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Regardless
of what is being negotiated, the structure of the subject of negotiation - the
facts and tricks and the way it is conducted - are eerily similar from one negotiation
to another, across the years and across national boundaries. However, to be
skilful in conducting a negotiation requires knowledge. But the knowledge
imparted in this on-line course cannot be absorbed simply by skimming through
these Notes just once. The next step of the diligent buyer wishing to become
expert in the subject must be to commit the material to mind and memory, by
conscious study. Only when it is remembered - fully absorbed and at the student's
fingertips - is the Course complete. The expert negotiator is not a buyer who
has been negotiating for 20 years - after all, anyone can negotiate, and gaining
experience alone is an infinitely slow way of improving. What is needed to become
an expert negotiator is the formal knowledge that this on-line Course
provides.
Study
of these Notes in full will take approximately two hours
Course Agenda
Course
Motto: In negotiation, no good deed will go unpunished!
1. Preparing for the Negotiation
Meeting
1.1
The Nature of Negotiation
No matter which his industry or what his area of specialisation, one skill
that every purchasing or sales professional should be practised in is negotiation.
For the buyer, a dictionary might define "negotiation" as a discussion
between ourselves and a supplier intended to produce an agreement, and over
which each has the power of veto as to the final outcome. If either of us is
compelled to agree terms, it is not a negotiation ... in negotiation, consent
to the final agreement is by definition voluntary and mutual. Nevertheless,
negotiation is not about equality or equity or fairness. The supplier
has a warehouse full of 12v electric engines and wishes to replace them with
money. We have money and would like to spend some of it on twenty 12v engines.
But there is nothing to say how much money equals 20 x 12v engines. There are
merely two opposing assertions: one (by the supplier) that one engine (his)
is worth £10 of our money, and the other assertion (by us) that £6
(ours) equals one engine (his). The assertions themselves are, of course, considerably
complicated by the fact that the supplier and ourselves are both in business
to make a profit. The more money he gets for his engines, the bigger his profit
and vice versa. The purchasing executive spends a considerable time negotiating
such matters as material prices, schedules and delivery plans, quality standards,
credit terms, discounts and so forth.
Not every purchase or every contract will be negotiated, and the depth of
negotiation will not be the same for every one that is. The 80/20
rule will be invoked to concentrate on major purchases; "new buys";
long-term contracts and deals with suppliers with whom it is hoped to establish
important, long-term relationships.
The route to negotiating an agreement can stress either co-operation, emphasising
first and foremost what the parties are perfectly agreed on. This approach says
that the purpose of negotiation is not simply to resolve areas of conflicting
interest. It is also to cement agreement in matters where both sides are in
full accord. This is an important message regarding negotiation: the skilled
and sucessful negotiator builds into the negotiation process a solid sub-structure
of known agreement. By taking the lead and emphasing the positive, a greater
chance exists that genuine areas of conflict will be resolved satisfactorily
with more than a tilt in our own favour. The second approach is more-or-less
to ignore this aspect and simply go for "advantage". What is already
agreed is made to look unimportant - yesterdays problems. Confrontation may
be kindled as remaining areas of disagreement are tackled head on. Even in this
day of "supplier partnerships", the confrontation alternative should
not be ruled out. Certain suppliers or supplier personnel may be best dealt
with in this way. Or perhaps our relationship with the supplier will never be
close, and so going for the jugular will be best for our company.
Best of all, perhaps, is to try and have it both ways. It is said that negotiation
is only about give-and-take so long as we make sure we only give a little and
take a lot. After all, poor negotiators are not buyers who are poor at getting
deals - they are buyers who get poor deals.
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1.2
The Negotiation Process
The consecutive, interlinked stages and sub-stages of an industrial purchasing
negotiation are: 1) PRE-NEGOTIATION (sourcing, vendor appraisal etc.) ; 2) MEETING
PREPARATION; (3) THE MEETING ITSELF (comprising three accepted sub-stages (3a)
INTRODUCTION; (3b) DISCUSSION; (3c) AGREEMENT)) and (4) POST-NEGOTIATION (contract
preparation, operational implementation).
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1.3
The Pre-Negotiation Stage
The pre-negotiation stage is part of purchasing research, sourcing, vendor
appraisal and supplier performance evaluation ... each an on-going activity
of the buyer's every-day professional life. Clearly, when a definite negotiation
is in mind, the work is focussed on specific material, a specific supplier and
on that supplier's competitors. The important thing is that sufficient time
be set aside to marshall and sift the data and commit the salient facts to mind.
Information may be gathered and arranged under two headings: strategic
and tactical. Thus:
Strategic: Each year the buyer should agree a strategic plan with senior
management covering such important topics as *the results of last years activities;
*an analyis of market conditions; *constraints and opportunities; *the key
suppliers; *sourcing policy in such matters as supplier location, size and whether
or not single source; *identification of who is to be responsible for actual
negotiation, and the limits of his (her) authority; *targets to be aimed for
and how the results achieved are to be evaluated (targets may be difficult to
attain, but they must be achievable).
Tactical: The negotiator must pull together all such information
as will be useful to him in preparing a case. For example: * the general state
of the economy and the industry, trends, and the effect of such factors as inflation
and industrial prices; *details of companies which provide the service or equipment
which is the subject of the negotiation; * the "fine detail" on companies
which seem worth approaching - by whom they are owned, their profitability,
management structure, market share and their reputation for quality and delivery;
* details of any current agreement as to its duration, value, terms and the
satisfactoriness with which it is being carried out (ie current performance
in respect of delivery, price and quality).
Acquiring and assembling this data are major tasks. Once established and
catalogued, it is not difficult, however, to keep it up to date by the insertion
of new information as it comes to hand. Hard facts and figures are powerful
tools in any negotiation, and the more one party has, by far the stronger its
position.
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1.4
The Preparation of the Meeting
The careful preparation - even, sometimes rehearsal! - of the meeting
is essential. The alibi of the amateur is the phrase let's see what they
have to say, which often really means I have done no preparation for
the meeting, so I am forced to negotiate as I go along, by the seat of my pants.
The checklist of meeting preparation consists of seven major headings and a
number of smaller topics as follows.
1. Authority
Ensure that the person who is to conduct the negotiation has sufficient
authority to conclude a deal and do a good job. Senior people, for example,
are able to be more flexible and make deals outside general company guidelines.
Use the telephone and supplier knowledge to check the seniority of the supplier
personnel who are to conduct the negotiation. Remember that playing with "escalating
authority" is a major tactic in the negotiation process (see
below).
2. Issues
Issues will relate to such matters as future pricing policy and programmes
of technical improvement. They answer the question "what do you want
to get out of the meeting?". Each issue might be assigned a weight. And
remember that the supplier will also have issues of various weights of importance
- say, the continuity of our business and our own future product development
intentions. Issues are typically dealt with at the middle sub-stage of the
Meeting.
3. Supplier Knowledge and Assumptions
What do you know about the supplier? Basic information is usually
relatively easy to obtain, such as his size, history and profitability. But
other knowledge should be gathered where it is possible to get it. Paramount
among this, if the company already does business with this firm, is past and
current performance. Questions which must be answered
quantitatively are consequently those that relate to delivery performance,
quality, price rises and product improvement. Other knowledge about about
the supplier would be good to have ... is he overstocked and desparate for
an order? ... on the downslide? The answers to such questions as these are
usually best considered merely as assumptions, with various probabilities
of their being true. A major purpose of the Introductory sub-stage of the
meeting is to test such assumptions.
4. Purchasing Requirements
The buyer should find from the using department the specific requirements
of the company regarding technical standards, delivery and the acceptability
or otherwise of competitor products. When we discuss "power" (below
in these Notes), we note that power is in the mind of the negotiator.
The background of technical needs and commercial availability will make
an enormous difference to the negotiation approach and the balance of power.
Even where the buyer might otherwise feel he is weak because the supplier
has technical superiority, careful research will strengthen his hand from
deep product and market knowledge.
5. Targets
It is essential that meaningful, clearly stated targets be set. By 'meaningful'
is meant that they are expressed in concrete, quantitative terms. For example,
an objective of "doing better than in last years negotiation" is
not meaningful, whereas objectives stated in terms of specific price bands,
delivery performance targets and SPC quality levels are meaningful.
Objectives should be written down by purchasing management, published, communicated
and discussed. Failure to state targets clearly, and in unambiguous terms,
is a major cause of negotiation failure, especially in team negotiations.
A good way to set out targets is according to the L
I M model, in which money/prices are drawn on a horizontal line. L stands
for Like To Get, a range on the horizontal line which starts from a
point at the lowest price on the line equal to our lowest ideal purchase price.
I stands for Intend To Get, a range of prices we would be prepared
to pay, from a lower price that would be a success to a higher price that
would not be. Finally on our horizontal line there is M, Must Avoid.
All the prices in the M range must be avoided and will not be paid. (Perhaps
the supplier's opening offer is at the highest end of this range!).
6. Other Preparatory Matters
Five issues and questions arise. (1) Can the meeting be timed to suit
the buyer? For example, can the buyer judge when there may be surplus capacity
in the market of the required item to be purchased? (2) Is the buyer to be
involved with one firm or several at the meeting? (3) Is it intended to send
out a detailed specification and ask for a writen quotation before the meeting,
so that the strength of the supplier's hand can be assessed in advance? (4)
Where is the meeting to be held? It is normally an advantage to the buyer
to hold it on home territory, but there are exceptions - for example, when
he wishes to see the state of the opponent's factory. (5) The buyer should
prepare an agenda and time plan, in order to take the initiative.
7. Teams
Who is to attend? Should a team be set up, including experts? Remember
again that if a team is involved, it is essential that all our representatives
are thoroughly briefed as to the objectives and the plan, and that each team
member is assigned a task. (For more about teams, see
below). Depending on their size, teams are often organised along the following
lines. Leader - the main person and main speaker at the meeting, but
not necessarily the most senior person. Summariser - interrupts the
leader in the meeting in order to clarify difficult points and - particularly
- to summarise, buy time and keep things on the tracks that our side wants.
Observer - keeps a visual watch on the opposition to pick up any tell-tale
signs, such as those of stress.
Note that unless there is no alternative or adequate time has been denied
to prepare a full case, negotiation by telephone or
teleconferencing should be avoided. Telephone selling is a particular skill
and tactic of some suppliers, and may be adopted by them with the express purpose
of finding the buyer off his guard. In no event should the buyer feel compelled
to give an instant decision on the phone - for example, for a "special
offer". If he does respond, he should make it clear that everyting "agreed"
is, in fact, merely "discussed", to be confirmed later.
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1.5
L-I-M-I-T All Targets
In talking about targets in discussing the preparation
of the Meeting, the 'L-I-M' system was referred to as Like to - Intend -
Must. This kind of targeting reflects the fact that the skilful and successful
negotiator is one who considers a wide range of outcomes and options in preparing
for a negotiation. On almost every point in the negotiation itself the agreement
reached will be a compromise, whether with regard to price, delivery conditions,
cost of training, maintenance, payment terms ... This could be illustrated by
an L-I-M 'scale' - a horizontal line marked off in equal divisions of financial
value, showing, say, £10 at the left extreme, and, say, £30 at the
right extreme. The left point of the scale is where the buyer would like
to be (buying at £10) and the right point of the scale is where he must
avoid. Somewhere in the middle of the scale, say £17 up to £22,
is what might be terrmed the 'room for negotiation'. The supplier also views
the scale in this way, though clearly his LIM points are opposite to the buyer's.
Comments about the L I M points on the scale are as
follows:
L the like to get or ideal settlement
For example, £10 is the ideal but credible
settlement price the purchaser would like to pay, and £28 is the ideal
price the supplier would like to sell at. If the opposing negotators are experienced,
each side's opening request will be even more 'optimistic' than his ideal
price.
I the intend to get, or realistic settlement
For example, £23 is a realistic settlement
price the supplier would like to obtain and, say, £15 is the purchaser's
like-to-get price.
M the must get, or fall back position
On the scale referred to above, the purchaser believes (at the outset,
anyway) that he will definitely not pay more than £21 and the supplier
at the outset believes he will definitely not sell for less than £17.
As stated, the part of the scale between the two parties' positions is the
'room for negotiation'. It should be noted that the centre of the buyer's Like
part of the scale and the centre of the supplier's Like part of the scale do
not coincide. The skilled negotiator must thus consider a wide range of possible
outcomes.
One analogy of the L I M model is the runner in the London Marathon who
would like to win the race. He intends to finish.
He must not give up and pull out of it.
The
Walking Towards You Negotiation Game
A more vivid illustration of
L I M is that of two opposing negotiators, each in his Like to position in opposite
corners of a room, who must meet and shake hands to conclude their business.
The winner is the one nearest his Like-to (starting) position. They walk towards
each other (= the negotiation), attempting nevertheless to stay as close to
home as possible. The winner is the one who has taken smaller, fewer and more
grudging steps.
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1.6
Take Time
Time spent in preparation is money made,
and the more time you take, the more you make. As mentioned earlier, the 80/20
rule applies in purchasing. That is, 20% of the products we buy will be seen
to account for 80% of the annual purchasing budget. To perform this analysis
and verify the contention just made, take the annual usage of each purchased
product and multiply it by its unit cost. The answer is the 'annual value'.
