a typical fashion, with each side trying to persuade the other side to agree with them, then your procurement team will soon come back, informing you that they have to accept the deal as is, because they have no choice. The real question here is, did they attempt to come to a different agreement? Were they flexible and creative in terms of finding outside-the-box solutions? It is challenging to be flexible when the only thing being negotiated is price.
In the end, spend a bit of time with your procurement team to provide guidance around creating value for the organization. The only way to mitigate risk, manage the relationship and create sustainable results is to explore the combination of incentives and sanctions, and to leverage these variables at the negotiating table. Your team must put themselves in the other party’s shoes without losing their objectives — meaning, what delivers the most value to the organization.
What worked for your people in the past won’t work during this pandemic — and may no longer work at all moving forward.