Imagine walking in to negotiate a new annual contract with a highly valued client. Your company has provided consistently excellent service for them over the last year, so you have high hopes for a reasonably smooth process and outcome. But your team has scarcely finished introductions and handshaking when the procurement leader across the table announces, “We’ve reviewed your rates and cost structure. You’re too expensive, plain and simple. We can find lots of other firms to do what you do, and we’ll have to — unless you can come down by 25% in your overall fee.”
Unfortunately this scenario is far too common. Even companies that say they value relationships are prone to deploy hard bargaining strategies and tactics, particularly in tight markets. In response, teams usually make concessions and then must scramble to reorganize and outsource (often incurring risks to the client) in order to claw back their margins. Sadly, doing this year after year leads to business relationships in which resentment and low morale erode innovation and performance. So what can you do to manage negotiations with procurement to ensure your team avoids these pitfalls and achieves better outcomes?
1) Before negotiating, clarify procurement’s role and decision authority.
Procurement is likely to tell you that they have complete authority and that you are not allowed to talk to your actual clients about the negotiation. It is almost never the case that procurement has final say in complex service agreements. In advance of the negotiation, clarify procurement’s reporting relationships, and how they are measured. When they ask you to move to 25%, try saying, “I might be able to help you do better than that, but I have to understand a lot more about your interests, and I have to meet our interests as well.” Remember too that there are often enormous switching costs to changing suppliers or partners.
2) Send the right people to negotiate.
In service negotiations, companies often send the account manager who knows the most about the client. But that person may have the most to lose if the negotiation fails. Her interests may not align well with their organization’s commercial interests. It might be wiser in this case to make the account leader a trusted advisor, and send several portfolio-level commercial managers to lead the negotiations. Send more than one person, because research shows that under pressure we remain calmer with at least one ally in the room.
Effective negotiating teams secure the authority to walk away well in advance of negotiations, based on careful preparations with stakeholders and decision makers. A carefully considered walk-away point balances the desire to retain the customer with the costs of reaching a poor deal. Commercial agreements that produce low or negative margins are likely to erode morale and create talent retention problems.
3) Raise doubts about the client’s walk-away alternatives or BATNA, and seek to strengthen yours.
Procurement often seeks to “gate” bidding processes by insisting that certain conditions are met in advance of negotiations. If the client views you as truly equivalent to other firms, they will feel they have little to lose. But giving in early sends a message that you will give in at other points. Such early concessions can ruin the chance of reaching a good deal for your side. If you are differentiated from competition, you can refuse to participate on principal, while affirming your belief that you can better help the client meet its needs than anyone else.
4) Explain your value proposition.
Companies too often assume that the client knows precisely how they are better than the competition. When procurement asserts that you are no different from the competition, use it as a golden opportunity to explain all the ways in which you are different, and all of the risks that the client will be taking if they move to someone else. The key here is to marshal relevant evidence to back up your claims. Claims about new digital platforms or industry awards may matter little to a client who is focused on growing market share. Most procurement leaders are willing to pay a premium of some kind if they believe it is merited. But you have to help them reach that conclusion by producing evidence that you are better than other firms.
5) Seek to create value before falling into claiming behaviors.
Procurement may tell you that price is all that matters, but price is almost never the most important thing. Rather, it is usually the thing that procurement is trained to address. Seek to delay value claiming and haggling as long as possible by getting permission to ask “what if…?” questions. Offer multiple kinds of tradeoffs (“If we reduced our rates would you be able to give us more business?”) and document all of the kinds of proposals you would consider (without firm numbers or commitments). This puts pressure on procurement to clarify their client’s interests. Even when they insist that you fill out their form and only include parameters within it, there is nothing to prevent you from attaching a second, more creative proposal in whatever form you feel is most compelling.
Following these five steps can help you to manage procurement negotiations more effectively, even with tough counterparts.
For more on this topic, see Movius and Kinnaird, "Avoiding the Three Deadly Sins".
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