Next do two things. First, add up the annual value amounts to get a grand total.
Secondly, arrange the products in descending order of their individual annual
value. It will then be found that the top 20% of the products in the list account
for 80% of the grand total.
In the matter of time also, it must be remembered
that most of the goods entering our factory each week are doing so as the result
of re-orders. They are not the first arrivals of 'new buys'. So with combination
of this fact and the 80/20 rule, it must be at least ensured that the top products
get plenty of time devoted to them.
As one goes down the list of purchases well
into the morass of the 80% that account for 20% of the budget, the buyer will
increasingly have less time for protracted negotiation preparation. (Eventually,
he has no time for negotiation at all, and must place orders direct, with only
a nominal discount.) If the buyer has less time, he should chose a negotiation
strategy that is sharper and more brusque ... Take
It or Leave It, The Seven-Word Challenge etc..
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1.7
Satisfaction from a Negotiation
In negotiation, the party who gets the best price is not always the happiest.
In negotiation, it is also how we get the price that counts. Feelings
about "how" have a marked effect on the conduct of the contract, the
subsequent buyer/supplier relationship and the next negotiation. "How"
may not matter for many trivial purchases, but for those purchases on which
the buyer spends significant negotiating time, it undoubtedly does matter.
Suppose that a supplier sold a certain type of engine that you needed
which had a list price of £6000. You enquire about availability, and ask
what would be discounted. The supplier offers the engine with a £700 discount
- ie for £5300. Then you say "Fine! I'll buy. Where do I sign?".
Alas! Now the supplier is miserable! All he can think is that the £700
discount is too big. "If only I'd asked for £5800", he weeps.
Buyers do not want weeping suppliers. They see sales representative and
companies year after year. As stated, how they feel about the previous deal
has a great bearing on the relationship between the firms and the next negotiation.
Feeling of satisfaction are important in both the short-term and long-term,
and depend as much on how the price and conditions are got as the price
and conditions themselves. If we accept the supplier's offer too soon, he will
feel he could have got a better price or got other more favourable terms. (Similarly,
if he accepts our offer too soon, we will feel we have overpaid him.) If things
are too fast and easy, and the supplier feels he might have done better, he
will be far more difficult to deal with next time ... discounts hard to get,
concessions not forthcoming. In the example above, you had previously decided
you were willing to pay £5500 for the engine that had a list price of
£6000. As before, you ask for a discount and again he says £5300.
But now you say you'll think about it and you'll talk it over with production.
Later, you phone him and tell him you can go to £5000. He now says his
last offer is £5200 and not a penny less, and you reluctantly agree (I'll
find the £200 from somewhere, but Lord knows how!). He is pleased
at getting £5200 and you would have paid £5500. It's a win-win situation!
And the next time you meet the supplier he is pleased to be doing business.
He remembers last time with pleasure - he really made you work.
The buyer also is entitled to a little satisfaction here on Earth. If (an
inexperienced) supplier accepts your offer straightaway, you will feel that
you have paid more than you needed. In these circumstances, that feeling is
likely to be justified. So make sure the offer you do make is
low (see below).
In summary, a supplier can be made to feel happier about a £5200 price
than a £5300 price. It is the buyer's job to leave the
supplier feeling happy with the agreement. So never
accept a first offer. If you give him his price too easily, he feels
miserable. (Try the negotiator's trick: in a quiet, utterly serious voice tell
the supplier at the conclusion of the deal what a hard man he is / hard woman
she is.) Make your opponent feels good about himself!
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2. Personality & Style
2.1
Commitment
Certain personal characteristics must be adopted
in a negotiation if a person is to be considered skilful at the task and if
he is thus to be successful. These attitudes and behaviour patterns can and
must be carried into the negotiation environment. Not all of them are likely,
however, to be natural to the behaviour of the person concerned in his or her
everyday life. In his family and social life, a man may be greatly generous
and always ready to share his thoughts with others. When he approaches the negotiating
table, that same person must put on an iron mask. He must play the game in quite
a different way from his "normal self".
The first matter is commitment. The commitment
of the buyer should be fourfold:
1. Commitment to the Company. The buyer must
see himself and the Purchasing department as part of the company team, with
responsibilities in the areas of finance (price and the cost of concessions),
production (quality), materials control (delivery), marketing and design (supply
product improvement) and so on. In the negotiation, then, the buyer must continually
remind himself of his commitment to the company team's objectives and so continually
keep his defences up. When the supplier persists in trying to maintain his price,
we remember that his objectives are different. Our own loyalties lie first and
last to our own company.
2. Commitment to Oneself. The buyer has his
own targets, including price. Remember L I M above.
He must also set personal objectives and make sure they are attained. The buyer
should also set objectives in consultation with his manager, so that he feels
has has moral support in the conduct of negotiation and so that both share in
the success of the outcome. Conversely, a manager must encourage buyers in the
same way.
3. Commitment to the Supplier Relationship.
Where a new, closer relationship has been forged with a supplier, the buyer
must ensure that his end of things is maintained. For example, if the supplier
has been promised payment in 30 days, it is not sufficient simply to point to
a company computer system if payment doesn't get made for 60 days. In new supplier
relationships, help may also be offered in an on-going manner in the area of
quality.
4. Commitment to the Sales Representative. The
supplier must be able to believe and trust what the buyer says and the motives
for his actions. The buyer, therefore, should behave at all times with personal
integrity and decorum.
2.2
Integrity and Reputation
The OED defines integrity as soundness
of moral principle, the character of uncorrupted virtue; uprightness; honesty;
sincerity. Now although the term appears to rule out its adoption for commecial
motives, the possession of it is a great strength in negotiation. Integrity
and negotiating reputation can bedazzle the supplier and lower his aspirations
when he faces the buyer. Part of the buyer's power is in the supplier's mind;
the possession of integrity makes that power the greater.
2.3
Lacking in Charity
Uncharitableness means tightfisted, parsimonious,
lacking in goodwill. It does not imply that the buyer should be impolite or
curt or lacking in charm. The image of the friendly but quite miserly buyer
is a good one to keep in mind.
The truth that must be stated, if necessary time and time
again, is that generosity by the buyer does not induce
generosity in the supplier. The supplier may well be pleased and the
glow of his face may well give the buyer a warm feeling. But it will not get
reciprocal benefit in kind. Among other things, the buyer has no right to spend
his company's money to get warm feelings.
Negotiation is a game.
Generosity by the buyer will appear as weakness in playing it. Generosity by
the buyer will be seen - and taken - as an opportunity for his opponent. Salesmen
are taught in sales training courses to take the maximum possible advantage
of what they call "openings" of this nature. The buyer must therefore
be studiously uncharitable, no matter what his nature outside
the negotiating environment.
2.4
Toughness and Resilience
The supplier forms his opinion about what
is possible and what is not possible from contact with the buyer in the negotiation.
There is no other way. Consequently, it is essential that the buyer should
take a tough stance. By doing so, the aspirations of the supplier are modified
downwards and he takes a weaker line. In the conduct of negotiations, it has
been found that the chances of deadlock when one of the parties takes a tough
line are only marginally increased. The total value to the buyer over the years
in taking a tough stance is very much in his favour, even given the few occasions
when deadlock does result.
Toughness here implies a somewhat aggressive
demeanour. This should be accompanied by that personal determination and staying
power we call resilience. The tough and resilient buyer then * refuses
to be intimidated; * sticks doggedly to his demands; * makes miserly concessions;
* is not worried by deadlock.
A weak stance and giving way can be guarded
against by continually reminding ourselves of our commitments, and assuring
ourselves that charity begins - and indeed ends! - at home.
2.5
Taciturnity
Taciturnity means guarding against uttering
any word that has not been weighed carefully, on any matter having a bearing
on the negotiation, whether during the Meeting or in socialising with the supplier
outside it. No opinion must be expressed, say, on product quality except as
a deliberated and deliberate action so to express it. No word must be mentioned
on price, satisfaction or dissatisfaction with the product in use, competitor
quality and so forth unless it is specifically intended to express that view
as part of the negotiation plan. As stated, taciturnity includes not only silence
at the negotiation table itself, but silence on these matters in polite or friendly
conversation in an "out of work" situation such as at a restaurant
for lunch.
The reason for requiring taciturnity will
become more clear later in this on-line course when the nature of "power"
is dealt with. One of the chief sources of power of the buyer over the supplier
is in the supplier's mind - what he supposes to be true. For example, it is
greatly to the buyer's advantage if the supplier believes that he (the buyer)
regards all sources of this product to be pretty much the same. So a casually
made remark such as "You have a superior product - our engineers say there's
nothing to beat it" is immediately destructive of that power and could
cost our company dear.
Other silly remarks include "We need
delivery urgently. How much would you charge for that?"; "I have 90
requisitions to fill by this Friday" ; and "We are deperate for these
parts. Our whole production programme is about to grind to a halt". Remarks
which give away power are not confined to the company's buyer. Technical personnel
on the negotiating team must also keep their lips buttoned. Far more difficultly,
they should stay on their guard when speaking to the supplier's technical staff
in other than a negotiating environment. A particular problem here is the supplier's
technical visits. Enthusiastic remarks by our own staff may have to be countered
by including a (more senior) manager on the negotiating team, whose job it is
to denigrate somewhat the enthusiasms of his technical colleagues.
The supplier can also make remarks which
undermine his power, of course, and we should obviously listen out for them.
For example We have a huge surplus of these components; There is something
of a cash flow problem at the moment; We have been having quality problems
lately.
Be taciturn. Concentrate at all times when
you say anything at all. Guard the flow of information to the supplier. (Another
virtue of taciturnity is that it helps us in concentration and listening, as
below.
2.6
Listening and Signalling
L i s t e n i n g
Most of the information that comes our way is of no relevance to our lives
and is filtered out of consciousness by our mind. We pay attention only to
those things which are of concern to us. The problem with this way of seeing
and listening is that the brain takes shortcuts without evaluating or 'taking
in' all the evidence. But shortcuts often lead down wrong paths. Our mind
makes instant assumptions- we jump to conclusions and then carry on with an
erroneous impression of the facts. In a normal environment - in the office
or in the pub - this doesn't really matter, because the speaker repeats the
message several times in different ways. On the second or third occassion
the penny drops (Hey! Are you telling me that ... ?).
But in negotiation, all this matters. For a number of reasons we simply
cannot afford to have a lazyminded attitude to what is being said. The negotiation
is not like the 'normal' environment of office and pub. So things will not
be said over and over again until the opponent is sure we have taken them
in, or at least, if it has to be, progress will be slow. It is essential,
therefore, that we listen carefully. That we concencentrate acutely on what
is actually being said, and don't 'hear' what we assume the supplier is going
to say. And that we evaluate - turn over - all that is being said in our mind.
A further reason we should listen carefully to what words are being uttered
is that the supplier may say something that increases our power. That is,
he may give out information that bears upon the product, his company, his
stock or his financial situation. (Of course, if what he says can be taken
in two ways, we must question him carefully to make sure we
have interpreted the news correctly.)
The main reason we must listen carefully, however, is to receive the supplier's
signals.
S i g n a l l i n g
A signal is used to overcome an impasse in a negotiation. It is the means
by which one party which has taken a resolute stance on a current
issue now indicates its willingness nevertheless to negotiate, provided this
willingness is reciprocated by the opponent. The reply by the second party
to a signal is a reciprocal signal that it is willing to proceed along the
new lines. The purpose of the signal and reciprocal signal is to move the
negotiation along, and break a deadlock.
A signal usually takes the form of a qualification - perhaps quite a subtle
qualification - to the main stance. For example, from "we simply cannot
do it" to "we would find it very difficult to do". The reciprocal
signal must take up the new direction of the argument. This willingness to
to take things up just in the direction of the first signal is important.
If it is done incorrectly or if the opponent simply repeats his previous demands
in a different form, the original signal would start to look like a surrender.
Since it was not intended as a surrender, the original party will immediately
back off and the negotiation will be at deadlock as it was before.
The three simple examples below illustrate why the buyer must listen carefully
to what is being said in order to pick up the signals. If the buyer misses
a signal, it is true that the supplier can repeat it, louder and louder. But
time is limited, especially the buyer's. The buyer who misses signals will
either spend far longer negotiating than he intends or needs, or will break
off negotiating unnecessarily because he (wrongly) believes he can make no
progress.
Example 1:
No Signal: Buyer: We require a 15% discount. Supplier:
We never give discounts of any size. Buyer: Well, we want one
even so.
Signal: Buyer: We require a 15% discount. Supplier: We
never give discounts, and even if we did they would not be as high as 15%.
Buyer: Well, how high could they go to?
Example 2:
No Signal: Buyer: We require delivery on 24 hours notice.
Supplier: We need 5 days notice of all deliveries. Buyer: You're
not living in the modern world.
Signal: We require delivery on 24 hours notice. Supplier:
We would find it extremely difficult to deliver with less than 5 days
notice. Buyer: Well, how could we help shorten your leadtime?
Example 3:
No Signal: Supplier: Our price is £20 each. Buyer:
Our offer is £10 each. Supplier: I can only let them go
at £20.
Signal: Supplier: Our price is £20 each. Buyer:
Our offer is £1000 per thousand. Supplier: What would be
the yearly value of the business?
To summarise, a supplier's signal is an indication of his willingness
to talk over (ie negotiate) a position. It is not a surrender and it is not
a request to the buyer to propose a different set of terms. The buyer's response
must be to go along with the signal (give a safe conduct pass) so the
viscious circle of deadlock is broken. This is why signalling is done - it
is its only purpose. A common mistake of the inexperienced buyer is to react
to a signal with yet another new proposal. If he does so, eventually the negotiation
ends up with the buyer having put all his possible concessions on the table
for the supplier to pick and choose which he would like best.
Note: If a signal is recognised but ignored, this is a sign that the
party ignoring it believes it can intimidate the other. The argument is accordingly
resumed. If other signals are ignored and there is no capitulation, deadlock
will ensue.
2.7
Patience and Pace
Patience is one of the seven virtues, and
its virtue in negotiation is in being able to conduct the proceedings at a pace
favourable to us. It is a prime requirement of the negotiator and, once we realise
the need for it, it is something that is not difficult to acquire. Since patience
is also a virtue adopted by the skilful supplier, the buyer who is himself also
patient will be better able to resist the supplier's use of time against him.
An example of the value of patience is in
delaying the introduction of an issue until it is strategically right to do
so, even if it is a hot topic as far as we are concerned. Another is the prolonging
of a discussion to enable a supplier to become resigned to a lower price or
more stringent conditions than he had been aspiring to. Yet a third is going
at a snail's pace to counter the supplier's tactics. The use of pace and patience
by the buyer is analogous to its use by the barrister in a court of law. The
timing of disclosures of evidence and the presentation of argument are made
according to a plan prepared in chambers. Although the timing may have to be
modified in the light of events, as it is originally conceived it is the one
judged best to support the barrister's case.
To employ patience is not to be 'laid back'.
It is to use time while maintaining full concentration. The patient (alert)
buyer can find out more and more about the supplier's position and negotiating
stance while giving nothing away about his own. So patience allows us to add
to our power without adding to that of our opponent.
3. The Meeting and Negotiation Tactics
3.1
The Structure of the Meeting
The Discussion
One of the purposes of 'discussion' is
to air the issues mentioned in the pre-discussion stage - the supplier's as
well as our own. But beware - discussion also leads to argument. Remember
also not to accept facts and figures unless their source is impeccable (even
then, their interpretation might be questioned). If facts are not forthcoming,
probe to find out why he will not provide them.
The Agreement
As the agreements start to come, be on
your guard. See Concession Management below.
Broad Front v. Narrow Front Negotiation
Broad Front. After the issues have been
identified in the Introduction, in a broad front negotiation the deal is discussed
in its entirety - ie all fronts together, such as delivery, price, terms etc..
As the negotiation proceeds, all these aspects are gone into in increasingly
fine detail. One advantage of this approach is that it saves having to re-open
each facet of the agreement as every new product requirement is dealt with.
Broad front negotiation is likely to be suitable when dealing with major new
suppliers or suppliers of critical material. Broad front is not usually used
when it is the buyer's intention to be confrontational (see below).
Narrow Front. Each issue or purchase is
dealt with in its entirety, with the agreement on it finalised before moving
on to the next. Narrow front negotiations are best employed, for example,
with an established supplier selling a variety of dissimilar products. Note
that when narrow front is used in a confrontational manner, the order in which
issues are raised should be considered carefully - see below.
Collaboration v. Confrontation
It is a truth that two companies in negotiation as supplier and buyer
have far more in common than otherwise. (This may not be true in industrial
wage negotiations or in political or international negotiations, but those
are not the concern of these Course Notes.) It is likely to be better, therefore,
to follow the collaborative route described below, at least for mainstream
supplies - ie the 20% of the items we spend 80% of our money on. Thus:
C o l l a b o r a t i o n : The positive is emphasised from the beginning.
For example, the buyer is likely to begin the meeting by going over areas
of total accord - and there will be many (We propose to continue paying
you specially by BACS, not by cheque - you said you preferred this.) The
desire is for both parties to win. Ultimately, this may pave the way to a
close supplier relationship, such as described in the Notes in Section
5 below.
C o n f r o n t a t i o n : The buyer is solely concerned with his own
company, not the mutual relationship between the two companies. He is therefore
seeking solely to gain his own advantage. The order of raising issues is important.
The buyer should have a cogent reason reason to depart from it. The order
is:
1. Work on an issue not important to us or, indeed, to the supplier,
and on which we are prepared to make a concession.
2. Work on an issue not too important to us, but important to the supplier,
to test his pattern of concessions.
3. Work on an issue of serious importance to us (although don't say
so!).
4. Other major issues.
5. Other minor issuees.
6. One last minor issue that we can fight and then surrender, to give
the supplier the impression of having got an overall bargain.
The Form of Argument
The manner in which the inevitable disagreements between buyer and supplier
are brought up are important. There are two basic forms:
C o u n t e r p r o p o s a l s : The buyer makes considered counterproposals
to the supplier's requests, with a view to discussing the merits of the two.
For example, in response to a quoted price of £100, the buyer would
first verify the exact meaning of the proposal - what was and what was not
included in the price. Then a counterproposal would be put of the nature of
Our figures show that £50 is the right price for this material, plus
£5 for delivery. This form of argument is better for the collaborative
approach.
C o u n t e r a t t a c k s : The buyer attacks the supplier's proposal
with a view ultimately to wearing him down. In response to the quoted price
of £100, the buyer says Rubbish! How can you justify that? We would
be looking for a 50% discount on that basis.
3.2
Power
1. The Nature of 'Power'
Understanding, creating and exercising power are at the centre
of the negotiating process. Power itself is the sum of two elements:
Objective Power: this is the power arising from circumstances
that are plain for all to see. For example, the fact that the supplier is
selling and the buyer is buying. The fact that ICI is a large multinational
firm and Garstang Engineering is small. The fact that Company X is the sole
supplier of a particular technology and Company Y requires to buy that technology.
Subjective Power: this power is in the mind and cannot
be seen or quantified. It concerns not whether we buy and sell, but our degree
of eagerness to sell and our degree of willingness to buy. It concerns how
attractive or unattractive we find a product; a particular supplier's acceptability
to us against the acceptability to us of its competitors; the 'importance'
of various conditions of sale. Subjective power can and often does change
over the course of the negotiation.
It is true that objective circumstances ultimately create
the very reason for the negotiation itself, but once that negotiation is underway,
they are subserviant in importance to subjective circumstances. And if subjective
power is in the mind, we remember in negotiation that there are two minds.
2. The Exercise of Power
The key to the exercise of power is belief
that it really does exist and work the way we say it does.
Power (subjective power, at any rate) cannot be literally seen or measured.
It is not like the physical power of a gun or a stick which is obvious to
all. When we use a gun or stick, we can see its effect. When we use
our negotiating power, we cannot see the turmoil in the supplier's mind or
see his despondency as he contemplates a lower price. Indeed, the selection
criteria and training of salesmen are focussed on their ability to hide signs
of emotion.
What the buyer is asked to do is to weigh the effects of
something that has no physical weight. He must believe his power is working,
even though he cannot see it work. If he wishes to, he must be able to feel
the emotions inside the salesman's mind. He must believe in his power and
patiently wait for the outward manifestation of its effect on the supplier,
in the way of capituation and concessions. And he should invoke his commitment
to ensure that his power is ruthlessly exercised.
3. The Assessment of Power
There are four elements in the assessment of power, as follows:
1. The Objective Circumstances, which include indisputable
facts such as our use of particular products in our production process, the
fact that the supplier makes and sells these products, the nature of our company,
its size, the existence or not of a research department, the nature of the
supplier's company ... Most of these facts will be known to both parties,
but some will not be. A purpose of preparation is to ensure that the facts
relating to objective circumstances are at our fingertips.
2. Our Own Real Subjective Circumstances, These include
our real need for the product, our "L I M" view on price, our budget,
the urgency with which the using department requires the product, the real
value of prompt delivery, our real assessment of the competition ... Our own
real subjective circumstances are unknown to the supplier. Opportunities and
facts arising in the course of the negotiation may change these circumstances.
3. Our Subjective Circumstances as they are perceived
by the Supplier. The supplier may have made assumptions about the issues
in 2. above and so it is these assumptions that will be in his mind during
the negotiation. Consequently, in evaluating power for the purpose of establishing
negotiation advantage, we must take into account the supplier's perception
of what we want, the supplier's perception of how much we want it and
the supplier's perception of what we are prepared to give, not the
underlying "truth" (that only we know!). Where the supplier
has not yet made assumptions, he will be trying to build up facts so that
he can do so. If the supplier were to know these things, he would clearly
have an immense advantage in the negotiation ... he would know what to press
for and how far to go.
4. Our Perception of the Supplier's Circumstances.
These include the lowest price at which we believe he will be prepared to
sell, the cost to him of making the product, his commitment to quality, the
value of his product improvement programme, his production control and abilty
to deliver on schedule, how much his company needs the business from a financial
viewpoint ... A large part of the negotiation process, therefore, is building
up facts and testing the validity of our assumptions about the supplier. If
we, the buyer, were to know these things, we would clearly have an immense
advantage in the negotiation. We ourselves would know what to press for and
how far to go.
4. The Creation of Power
In order to gather power and so be capable of exploiting
his position, the buyer must undertake the following tasks vis-a-vis the four
power sub-headings in 3.3 above.
* He must ensure he is up-to-date on objective facts;
* He must be is fully aware of his own real circumstances,
and that he knows enough to be able to spot opportunities for change, should
they arise and be to his own advantage. This knowledge must be rigorously
denied to the opponent. For example, under this heading, the buyer may in
reality be pleased with the supplier's past performance and quality, and unimpressed
by his competitors. He should not say so. He must not say so. He must safeguard
his power.
*The buyer must create an impression in the mind of the supplier
about the real facts that will give him an advantage. For example, a buyer
who is (really) pleased with a supplier may nevertheless care to have a copy
of a competitor's catalogue on his desk. Suppliers will try to test the validity
of their assumptions in this area, but the buyer must stay tightlipped. He
must not say how much he loves the supplier's products - he might mention
his competitor's excellent product range instead. If the supplier believes
you have the balance of power (eg if he thinks this buyer knows I havn't
made a sale all week) - then you have the balance of power, by
definition. If you believe he has it, it will cost you something.
* He must probe the supplier patiently and skilfully to elicit
facts and test/validate his own assumptions.
A prime task of the successful negotiator is
to understand, acquire and maintain power. His task in the meeting is power's
ruthless exploitation. In the negotiation, the buyer must be in the frame of
mind to use to the very hilt the power he has got at all times.
3.3
Tactics and Their Use
In negotiation, buyers and suppliers take
stances, and the stances they take are as many and varied as the issues they
negotiate. The price offered for apple juice. The price asked for aeroengine
blades. The standard terms demanded by an office cleaning services company.
But although the issues are varied, the manner in which they are raised, the
manner in which the stances are then challenged and the manner in which they
are defended are found to follow certain definable patterns.
The patterns of defence and attack in negotiation
stances are referred to as tactics. This is a term familiar to even the
most inexperienced negotiator, but it should be remembered that tactics - clearly
- do not come labelled as such in the negotiation. They are the underlying
pattern of the negotiating stance. When used by the supplier, they may even
have been adopted unconsciously. The buyer has two tasks as regards their use:
Tactics Used against the Buyer
The buyer must learn to strip out colour
and emotion from the supplier's arguments and .. .(i)
recognise which of the standard tactics is being used against him or her;
(ii) label the argument with
the corresponding tactic label; and (iii) from his knowledge of tactics, and
so knowing what the tactic is intended to achieve, isolate the supplier's
arguments and prepare a countermeasure along standard lines relevant to that
particular tactic.
Tactics Used by the Buyer against the Supplier
Different approaches and different ways
of packaging an argument - ie different tactics - are suitable for different
circumstances. The buyer must select with care the one or ones he or she intends
to use, based on two important considerations as follows: (a) A tactic
must be chosen that is inherently suitable for the negotiation in question.
The background and purpose of different tactics will be given in due course,
but for now, tactics can be considered in two classes: 1. those used in either
collaboration or confrontation negotiations; 2. tactics used exclusively
in confrontation negotiations . (b) The tactic must be couched in terms which
relate to our own company and its operation and circumstances. In other words,
we must dress up our argument as a 'true' story based on 'true' facts. The
stronger these facts are ... ie the nearer they are to the real truth!
... the better we will be able to defend our case. In other words, while it
will usually be possible to invent a storyline in which to cloak an argument,
it would be better if we could use some important, genuine event to lend verisimilitude
to our argument.
The importance to the buyer of learning
to recognise, label and defend himself against the use of tactics is paramount.
In a negotiation, people can experience fear, anger, friendship ... Tactics
can overwhelm the untrained buyer (or supplier) and can cause almost instant
capitulation or deadlock (which is what they may be intended to do, of course).
When a tactic is chosen, developed and employed by the buyer, he must be quite
clear what he wants to get out of it, what the defence or countermeasures are
likely to be and whether its use is in his long-term interests.
3.4
Countermeasures to Tactics
A tactic very often appears as a fixed negotiating
stance - for example, "Our Head Office has put a minimum sales price on
this material of £10 per yard". But fixed negotiating stances very
rarely are fixed. "Truth" in negotiation
is a shifting concept; stances change, people change thir mind. Extraordinary
measures can be taken to break the rules.
Although tactics must be gone along with
(*), there is not a specific countermeasure corresponding to each one. The two
general rules are given below. (* Note: deliberately not going along with a
tactic, such as completely ignoring the supplier when he sets a deadline, is
itself a countermeasure, of course.)
Rule 1. Keep the dialogue going;
Rule 2. Change the deal - reshape the
original proposal with new conditions and variants of what it had been proposed
to buy. This pushes the tactical position to the sidelines.
Examples of changing the deal are the elimination
of unwanted product features, changing the packaging, specifying different distribution
terms of sale, coming to alternative payment and credit arrangements.
Countermeasures glide into the final agreement
sub-stage of negotiation, where the agreements start to come. It is a dangerous
area - see Section 4 of these Notes below.
3.5
The Focus on Price
Because of its inherent importance to the
company and because he will have usually already satisfied himself as to other
aspects of the deal, such as quality and supplier reliability, the buyer will
normally wish to focus the negotiation on the price being asked by the supplier.
As a simple illustration of the importance of price to the buyer, suppose that
a company's profit was 10% of turnover and that its turnover was £100,000
- ie its profit was £10,000. Also suppose that its raw material costs
were 50% of turnover. In order to increase profit by £2,000 purely through
increased sales, the company would have to increase turnover by £20,000,
since 10% of £20,000 is £2,000. However, the same increase in profit
will result if the cost of purchased material (on the original turnover) merely
falls from £50,000 to £48,000.
To focus the negotiation on price, the buyer
should appear to denigrate or at least disregard other factors. He will often,
of course, be able to make important distinctions between suppliers on such
criteria as service, reputation, credit terms, distance from his premises etc..
Yet unless it is part of a wider scheme that includes establishing geographically
closer supplier relationships, the buyer must not express pleasure at these
other aspects of the supplier's performance and terms.
The industrial buyer is highly vulnerable:
he must normally buy for his own production. If he feels that there is competition
to buy - ie other companies wishing to buy and a limited supply - price and
negotiating power disappear. The buyer should guard against this possibility
by (1) first ascertaining whether the apparent position is, in fact, true; (2)
better tactical sourcing; and (3) using other business as a ransom.
3.6
Negotiation with Foreigners
Of particular importance in negotiation
with many foreigners, especially Asian, but also southern Europeans, is the
need for extensive socialisation beforehand. The Japanese and Chinese may be
reluctant even to do business with people they don't know. But beware! They
will try and capitalise on prenegotiation friendliness by asking for lower prices.
Also, beware of causing "loss of face" with Asians - if you say you're
not keen on their product, they lose face. So instead, say you will have to
talk to someone, or "there may be a difficulty", or say nothing. Also,
UK negotiators should negotiate as a team (of senior people). And remember to
resarch the nationality involved, such as by talking to relevant staff in the
sales department. Here are a few thumbnail sketches:
The American ... enthusiastic, professional,
willing to take a risk;
The Arab ... hospitable, very
slow, willing to reciprocate concessions;
The Austrian ... highly prepared, assertive, loyal to
suppliers, will not take risks;
The British ... seen by others as unprepared
and amateur, but sociable;
The Canadian ... friendly and helpful,
otherwise similar to the American;
The Chinaman ... concerned with "face",
suspicious, expert at "nibbling" small last minute concessions;
The Dutchman ... fabricate stories, arrogant,
laid back (no good after 3pm on Fridays);
The Frenchman ... broadfront, firm, disloyal to suppliers,
very confrontational (note - also having a dislike of the Englishman);
The German ... assertive, loyal to suppliers, will not
take risks; slow to respond; often do not deliver goods on time; note - it is
a myth that the German is highly prepared;
The Greek ... open to backhanders;
The Indian ... having a love of negotiation, a born liar,
untrustworthy ( "three ways to ask a question");
The Irishman ... very astute, slow to take action;
The Italian ... a liar, laid back, big sense of drama,
knows how to flatter;
The Japanese ... mysterious and difficult to fathom,
yet open and honest;
The Korean ... excitable, a show-off, disloyal, enigmatic,
expert nibbler of concessions;
The Norwegian ... open, friendly, devious;
The Pole ... weak;
The Russian ... open to bribes;
The Saudi Arabian ... likes to build relationships, gets
to the point, well dressed, decision maker is usually a silent observer;
The Scandinavian ... reticent, quiet and difficult to
fathom, overcautious;
The Spaniard ... laid back, "inexact";
The Swiss ... liars, laid back;
The Taiwanese ... excitable, show-offs, disloyal, enigmatic;
The Thai ... always wanting to say "Yes!" -
he will promise the Earth;
The Turk ... open to backhanders;
The Latin American ... passionate, and impatient with
documentation.
If your experience of a particular foreign group (ie
not your own national group) is different from the above, please let the author
of these Notes know at : info@gmcs.co.uk.
3.7
Tactics I : The Opening Offer
The
less you offer, the less you pay.
It has been demonstrated repeatedly that the initial
offer greatly affects the outcome of the negotiation. If
a buyer is to make an opening offer of price, it should be as low as possible
while remaining (just) credible. This may mean it could be below the
'L' of the L I M range referred to above. Remember,
by making an offer, the buyer is setting an absolute lower limit on the price.
He won't do any better than his opening offer. The three advantages of a shocking
first offer are:
1. the supplier's aspirations are lowered;
2. the buyer has room to manoeuvre;
3. the final deal is much more likely to
be at our end of the range than the supplier's.
The supplier has a price in mind prior to the
meeting, and so do you. Once the negotiation has started, however, price expectations
are fluid. The best time to influence them is at the beginning. Indeed, the
low offer sets the tone for the meeting; getting a high price must be hard work
if you offer so low. Remember that to be credible, the shocking low offer must
be 'believed' and pursued by the buyer. He must not back off after 5 minutes.
Consequently, it is necessary to construct a reason for the price, so that it
can be properly argued.
If the buyer himself is hit by a high opening
demand by the supplier, if we suppose the supplier's price was not known before
the meeting such as through the existence of a price list, the first escape
is to make the low counter-offer and keep the discussion at the new low price.
If this appears to be difficult, it would be as well to have Mother Hubbard
at hand (see below).
The shocking first
offer lowers the supplier's aspirations and sets the tone for the meeting.
3.8
Tactics II : The Power of Legitimacy
The power of legitimacy is the use - and power - of apparently
inviolable published material that appears to eliminate the very possibility
of negotiation in the first place. Example are:
your own purchasing department's "standard"
terms and conditions; the supplier's printed price list; discount tables;
the company's printed procedures and policies; finance departments 'unalterable'
credit terms; ready-made contract documents which state that 'no other marks
are to be made except the signatures of the contracting parties'.
The purpose of using the power of legitimacy is not so much
to assist the negotiation as to remove the possibility of one in the areas covered
by the document. Cunningly, a small number of minor areas of little importance
may be left out so as to confine the negotiations to these.
Although the tactic can be used by the buyer (standard purchasing
terms, memoranda on price limits from head office etc.) it is more likely to
be used against him/her. In some negotiations, the buyer may dismiss the tactic
as not credible - price lists in a situation where negotiation of price is taken
for granted, for example. In other instances, counter-tactics include:
(a) challenging the actual legitimacy of the document
- for example, by quoting instances in the past or with other companies where
this document's directives have been broken;
(b) producing an 'opposite' - ie a contradictory - document
which challenges the original ones produced, such as your own company's printed
terms of payment. So then, if the terms of payment can be different, why can't
the discount policy?
(c) use of the power of legimacy is often accompanied by
a regret on behalf of the person using it that he can't do more (cave!).
In which case, a buyer might explain to the supplier how he can overcome things
by, say, initialling changes on the document or drawing up a completely new
agreement;
(d) use of "How much off if I ... ?";
(e) use of "This document does not cover X, so how much
off if I wish to buy stock of X?".
Remember, once you succeed in altering a single word on the
printed document - the two parties usually change the word with pen and ink,
and initial or sign the amendment in the margin - the way is open to change
them all [*]. In that respect, The Power of Legitimacy is a dangerous game,
and will either succeed from the beginning or not at all. [* Although in these
circumstances, the buyer should consider whether the document itself is a decoy,
and whether there are other issues outside the document's scope which should
be given more attention.]
3.9
Tactics III : Deadlines
Whatever its other merits, the 'deadline,
tactic is an attractive one for the buyer for two reasons. 1. The buyer often
has insufficient time anyway for a protracted negotiation. He may have a large
number of requisitions to fill or the product being bought may be a Class C
item. 2. The deadline can deny the supplier an opportunity to develop non-price
arguments. If the buyer is, in fact, highly satisfied with the supplier's performance,
he does not want its merits being used at length in the negotiation argument.
Deadlines can be genuine or fictitious.
A genuine deadline is one that is totally out of the buyer's hands and is therefore
dangerous. Because the buyer has no control, the supplier may turn this to his
own advantage. While the fictitious deadline should be a real event, it is an
event that is used in the negotiation simply for tactical purposes. In reality,
we could overcome it. In the deadline examples below, remember to construct
a proper story beforehand, so that the pressure of time can be genuinely used.
In the negotiation, the deadline has to appear a reality, not an excuse.
I have to place the order either with
you or Competitor X by Friday 4pm;
The engineering design people are meeting
on Monday morning. I can place the order now at Price N in time to tell them.
I am being reassigned on May 1st and
won't be responsible for this product after then.
Our year-end is August 31st, and it
has to show up in the capital budget by then.
We have an hour. I'm seeing another
firm then.
The countertactic by the supplier is called simply
"testing the deadline". It partly means the supplier probing to see
whether there exists a real (genuine) deadline. But mainly it means inducing
you, the buyer, to talk of ways in which the effects of the deadline might be
avoided. For example, accepting the supplier's tender for the engineering design
committee, agreeing to a return visit, placing the purchase in next years capital
account or agreeing to pay the full price if the supplier will bear the delivey
costs ...
Deadlines are used against the buyer in such announcements
as ...
This offer is only open until the 31st,
If we don't have your offer by Friday, it
can't be scheduled into next months production,
Head Office's new prices come into effect
on the 15th of this month.
Just as we use the tactic, time is being used
against us to force action, and panic us into agreeing a price and/or conditions
without further discussion or ado. As buyers, we must do what suppliers do:
test the deadline by discussing it, discussing how we might do business even
if we were to miss the deadline (My boss isn't even back until the 15th,
and I can't sign before he's seen it) - in other words, keep things going.
A dangerous but sometimes very effective counter
to a deadline is to ignore it and just carry on.
3.10
Tactics IV : Escalating Authority
This is an elaborate but effective tactic
that can be used to obtain information from the supplier, and then "start
again", with a new, more senior buyer, but capitalising on the information
gained thus far at the previous level. Even if it is not planned so elaborately
as to enable the previously obtained information to be exchanged and discussed,
the second person making the second start is fresh and the supplier is getting
weary.
Here is one of the many ways of playing
the game. The buyer begins the negotiation and acts as though he had authority
to conclude it. This point is essential, because the opponent will not negotiate
or offer concessions if he understands the buyer does not have this authority.
After a period, when concessions have been won, the buyer's manager appears
and apologises for not having been available earlier. The three of you start
again from the beginning, but with the supplier in a weaker position because
of his concessions. This can go higher. The manager may say the final price
must be initialled by his director, who (surprise!) later refuses unless another
penny per kilo is discounted from the price obtained so far.
The buyer may similarly be on the receiving
end of the Escalating Authority Tactic, so that he too finds it difficult to
do a deal - for example, the sales representative who says Yes! ... but I'll
have to get this agreed first by the sales manager.
The countermeasure to Escalating Authority
is to determine carefully the authority of the protagonist before the negotiation
starts, or, if that is impossible, immediately after it has begun. Quite simply,
ask the direct question: do you have the authority to sign the deal? Or
if you think that won't do, ask other questions to probe the truth. If unfortunately
you must initially negotiate with someone lower down, be sure not to play all
your cards at once. Keep some in reserve.
3.11
Tactics V : Mother Hubbard
Old Mother Hubbard
Went to the cupboard
To fetch her poor dog a bone.
But when she got there,
The Cupboard was bare,
And so the poor dog had none.
Here, the buyer is willing - nay, anxious - to buy the product
but declares that his budget or some other constraint means that he can pay
only a certain portion of the asking price. 'Mother Hubbard' must be backed
up by a demonstrated, credible contraint. An annual company budget difficulty
is useful, but other possibilities are:
1. a purchased part for a new product must be bought for
£8 not £10, otherwise the new product cannot be sold at its target
price;
2. not only is there a limit on the machine being purchased
that is less than the asking price, but this includes all extras such as training,
installation etc..
Mother Hubbard has the advantage of turning any annoyance of
the supplier away from the buyer to an anonymous third party such as the bank,
head office etc.. It forces the inexperienced or weak supplier to accept the
position at once.
The main uses of Mother Hubbard for the buyer are: 1. it preserves
a good atmosphere between him and the supplier; 2. in important and/or protracted
negotiations, it allows him to discover information about the cost breakdown
and slack in the supplier's proposal.
The reason for 2. above is that the stance by the buyer is
essentially I really want your product. It is excellent for us. We really
want to place an order, but ... The reaction of the supplier in these circumstances
is often to try and help the buyer by suggesting ways and means by which the
price might be reduced to the limit imposed by the budget. For example, the
supplier may suggest cheaper material, different packaging, the omission of
certain features "which are not really necessary". From this information
and discussion, the buyer attempts to glean the cost breakdown of the purchase
and the price/product features he should be going for.
Mother Hubbard is an excellent tactic for an extensive negotiation,
since it focusses on the real value of the purchase, the buyer's real needs
and the question of price v. cost.
3.12
Tactics VI : Sell Cheap, Get Famous!
This simple tactic is to invite the supplier to get his foot
in your company's door by making a heavy price cut. As the buyer, you point
out that although the company intends to order only 100 widgets now, at £10
each, in time your use of them is sure to grow. By this time, you (truthfully)
tell the supplier, your product will have proved itself to our manufacturing
people, and we can reevaluate the price.
As with every tactic, the argument must be backed up by evidence,
in this case detailed figures on your future need for widgets. And you must
"believe" it yourself ... play the actor. You should also have a good
reason why you yourself wish to buy cheap - perhaps the product is to be test
marketed at first, and the compny wishes to sell the first 500 at bargain prices.
3.13
Tactics VII : What If .... ?
When the amount of money or price is not known
or the supply market is unknown and unusual, it is not fruitful to concentrate
on the actual money amount. Instead, ask a succession of pre-planned "What
If .. ?" questions designed to find out more about the market, the product,
personalities and players, conditions etc.. Only then, when the buyer has got
a feel for things, can he be confident about price.
Most importantly, so-called "What If .. ?"
questions also protect the company legally and in other ways when the market
is new or when complex technical issues are to be agreed. Five examples are:
1. What if the machine does not reach 500
units / 300 units / 200 units per hour? And how do we define and measure "units
per hour"?
2. What if the machine breaks down?
3. What if the machine breaks down due to
our company's own negligence?
4. What if the supplier goes out of business?
5. What if any non-consumable part requires
replacing within the first 12 months? And how long should the replacement
take?
"What If .. ?" is a standard way of making progress
in any negotiation beyond the stage of tactics. It is a way of overcoming a
potential deadlock by changing the deal. In other words, if this isn't agreeable
to us both, what if ...? (see Notes under 4. below).
3.14
Tactics VIII : The Seven Word Challenge
The buyer quietly and grimly tells the supplier "You've
got to do better than that!", and then immediately suspends the negotiation
(for a week, or perhaps just for 10 minutes while he gets a cup of coffee).
The pressure can be made more severe by the alternative words "You've got
to do considerably better than that!", and less severe by "You're
close!". The purpose of turning away afterwards is to give the supplier
time to dwell, time to stew. The tactic is intended to focus the negotiation
on price, and that alone. If the meeting is adjourned for several days, it is
hoped that the supplier will attack his own colleagues - manager, pricing staff
- if permission is needed to set a lower price.
The tactic should be used by the buyer when the nature of the
product or service is relatively straightforward. That is, further discussion
about technical matters or terms is unneeded. Given this, it is especially useful
when the buyer is short of time, since it pre-empts time-consuming discussion.
The buyer must be ready to pick up the negotiation at the point the challenge
was made when the meeting resumes, otherwise the pressure may be dissipated.
He should not seem anxious simply to take any reply and get the negotiation
out of the way.
The supplier counterattack is simply to answer "Why? ...
What don't you like about my product / my service?". That is, the counterattack
tries to steer away immediately from price. The response to such an attempt
(ie the counter counterattack !) must be dry and considered, indicating
you really meant what you said. If the buyer blusters and raises his voice,
it is an unconscious signal that the use of the tactic was just fishing, to
see what he'd come up with.
3.15
Tactics IX : Take It Or Leave It!
This tactic consists of the abrupt, impolite
apparent closing off of the discussion in order to force the acceptance by the
supplier of a "final" offer of low price. Three examples are:
I am now offering 8p per kilo, and
you're now saying 10p. If you want the business, 8p is what we'll pay. If
you don't, Goodbye!
Your product is barely acceptable,
and if I wanted to take the trouble I could find better alternatives and a
better supplier tomorrow. However, I'm offering you £1000 - take it
or leave it.
Here is our final offer and there are
no Ifs, Buts or Maybe's. I don't have the time for further debate. Finis!
Take it or leave it.
The buyer will realise that if this tactic
succeeds, he will not gain the benefit of further discussing the product or
its use. He may also alienate the supplier, who will not share the "good
bargain" feeling. It is a tactic hardly conducive to a satisfactory long-term
relationship. When used as brutally as in Example 2 above, circumstances of
use are likely to be for non-differentiated products for which price is a major
determinant, sold in a supply market with an abundance of competitors. An advantage
is that it saves time.
If the suppplier has found out that his
product really has features the buyer likes, he can raise these at once and
attempt to call the buyer's bluff. So guard your power!
3.16
Tactics X : Intimidation
Gleaming chrome, tinted glass, beautiful
receptionists and deep pile carpets are there not only to impress customers
but to intimidate other companies' suppliers and buyers. If used by yourself,
the background is there to change the supplier's view of your strength ... there
to get the supplier subtly to undersell himself. The same effect is at work
if your company's negotiator is manifestly a top-level VIP.
The big treatment really works because it
lowers unconsciously the supplier's defences and heightens his view of the buyer's
power. Provided they are planned in such a way as not to go against the buyer's
image of integrity, intimidatory tactics may include the following:
Keeping the supplier waiting;
Rescheduling the appointment;
Inferior seating for the supplier,
or, say, facing a bright window or light;
Arranging for someone important to
interrupt you;
Phone keeps ringing (buyer answers
in an unhurried way);
The buyer gets the supplier's company
name wrong;
The door is left open, or the room
is uncomfortable;
The buyer makes disparaging remarks
about the supplier's product or service;
The buyer makes extended complimentary
remarks about the supplier's competitor products.
The negotiation is interrupted and
then resumed with a different buyer at the same level or more junior.
Every negotiator must learn to cope with tactics such as these.
If the supplier is an experienced person, he is likely to find some of them
amusing rather than intimidatory, so plan to use them with care.
The buyer himself can find he is at the wrong end of intimidation,
although by electing to conduct the negotiation in his own premises the incidence
of these occasions can be reduced. The counterattack to this tactic is simply
to recognise these trappings - these masks of behaviour - for what they are
( but see the warning anecdote below). They are theatrical props to 'psyche'
you down. The enemy is our own mind. Do not show that you admire the intimidatory
props or your opponent will smell blood.
Alan Shea, one time
distribution manager at ICI Organics Division and now of Anglesey, tells of
the time he was required to negotiate with a Turkish buyer at the buyer's headquarters
in Istambul. He was shown into his office and then required to sit on a plain,
rather low chair before the buyer's magnificent eight foot desk, looking up
at his opponent sitting behind. Behind the desk was a large stained glass window
covering the wall opposite. As a trained negotiator, Alan realised at once he
was being set up and given the treatment, but for all his realisation and experience,
found it was one of the most difficult negotiations he had ever undertaken.
3.17
Tactics XI : Good Guy, Bad Guy
This elaborate tactic can be used by a buyer perhaps in a relatively
strong position to impose tough conditions on a supplier who is less than very
experienced. To carry out the tactic credibly requires careful preparation and
practice, and skilful execution by two personnel.
The bad guy and the good guy may both be present throughout
the meeting. Or the meeting may start with the bad guy and the supplier only.
The purpose of the bad guy is to reduce the supplier's aspirations and make
the subsequent position of the good guy look inviting and acceptable. Thus:
Bad Guy: a fellow buyer, an engineer or other - someone
with a sense of theatre and a belligerent way with him. The bad guy makes
continual outrageous (not credible) demands in a haranguing, obstreperous
manner. [Note: this role must not be overplayed such as to cause the supplier
distress. If it is, the supplier will complain to higher management and the
tactic will collapse.]
Good Guy ... steps in and either dismisses or silences the
bad guy. The good guy is quiet, polite and friendly. The requests he makes
seem reasonable. In fact, they are tough, but are dressed up by him and put
across with skill so as not to seem so.
The countertactics are to recognise to yourself that the tactic
is being played and (1) grin and bear the bad guy 'show' and (2) carefully evaluate
the good guy's 'requests' for what they are, and not for the way they are made.
3.18
Tactics XII : Threats - General Remarks
Open threats almost always result in counterthreats
and are consequently to be avoided. Indeed, it is said that threats in a negotiation
are the mark of the amateur, insofar that they are a replacement of the negotiation
process ( = mutual agreement) by a statement of power. Both parties in a negotiation
will already be aware of their relative objective power. The whole point
of the negotiation is not to use or abuse it, but to rely on mutual trust.
And since power is very rarely totally one-sided,
the emergence of counterthreats usually results in both parties losing. For
example, a small company sends a batch of components to a large firm, and it
transpires that there are a number of defects. The large firm then inspects
every one and itself reworks the defective units. It then withholds 10% of the
invoice to defray the cost. The small firm demands payment, pointing out that
the agreed procedure was to return the parts to itself for correction. Threats
are made (eg to go to court; to cease all further business). The
large firm pays up and stops all business. The small firm gets its money. But
who won?
When contemplating a threat, consideration
must clearly be given to (1) its credibility, and (2) the damage of the action
threatened. If the threat is credible and severe, why negotiate in the first
place? Remember from Session 1 above that for there
to be a negotiation, each party must have a veto over the outcome.
Notwithstanding the risk, threats can sometimes
be made successfully to break a deadlock (as well as tactically, as described
below). The threatened party must be considered
to be sufficiently mature to respond by adopting a new course of action (not
surrender) instead of hitting back.
Small firms which are in the power of large
ones - suppliers of goods sold solely through specific supermarket chains; Marks
& Spencers' suppliers; et al - are clearly aware of the imbalance of power
and the latent potency of threats. But why should a good small company be driven
to the wall for no good purpose? Why should the large firm damage its own interests
- the investment it has made in goodwill, mutual needs?
Notwithstanding the foregoing, it is possible
to use threats tactically, provided the user is aware of the dangers described
in the general remarks just made - See Threats (Tactical) as follows.
3.19
Tactics XIII : Threats (Tactical)
The story goes of the young German lieutenant
in Paris in 1943, during the German occupation of that city, who was at a dance
with a beautiful mademoiselle. The lieutenant's commanding officer, Colonel
Schmidt, decided he would like to take over and suggested that the lieutenant
'take a long walk'. The officer refused. The colonel now made a threat: Take
a long walk now, or I will post you to the Russian front at 0800 hours tomorrow
morning.
The young officer had been Russian Fronted,
a phrase used by Gavin Kennedy in his excellent negotiation paperback (p. 232).
The tactic is to open the argument with a threat of action that would do considerable
damage, or at least to open it with a proposal that is tantamount to a threat
even if it is not so crudely put. When the threat has had time to sink in, a
second alternative course of action that is far less damaging is also
put forward. The second alternative is what the the opponent wants all along,
and the idea is that the person threatened will be so grateful for his escape
from the original threat that the second proposal will be accepted without further
argument. The tactic is not dissimilar from Good Guy,
Bad Guy above.
A first counterattack to any threat is to
make it clear to the threatener, through manner and voice, that the threat is
recognised for what it is, and is regarded with contempt as the action of an
impatient amateur. The next is to weigh up whether the threat would be carried
out or, at least, the limits to which you could go before it was. Since the
outcome of the threat would not be one-sided, as made clear above, the threatener
may be glad of the opportunity to compromise. Finally, in the case of Russian
Fronting, the less severe alternative should be closely discussed, and a preferable
alternative to it put forward.
3.19
Tactics IXX : Tricks and Dirty Tricks
1 Negotiation by Telephone
Never negotiate by telephone. The telephone
caller holds all the aces. He has prepared; he has papers to hand; and he
has facts and figures. Simply ring off. Some companies you shouldn't be buying
from in the first place make a speciality of phoning up with 'offers', bargains,
new releases etc.. This is no way to buy. Hang up.
2. Add-Ons
The seller agrees a low price, but then
declares that various features which are customarily not separately charged
for are 'additional items'. The tactic can be played in conjunction with the
fait accompli in 5. below.
3. The Exposed Memo
The buyer wishes to obtain a low bid on
a particular component, and so cooks up an elaborate trap in the form of a
memo or summary sheet containing fictitious low bids by actual competitors.
The buyer leaves the room during the negotiation, leaving the supplier able
to read the document.
4. Lying and Deception
The buyer must never promise to buy at
some time in the future volumes of material he has no intention of buying.
Nor should he give specifications he has every intention of changing when
price has been agreed.
5. Fait Accompli
The purchasing department sends a cheque
for a lower payment than is due for goods and services, and a note marked
"Full and final settlement". Terms of payment are 2% discount if
paid in 7 days. The firm pays in 30 days but deducts the 2% anyway.
6. Dutch Auction.
A buyer arranges for a number of suppliers
to meet each other prior to the one-by-one negotiations. The hope is that
the suppliers will be stampeded into making price reductions or other concessions,
and providing more information than normal (especially about other competitors).
Suppliers will often refuse to take part in such meetings. A variant of this
tactic is to ask for quotations and accompanying literature, and use these
to respecify the original request along sharper lines.
4. Agreement and Concessions
4.0
The Power of the Considered Response
Before discussing the nature and objectives
of the Agreement stage itself, a word should be said about manner. Every
negotiator has his or her own style, of course, and if that style works, so
be it. There are, nevertheless, considerable advantages in adopting a deliberate,
if not downright slow, manner. First, it enables you to keep control of the
meeting when the supplier seems to be rushing it along, by insisting that the
various points are dealt with at your own, slow pace. Second, the meeting will
tend to dwell more on your own topics rather than on the opponents'. Deliberateness
will also make sure that dragging concessions from you is a slow and painful
job. Finally, the opposite of slowness - quickness - may be distrusted if you
finally get your way. The opponent may consider that he has been rushed into
the deal.
4.1
The Agreement Sub-Stage
Concessions
The final stage of the negotiation meeting
is where the agreements come. But in order to get agreement on one thing X,
it may be necessary to give way on some other thing Y. For example, suppose
that seven of the supplier's standard conditions of sale as printed in his catalogue
for the purchase of a machine are:
(1) a price of £1000; (2) the supplier
delivers the machine to the purchaser's factory; (3) 10 man days free training;
(4) £100 per annum maintenance; (5) 6 months free warranty; (6) 5 free
sets of documentation provided; (7) response to a repair & service call-out
within 48 hours.
What is finally agreed, however, is as follows:
(1) a price of £900; (2) the buyer
collects the machine from the supplier's factory; (3) 10 man days free training
and a further 20 days at half-rate; (4) £90 per annum maintenance; (5)
3 months free warranty; (6) 5 free sets of documentation provided; (7) response
to a repair & service call-out within 24 hours; (8) the buyer agrees to
his factory being used as a 'reference' site.
In the above, the two companies have each
made concessions. At first sight at least, it would appear that four
concessions have been made in the buyer's favour (numbers 1, 3, 4 and 7) and
three in the supplier's favour (2, 5 and 8). Condition 6 on documentation was
accepted as standard and Condition 8 is new.
Concession Management
The buyer must ensure that the concessions which are being
traded are under control. That is, he should be aware at all times of the balance
of concessions given and taken, and what costs are involved in them.
Concession Pattern
The 'pattern' is the sequence and value of the concessions
which the buyer has made and the resistence (ie time) that he puts up
before making each one. The actual concession pattern made will clearly depend
on the concessions being made by his opponent.
Nibbles
Nibbles is the term used here for little pushes for
something extra - the raising of innocent points to do with the purchase or
actual use of the product, and the resolution of possible problems in our own
favour.
4.2
The Cost of Concessions
One of the principles of concession management
in the agreement sub-stage of the negotiation meeting is to be fully aware of
their cost. Even though a concession may be couched in such terms as promptness,
quality defects etc., remember: always boil things down to a straight financial
cost/value, even though some ingenuity may be required sometimes to do so. Never
be afraid if necessary to use your calculator at the meeting - have it on the
table.
One use of a calculator is for the assessment
of total cost when unit prices are used. For example, you may be proposing to
buy 550 tonnes of material priced at 35.00 p/kg. The supplier offers a discount
of 1.75 p/kg. How much is that worth? (£9,625.00!) What would be the value
to the company if you obtained another 0.50 p/kg off? Even worse conundrums
are posed where prices are quoted in odd quantities such as for 144 bottles
of perfume in 650 ml bottles.
Concessions also, of course, concern elements
which are easily spoken of but the costs of which may not be known. Examples
are various conditions of freight (Ex-Works, FOB, CIF etc - see "Incoterms"
in the glossary
of manufacturing, off-site), insurance, product training, supplier maintenance
charges, service call-out charges etc.. The buyer must be thoroughly aware of
the costs of all such potential elements in typical terms and conditions through
prior research (or, if he cannot be, he must adjourn until such costs can be
ascertained). Only when the figures are to hand can he plan concessions in advance
and confidently make and take concessions at the meeting. The complexity of
concession swapping at the meeting is exemplified by the following exchange:
If you reduce the price by 0.75p/dozen, we will pay for all service calls
in the first 12 months.
Some concessions are valuable to the buyer
but relatively cheap for the supplier to provide (eg training). Similarly, some
are valuable to the supplier and cheap to us. Both companies will wish to capitalise
on this to create a 'win-win' deal. We should particularly bear in mind the
giving of expensive-sounding but low cost concessions in planning concessions
before the meeting. The game can be played to great effect in the purchase of
large capital items: we pay a tough, mean £100,000 for this and £200,000
for that, but then overpay £300 for another item in the package. (Incidentally,
suppliers are forever complaining that they don't get any thanks for the concessions
they give. We should not shout "Thank You" triumphantly, but a murmer
of thanks would not go amiss.)
4.3
In Praise of Parsimony
The points at this juncture of this on-line
Course session are a timely recapitualation of "Lacking
in Charity" in Session 2. The guiding rule on concession giving is
to be first and foremost tight-fisted. As stated in the earlier Session, generosity
does not induce corresponding generosity of spirit in the supplier. On the contrary.
This is a deadly game. Generosity will be looked on by the supplier as weakness
and opportunity, although outwardly he may appear very gracious.
In the agreement (concession) sub-stage of
the meeting, the gross mistake of generosity is characterised by two common
fallacious remarks all too often stated by ill-educated buyers:
I concede one or two things early on to soften them up;
Somebody has to give way, or we would never progress.
Neither of these statements is true. Both are categorically
untrue. Their refutation is as follows:
(i) As far as your opponent is concerned, your (perceived)
'weakness' will be seized on as a springboard for further demands, given the
evidence before his own eyes of your having given way. Even if that is not the
interpretation, an opponent of experience will not reciprocate. 'Softening him
up' will in fact spur him to be tougher.
(ii) The 'somebody' who has to give way is the weaker person.
Remember the negotiating 'walking towards you'
game. All you have done is moved towards the other person. If you simply want
to talk, repeat your demands! If you concede when I press you, all I will do
is press you harder.
Concession giving by the buyer simply induces
more and more concession asking by the buyer. Generosity by the buyer has the
opposite effect he or she intends. The guiding principle for all negotiators
is parsimony.
4.4
The Concession Process
Negotiation is not about striving for some
notion of 'equity' or 'fairness'. The buyer must assume - can only assume -
that it is the supplier himself who will look after the
supplier's own interests. The buyer's job is to look after the interests of
his own company. The paramount principle to support all this is that
nothing is ever given for nothing; a price is abstracted for everything.
When the buyer gains a concession from the
supplier, the supplier will ask for something in return. What he asks for in
return is in effect a concession from us and it is this which should be resisted.
Any buyer can get a concession from a supplier if he gives one in return. What
he should be doing is getting concessions from the supplier and, if at all possible,
giving nothing in return.
It is true that negotiation is about trading
- what is unfortunately referred to as 'give and take'. But it is our duty as
a negotiator to ensure that we take what we can and that what we give is (1)
less than his concession; (2) less than we gave last time; (3) a total struggle
for him to get; and (4) preferably nothing.
If you find yourself negotiating with a unilateral conceder, sit there and
accept it gracefully. When he asks you yourself to make a concession in return,
graciously say "No!". You have no obligation to return his largesse.
Four scenarios (a) to (d) follow, relating to argument about weekend maintenance
of a machine the buyer is proposing to purchase.
(a) Concession by the Supplier, & the Buyer's Answer...
S. I am prepared to guarantee weekend engineering maintenance on this
machine, as you are asking for, but I feel you should contribute £100
per actual call-out.
B. We accept your guarantee on the weekend maintenance, but we cannot
undertake to pay for this. After all, it would be your machine which has
broken down, wouldn't it?
(b) Demand by the Buyer (correct)
B. We require a guarantee of weekend maintenance on the machine, and
I don't know how we could proceed without it.
(c) Concession by the Buyer (incorrect)
B. If you will guarantee weekend maintenance on the machine, we would
pay £50 per actual call out.
(d) Unilateral Surrender by the Buyer (very incorrect)
B. How much would you charge to guarantee weekend maintenance on the
machine?
4.5
Concession Planning
The skilful and successful negotiator is one who considers
a wide range of outcomes and options in preparing for a negotiation. On almost
every point in the negotiation itself, the agreement reached will be a compromise,
whether price, delivery conditions or payment terms. Despite the need to maintain
the flexibility implied by the foregoing, the buyer should prepare a concession
plan before the meeting covering the points at issue and his L
I M prices/terms/compromises. The situation is somewhat analogous to the
need for someone, preparing to bid at auction for, say, a number of items, to
have considered upper limits on what he is prepared to pay. Besides the L I
M 'numbers' associated with the negotiable matters themselves, there are three
vitally important rules in concession management which relate to the style in
which concessions are made. They are:
1. Concede in small, ever-diminishing
increments.
As previously stated, if the supplier believes he will get
a concession from you every five minutes, he will persevere and get them.
While the buyer should not reveal his concession pattern, he at least wants
one thing to be very obvious: namely, that if concessions come, they are of
an increasingly miserly, not to say worthless, nature. Consider the rounds
of bids as follows, after the supplier has asked for £200,000 and the
buyer has offered £100,000: Round 1 - Buyer £100,000, Supplier
£200,000. Round 2 - Buyer £114,000, Supplier £175,000.
Round 3 - Buyer £122,000, Supplier £150,000. Round 4
- Buyer £125,000, Supplier £135,000.
2. Concede painfully slowly.
It is important to make the supplier really work for every
concession that he does get. Negotiators are only human and we are on this
Earth but for a short time. If he has to argue and struggle in a full-pitched
battle for 20 minutes while you check this out and check that out, and phone
such-a-body to see if the others will be OK, you will get the message across
that concessions from you aren't worth the game.
The Principle
of The Considered Response
On the subject of slowness,
one should note that it doesn't pay in concession management to be super-efficient.
It certainly doesn't pay to show the supplier how quick you are at understanding,
by agreeing this and that all in 10 seconds flat. Even if the buyer is mentally
fast, he must consciously slow down his outward responses.
Concessions are bound up with signals. The following dialogue
signals that a concession will be forthcoming on Issue X in the future. The
party making the concession can always withdraw it in the meantime if things
don't go his way. If they do go his way, his opponent should not forget to
raise Issue X later, and take his concession. Thus: OK, but let's leave
Issue X for the moment. I don't believe it will prove too much of an obstacle
later on.
3. Make sure we know what we've already got.
Unless the purchase is totally straightforward, it is essential
for the buyer be thoroughly aware of the ancillary benefits and allowances
provided for in the standard terms of the agreement. He would look exceedingly
foolish, for example, if he spent time arguing that the supplier should bear
the cost of delivery, only then to find out after the meeting that 'cost of
delivey' was already accepted in the supplier's Terms & Conditions. One
could imagine in this case that the supplier might not remind him of the standard
terms, and would allow him to argue on (and eventually win).
It is strongly recommended, therefore, that the purchaser
make a detailed list of the 'free' concessions already granted in the standard
terms. Many of these will be technical, or related to quality, and will require
scrutiny by technical staff. This is the buyer's starting list, which he wishes
to add to during the meeting. It is possible that the items on the standard
list require further qualification from the buyer's point of view in the final
contract. For example, the list may state simply that the supplier "is
responsible for packaging". The buyer may wish to amend this to state
that the packaging provided "will consist of polythene wrapping of between
0.75mm and 1.25mm thickness".
4.6
Tit-for-Tat & Splitting the Difference
When concessions are traded, the buyer should
be quite clear that there is absolutely no excuse for matching the supplier's
concessions "tit-for-tat". The supplier might, in fact, suggest that
this be done. It must be firmly resisted. In concession planning, dealt
with above, it was seen how an irregular concession pattern of diminishing concessions
would severely discourage the supplier - that is, make it quite clear that we
were no soft touch, lower his aspirations and result in a bargain in our favour.
The list of four rounds showed that the buyer came
out of things far better for not matching the supplier's price reductions with
equal increases in his offers.
The same is true with "splitting the
difference", a phrase that smacks even more of equity, justice and fair
play. The supplier asks for £100 and you offer £80. He suggests
you split the difference. Think what he is doing! Be on your guard! Think
of his suggestion as a request for you to increase your price by £10.
Why should you? In the previous example, why agree
to £130,000 when you can get £126,500? Why lose £3,500 and
your self-esteem as a negotiator?
Thus the round of bids finally transpires as follows: Round
1 - Buyer £100,000, Supplier £200,000. Round 2 - Buyer
£114,000, Supplier £175,000. Round 3 - Buyer £122,000,
Supplier £150,000. Round 4 - Buyer £125,000, Supplier £135,000.
Round 5 - Buyer £126,000, Supplier £130,000. Contract
agreed at £126,500.
4.7
"Fair and Reasonable"
The misguided buyer may concede in a way he considers to be
fair and resonable. He should ot do so. All he will get for his fairness
and reasonableness will be the contempt of the supplier and the opprobrium of
his company.
Salesmen are specifically trained to exploit the desire of
certain buyers to be fair and reasonable. To encourage this distressing trait,
they will build up the buyer's ego and self-esteem by listening to him without
interruption, by agreeing with him and by exercising the charm they are mostly
well-known for.
The opposite of fair and resonable is not unjust and rude.
A buyer may be polite and affable. But when it comes to price and concessions,
he must be tough, resilient and above all lacking in charity.
Fair and resonable in a negotiation is always to be construed
as weakness. If an experienced negotiator says he wants to be fair and reasonable,
watch out! Remember the Good Guy in Good Guy/Bad Guy.
4.8
Concession Patterns
The buyer should never make the first concession
on any of the issues of real importance. If he does so, it will show him to
be an easy touch. It will whet the appetite of the supplier and the negotiation
will become harder, not easier. Indeed, the danger exists that he will become
completely routed.
If necessary, it is acceptable
to concede first on a minor issue, provided something is obtained in return,
in the hope of obtaining a major concession later. Remember, however, that the
buyer's and supplier's notions of what is major and minor will be different
(except in the matter of price, presumably).
The advice previously given on concession
paterns is reproduced here for convenience:
1. Work on an issue not important to us,
or indeed to the supplier, on which we are prepared to make a concession;
2. Work on an issue not too important
to us, but important to the supplier, to test his pattern of concessions;
3. Work on an issue of serious importance
to us (although don't say so!);
4. Other major issues;
5. Other minor issues;
6. One last minor issue that we can fight
and then surrender, to give the supplier the impression of having got a bargain.
4.9
The Danger of Deadlines
Tactic 1.3 described the use of
deadlines as a means of putting pressure on the supplier to obtain an advantage,
in a 'short-term way', if the negotiation is at our own premises, by springing
a surprise time limit to the meeting (By the way, we have to finish at 4pm).
Notwithstanding its tactical use, the approach of a deadline
is undoubtedly a time of danger to any negotiator, whether the deadline is a
specific agreed time to finish or whether it arises from a sense that things
are coming to an end. So when the deadline approaches, be calm and especially
vigilant. Watch your concession pattern especially carefully. Be cool!
4.10
Risk Taking
Regardless of other factors, people more
willing to take a risk have an edge over others. Risk-taking plays an important
part in negotiation.
Too many buyers, alas, are unwilling to take risks, especially
in large organisations. If a buyer switches to another product, it may later
prove to be unsuitable in production. A new supplier may in the event turn out
to be unreliable on delivery dates. Better the devil we know .... Suppliers,
indeed, often use 'risk' as a tactic, emphasing their own commitment to agreed
terms of sale - quality, delivery, service back-up - and denigrating the standards
of their competitors. The risk factor is used to justify the award of the contract
or the maintenance of high prices. The supplier might even bring in corroborative
evidence to demonstrate his speed-of-repair or his quality.
There will always be risk in buying. The buyer can minimise
it by strict, quantitative assessment. For an existing supplier, the buyer must
collect and study hard evidence of actual, achieved performance in such matters
as delivery, quality and price stability. For a new supplier, the required performance
in these matters must be spelled out in exact terms, with liquidated
damages agreed for non-performance.
For some buyers - and purchasing departments - risk may
be entirely in the mind. A bad experience in the past with a supplier or a product
may colour current policy even though things have utterly changed. These prejudices
must be rationalised and where no longer justified, eliminated.
4.11
The Role of Model Contracts
A 'model contract' (often published by an
institute or trade association) is a hypothetical written agreement or 'contract'
relating to a good or service that has been drawn up in a general way
to assist subsequently with the purchase of a specific good or service.
The model contract is intended to assist others who wish to enter into an actual,
real agreement for the good or service by including all the points of detail
that ought to be covered, and showing what form of words should be used to safeguard
the interests of all parties, especially from the legal point of view.
If such a one could be devised, a single
model contract might be the basis of all of the buyer's contractual obligations.
Even if a model cannot be formulated that covers every purchase, it is likely
that one can be found that gives a good start to the preparation of a great
many of his negotiations and later allows points of agreement in the final written
contracts to be framed in such a way as to be legally sound and comprehensive.
Any model contract used as a starting point in a negotiation
should be the buyer's, not the supplier's. The supplier already has a
model contract in the form of his standard terms and conditions of sale. In
a sense, his standard terms and conditions are his opening offer. If a model
contract can be used by the buyer, that model is the buyer's opening
offer. Where there is a conflict between the supplier's and the buyer's conditions,
use of the buyer's model will ensure conflict is resolved in the buyer's favour.
Having said this, it should generally not be greatly against the supplier's
interests to agree to the buyer's model.
A very large number of model contracts have been published
for use in commerce and negotiation. As well as those published, the buyer's
company will have its own models, including the wording of past agreements.
If it does not, it should set about building them up over the years. To research
books on the many hundreds of model contracts that have been published and are
available for use by purchasing professionals, the buyer is advised to search
under "Contracts" at the bookshop sub-domain of the Chatered
Institute of Purchasing & Supply. Compilers of model contracts in
the past are A.D.Allwright and R.W.Oliver, and their book may still be available
through Amazon UK. To
name only two institutes which have published models, visit the Institute
of Civil Engineers and the Royal
Institute of Architects. Example titles from the many thousands of published
model contracts are: The Supply and Installation of Computer Equipment; The
Supply and Installation/Purchase of Telecommunications Equipment; and
Model Agreement for the Provision of Warehousing and Associated Services.
4.12
Changing the Deal
By definition, taking and making concessions
changes the deal, and when done positively and constructively can result in
an enormously improved outcome for all concerned. The 'Equation' is as follows:
Supplier's Asking Price +
Standard Conditions = Buyer's Offer Price + Revised Conditions
Thus a supplier asks £20 and is not prepared to accept
our offer of £15 for a 6 months contract. But we now offer £15 and
say we will sign a 2 year contract. The deal has changed and perhaps to both
parties' advantage - we have got a
lower price and he has got the security of business in hard times.
When the buyer offers an initially low price,
it is on the basis of the standard terms of supply. He may then offer a concession
to sweeten this low price. The concession is automatically withdrawn if the
offer price has to be raised. That is, if it is raised, the supplier cannot
expect the concession. The same concession, of course, can be used again in
the bargaining later. Consequently, the buyer must not subsequently indicate
that the concession he was preparing to make was, in fact, of little value to
him. For example, the buyer perceives that a cetain technical feature on a machine
is of no value to his firm, so offers to accept the machine without it as a
concession. This must be seen to be a sacrifice on his part, otherwise the supplier
will be expect to be able to omit the feature for virtually no price decrease.
As a general point on these lines, when
discussing concessions on a hypothetical basis, be sure not to disclose any
information inadvertantly. Remember the buyer's vow of taciternity. The following
clangers illustrate all too well what is meant.
(1) S. We will lower our price to £8 if you agree
to forego Feature X. B. Never! We really want Feature X ... you're
the only firm which offers it.
(2) S. We will sell for £8 if we can deliver in
10 weeks time instead of 5 weeks. B. Never! We're desperate to get
our hands on them.
Concessions which Change the Deal
It is suggested that the buyer should make a standard 'negotiating
list' of about twelve things he is willing (if necessary, and only if necessary)
to concede. Prior to a specific negotiation meeting, he should cost and plan
about four of the items from his list as a way of changing the deal. Examples
are:
1. Volume. You are initialling buying for 6 months ahead.
Do you know how much your company needs for 12 months ahead, if this carrot
were to be offered?
2. Payment. Can you arrange with Accounts Payable to pay
within 10 days instead of the normal 30 days?
3. Distribution. Do you know the feasibility and relative
costs of the various INCOTERMs, such as EXW, FAB, FAS, CIF ... ?
4. Longer commitment.
5. Sole Supply.
6. Additional Business. We will take four chairs for every
table if ... We agree to your maintenance contract if ... WE WILL ... IF YOU
...
7. Packaging. We will accept bulk deliveries instead of
packs of 100 if ...
8. Revised Technical Specifications. Has the buyer discussed
the technical requirtements with production?
9. Other company outlets.
10. Product finish. We will take them unpainted if ...
It is important not only to cost the concession but also to
ensure by prior discussion with other staff/colleagues that the concession being
offered is technically acceptable and commercially also. Consequently, the concession
planning already covered in this Session of this on-line Course may take a not
inconsiderable amount of preparation.
Changing the deal must be done with care, and can require much
preparation. The result can be a better deal all round - one that suits us better
and one that suits the supplier better too.
4.13
Liquidated Damages
The buyer in a major negotiation should be familiar with, and
give careful thought to, the issue of liquidated damages. Liquidated
damages mean compensation payments stated in the agreement itself, and which
fall due when various stated conditions and warranties in the final contract
are not performed. Their use has become very widespread in the UK since the
mid-1970s. An example is a condition that states that delivery of the goods
shall be on October 1st, and an accompanying liquidated damages clause that
states the supplier will pay liquidated damages to the buyer of £3,500
per day for every day or part thereof that delivery is late. The sums nominated
in liquidated damages clauses must be the result of honest calculations truly
to estimate losses if the various conditions and warranties are not performed.
No attempt must be made to make them into penalties, and if they are
penalties, the supplier is likely to refuse to pay and will be supported in
his stance by the court. To help the buyer avoid the trap of specifying penalties,
three guidelines have been issued by the courts: (i) the sum stated in a clause
must not be more than the maximum loss that could be suffered as a result of
the breach; (ii) the sum must not be more than the 'consideration' attaching
to the contract itself; and (iii) a single sum of money cannot apply to every
condition or warranty not performed (since this would indicate an attempt honestly
to calculate the various losses had not, in fact, been made).
On a practical front, it is extremely important that the precise
circumstances are defined, for each separate clause, under which the liquidated
damages will be payable. (This is clearly likely to be complex for liquidated
damages involving technical performance.) There is also a need to define the
time and manner whereby payment of them will take place. When liquidated damages
are due, the amount due is strictly what has been defined. The buyer cannot
increase them because, say, his loss has been greater than he calculated. Note
that suppliers may attempt to insert damage limitation clauses into contracts,
disguised as liquidated damages. Thus the supplier may propose compensation
payments for, say, late delivery, which fall short of actual losses that would
be suffered by the buyer. The buyer should resist these 'easy' options. It would
be better if he left things to the courts rather than having his hands tied
in this way. Nevertheless, the courts are often a last resort. It may take six
months to bring a case, and involve, say, 100 hours of prepatatory work by a
legal firm charging, say, £300 per hour.
4.14
Cartels and Monopolies
A cartel is an organisation of suppliers of the same
type of goods or services which illegally conspires to fix selling prices. The
buyer will probably find it extremely difficult to secure any worthwhile reduction
in price, typically being fobbed off with small token concessions.
One way to tackle this situation is to inform the largest supplier,
Supplier A, that unless prices are reduced substantially, you will switch all
of the business to Supplier B. (Regardless of the fact that Supplier B will
not give a reduction either - the objective is to punish Supplier A.) Carry
out the threat, depriving A of all business and thus increasing the business
with Supplier B substantially. Do the same thing to Supplier B if necessary.
Do not inform any of the competing suppliers which one will benefit if you
withdraw your business and switch and do not inform any supplier how much you
are paying.
If there is only one supplier - ie if there is a monopoly -
the negotiator can attempt to play to any sense of guilt he may have. The monopolist
is sensitive to political pressure and media coverage, and can, in fact, be
reported. If the worse comes to the worst, the buyer should remember that the
skilled negotiator is not just someone who plays good cards well. He is someone
who consistently plays the bad cards better than anyone else. Even in the most
adverse circumstances, there is always something that can be taken advantage
of.
4.15
When Deadlock is Looming
Deadlock can threaten for a number of reasons.
Perhaps the buyer and supplier are not prepared to compromise. Or perhaps there
is nothing suitable that can be traded off between them. Or again, in the case
of a new supplier, the buyer or supplier or both may determine that the two
firms are incompatible. Four aspects of looming deadlock are dealt with below.
1. Deadlock as a Threat
Deadlock can be used by either party as
a threat ... getting up and saying Well - that's it, I suppose!. Clearly
this must be used cautiously. To be effective, the party doing the threatening
must have good reason to believe his opponent is far more anxious for a deal
to be concluded than he.
2. Reacting to Looming Deadlock
When genuine deadlock is looming, the inexperienced
negotiator may panic and back away from it by making a substantial concession
so as to save the situation. It is important for the negotiator to stay cool
and in control of the situation. He may make conciliatory remarks (What
a pity! ... I felt we could have done an excellent deal is only we could have
overcome such-and-such stumbling block.) 'Conciliatory' means shoudering
an equal part of the blame and expressing seemingly genuine regret. It does
not mean giving way on some major concession.
3. Signalling
The classic response to looming deadlock is to signal that
progress might be made if the two parties tried a different tack.
4. Existing Agreements
In industrial purchasing, the reason for deadlock with existing
agreements frequently arises because of a grievance. For example, the buyer
may have complaints about the supplier's quality or late delivery, or the
supplier complaints about the buyer's late payments or the short notice he
gives for specification changes. The grievance could be recent but more likely
has been simmering for a long time. The following five point plan can be used
to break out of it:
First: The parties need to have to wish to settle the dispute
by negotiation;
Second: The language used by the buyer must be changed
from being confrontational and belligerent to being conducive to reason
and help. Phrases such as screwed up quality again should be changed
to percentage defects were X% ... turning language from why
something was done (in the past) to how something else is to be done
(in the future). That is, from Grievances to Remedies.
Third: Elicit information about the concerns and needs
etc. of the other party. The questions must open up information, not be
Yes/No ones. The answers should be turned by the other party into qualitative
requirements.
Fourth: Get agreement as to the next step. Ask such questions
as "Could we do this?", "How about if we both did that?".
Fifth: Get agreement on the measures of success and the
specific goals to be reached.
5. Post Negotiation Topics
5.1
Bargains
Over this on-line Course, we have already reflected on the
nature of 'satisfaction' in the outcome of the negotiation ... one of the reasons,
for example, for never accepting an opening offer. As far as we ourselves are
concerned, there are a number of things the supplier will attempt to do to persuade
us we are getting a bargain. Not surprisingly, they have little to do with the
price we pay or the usefulness/value of the concessions we gain. As buyers,
therefore, we must be careful to evaluate objectively any such 'bargains' in
terms of money and company advantage, and not in terms of our own 'feel good'
level. Illustrations of the dangers of feeling good are:
* If we secure a lower price than on the printed list, we
still do not know if we really got a bargain. In these circumstances, a bargain
would be a substantially lower price than the average price paid by all other
customers. You do not know that average price. The printed list is irrelevant
to the assessment of whether or not you're getting a bargain. You don't know!
(Price list £14, you pay £11, everyone else pays £10
... hmm.)
* You buy an attractive product and later everyone in the
company congratulates you on your choice. You have a bargain. (If others had
thought it to be unattractive and pedestrian, you assuredly do not);
* Your production people have high satisfaction in the product's
use - good performance, high quality, doesn't break down ... You have indeed
got a bargain, but only provided you paid no more than you needed to.
* The supplier makes a couple of concessions that make us
feel good. But what are their value and price in relationship to the price
we paid for the product itself?
The
Acid Test
The answer as
to whether we did or did not get a bargain is the answer to the question "How
good a negotiator are we?". It is not usually easy to verify whether
we got a bargain, but if we do not try, we could delude ourselves for years
that our negotiating performance is better than it really is. If we are not
as good as we thought, we must apply ourselves to learning the lessons of this
on-line Course - especially with regard to attitude.
5.2
Dealing with a Price Increase
Suppliers wishing to pass on a price increase
may well attempt the Fait Accompli Tactic or The
Power of Legitimacy. Phrases such as I've been fighting it but there's
no other way and We had to increase the price, but at least we didn't
drop the product from our range may well be heard. To support these tactics,
suppliers will usually resort to generalities such as the state of the economy
or European Union regulations.
The supplier, of course, is trying to avoid
a negotiation completely, and the buyer may care to disappoint him. The buyer,
then, must announce he wishes to negotiate, and in the course of such negotiation
turns the attention of the meeting to specifics. These include costs of labour,
costs of materials, technology and perhaps the learning curve (*) . The original
price of the product is the buyer's starting price, plus a small amount for
the increased direct cost of the product's components. In short, negotiate,
with price not the only issue. (* see The
Glossary of Manufacturing, off site.)
5.3
The Supplier Relationship
There are two aspects to the supplier relationship.
The first concerns the general conduct, as an ambassador of his company, of
any buyer to his suppliers. The second is the 'modern', very close supplier
relationship that many companies have nowadays forged, especially with on-going
total quality programmes and closely coupled logistcs systems.
1. The General Relationship
The buyer must surely never misuse his power
outside the negotiating environment by being rude or indifferent to the supplier.
Vigilence in this matter must be especially keen when the buyer is a member
of a large company, perhaps with a near monopoly in the market, and where the
supplier is highly dependent on continuing business. The notion of the parnership
means that the buyer must be seen to be appreciative of the supplier's business,
once that business has been established following a successful negotiation.
Nor is this sentiment purely moral in nature.
There are real financial and commercial advantages to good and proper conduct.
Thus if the relationship is properly cultivated ...
(a) the buyer will obtain a better deal
in future negotiations, especially in the matter of concessions. The supplier
is likely to find it harder to say No! to someone for whom he has a genuine
regard.
(b) the supplier will do his very best
to ensure that the final deal works, in such matters as delivery and special
conditions. Curtness and belligerence may be useful in the execution of certain
negotiation tactics, but they should never become the norms of behaviour.
2. The Close Relationship
The forging of very close supplier relationships by a number
of companies, especially in the automotive industry, has been one of the outstanding
successes of manufacturing in the past few years. The advantages of a non-adversarial
, indeed intimate, relationship between ourselves and our suppliers are:
* the supplier 'meshes in' with our company's operations
- the outside shop, to quote a phrase that has been coined. This is
particularly vital to companies going down the stockless Lean Production or
Just-in-Time manufacturing route (see the
Manufacturing Glossary, offsite);
* particularly important with respect to the foregoing is
the matter of timely delivery. Besides its requirement in modern planning,
large savings in stockholding are possible by the buyer;
* the supplier is encouraged to adopt a total quality approach
and use such techniques as SPC (statistical quality control - see Manufacturing
Glossary offsite). Among other things, the absence of defects enables
the company, if it wishes, to receive the supplier's deliveries direct to
its production line, saving inspection and material storage costs;
* the supplier undertakes to carry out on an on-going basis
a continuous programme of product improvement;
* the buyer may need help in many purchasing decisions -
for example, technical explanations and product development. The mutual trust
established makes this possible. The buyer can also rely on the supplier's
support in the event of difficulties.
The biggest negotiation of all, therefore, is between the
two companies on a general basis to form such a supplier/purchaser partnership.
In this negotiation, the 'concessions' which are traded include such intangibles
as trust, reliability, security of business and frankness. Yet despite the altruistic
nature of these qualities, such a negotiation is really no different from any
other. The meeting is, of course, collaborative (in a big way) but there is
still an exchange of interests. Thus the buyer will require an additional discount
if he is to make the supplier a 'sole supplier', while the supplier may ask
for weekly payments of invoices if deliveries are to be made daily.
It has often been said that long-term relationships eventually
favour the supplier not the buyer. If so, this can only be due to the buyer's
sloth in reordering when he should be resourcing. In close long-term relationships,
performance is nevertheless monitored to ensure that sloppiness does not occur.
For example, so-called 'accreditation schemes' are set up, with supplier/product
accreditation able to be withdrawn if monitoring shows there is any deviation
from the standards set.
5.4
Post Negotiation Remorse
It is not uncommon - indeed it is natural
- to have feelings of remose after a negotiation. I might have done better
if only I'd done this or that. To counter these feelings, the buyer should
keep a balance sheet of the negotiating high-points and conditions. He should
also review his own performance from time to time, and resolve to sharpen it
up along the lines described in this Course. And finally, he or she should remember
during the actual conduct of the negotiation itself that feelings of remorse
are likely to sweep over him/her at the conclusion of the meeting, and do a
better job in anticipation of them.
The agreement reached will frequently affect
others in the company - accounts, quality, production, legal, engineering etc..
If there is to be anything whatsoever about the deal that
is new or non-standard, the relevant personnel should be kept informed during
the negotiation's progress. In extreme cases, other people may have to be part
of the negotiation team. If they have been involved in formulating the agreement,
their later cooperation in implementing it will be assured. If others are not
part of such a team and the negotiation is prolonged, it would be wise for the
buyer to write and send them intermediate memoranda summarising agreements thus
far. Write-ups should be fully to the point, and in many instances could be
hand-written. Not least, this activity helps focus the buyer's own mind on the
issues concerned.
Often, however, it is not practicable or
strictly necessary to involve others. In this case, new and non-standard agreements
should be communicated at once by the buyer. There is a possibility that these
departments will start questioning the agreement when they see the details in
cold print. The buyer should attempt to anticipate reaction such as this (especially
reaction to the final price agreed). He must at all costs avoid angry reactions
by himself in a state of personal anti-climax after a gruelling meeting. The
point is, there is a post-negotiation phase of remorse, and it must be dealt
with. Colleagues may have to be won over in the same way as suppliers.
5.5
Team Negotiations
There are a number of reasons why purchaser
and supplier may decide to negotiate each with a team of people, rather than
one-to-one. The scale of the purchase contemplated may be large, such as a major
construction, requiring a great deal of detail to be settled. Allied to this
may be the diversity of detailed specialist knowledge involved - financial,
legal, international, technical etc.. Negotiations demanding teams are typically
protracted - weeks, months. Teams can also be used to intimidate the opposition,
requiring counteraction with opposing teams of at least equal size.
Size of the Team
The ideal buying team is often composed
of four people. The advantages of this number are (1) ease of control by the
team leader; (2) the ability to incorporate a sufficiently wide range of expertise;
(3) to allow for changing team membership without jeopardising continuity
(Changing team membership may be required as discussion moves from the technical,
say, at the early stages, to the legal or financial, in the later stages.)
The Team Leader
The team leader should be a person of
sufficient calibre and standing in the company to command the respect and
loyalty of other team members. He must also be at least equal in calibre and,
perhaps, seniority, to the team leader of the opposition. It is frequently
found that staff with commercial backgrounds and long commercial experience
such as in purchasing or logistics make superior team leaders to technical
staff.
Team Members and Commitment
It will often be difficult to prise away
from their regular duties the best people for the negotiation. Given that
the best people will make a difference in our favour to the outcome of the
negotiation, this prising away must be insisted on by senior mansagement.
But perhaps more important than anything is the need for the wholehearted
commitment by members of the team to the negotiation process and the negotiation's
outcome.
Team Training & Rehearsal
Every member of the team should be instructed
in negotiation techniques to the level of this Course. The Course should be
followed up by a day or so of consolidation, including discussion and re-reading
of the material at this Internet site. Rehearsals should be held to ensure
that noone will buckle under pressure - for example, that noone will lose
his temper if an opponent shouts at him or hectors him. The more elaborate
team roles mentioned earlier might be tried out, namely (a) a team spokesman
(not necessarily the leader); (b) the team leader (person with controlling
authority); and (c) a team observer (to keep a watch on the oppostion, including
opponents' body language).
Team Support
Team members must give each other the
fullest, proactive support verbally and non-verbally throughout the meeting,
as well as on other occasions such as during lunchbreaks. This mutual verbal
support is paramount to success. (*) For one thing, it will seem to the opposition
to be a prime indicator of our resolution and determination. Verbal support
included such things as introducing fellow team members with praise and respect,
backing up team members' remarks with total agreement, and advancing fully
supportive argument of our own. An example of the last is a marketing team
member backing up a production member with remarks of his own. So-called 'non-verbals'
are also important. Team members should look interested and in full agreement
with what their colleagues are saying. They should nod in agreement. If any
team member contradicts another, it will show weakness and the contradiction
will be used to drive a wedge into the company's arguments. (* A few years
ago at ICI in a meeting with one of its suppliers, George Gleeson, a junior
member of the ICI team began by telling off in no uncertain terms the supplying
company for several instances of late delivery. The ICI team leader, a senior
director, halted Gleeson's remarks, and severely reprimanded him before the
whole meeting, threatening to ask him to leave. It was very embarrassing.
However, it was all a put up job that had been rehearsed before the meeting.
ICI got its way in expressing its annoyance at the supplier's peformance in
a manner that enabled them finally to save face. Moral: don't believe all
you see and hear at a negotiation. In this case, the ICI team leader's actions
were contrary to skilled negotiation practice, and could therefore be assumed
to be a deception.)
Non-Negotiating Staff within the Company
The position with respect to company staff in other departments
has already been touched on. The members of the negotiating team must discuss
matters with colleagues before and during the negotiation, if only to see 'how
far they can go'. In order to prevent a feeling by colleagues back at the company's
offices or factory that the team is isolated or unaware of the problems back
home, members should if possible meet colleagues between talks. If this is not
possible, they should arrange for a company representative to visit them at
the place of negotiation.
5.6
The Legal Contract
It is, perhaps, unwise to attempt to summarise
in such a restricted space as this Course the law of contract as it affects
negotiations and the negotiator. Readers are referred to the section on Contract
Law in the on-line Course on Purchasing, to be provided at this site in due
time. The reader might also purchase The Law of Contract by J.C.Smith,
an excellent book obtainable on-line through Amazon. A number of legal points
from Smith's volume are as follows:
1. Intention to create Legal Relations
A necessary condition for the formation
of a contract is 'intention to create legal relations', and it will generally
be assumed that this intention is present in the case of a negotiation such
as described in this Course. Consequently, if one party or the other regards
the negotiation merely to be exploratory, he should say so. The buyer should
be guarded about agreeing to new conditions which arise after the formal negotiation,
when he might meet the seller in a social enviroment, perhaps off site. (See
Smith, pp 111 - 114).
2. Offer and Counteroffer
As stated earlier under Model
Contracts, a counteroffer terminates the original offer. For example, suppose
the supplier offer to sell for £20 with free delivery, and the buyer responds
by a counteroffer to buy at £10. The seller's offer of £20 and free
delivery is now terminated, and the buyer cannot later 'accept' it.
In practice, a further principle of law
is highly likely to govern offer and acceptance. This is that all the terms
of the contract must be contained in the offer, and it is discussion of what
these terms are which makes up much of the negotiation - mode of delivery, payment
terms, packaging, quantity ... Thus if the supplier offers to sell for £20,
and the buyer responds by saying Yes! but delivery must be made direct to
our Nottingham factory, the (new) delivery condition amounts to a counteroffer
in just the same way as above (ie the new price of £10). Consequently,
at this point, the supplier is now faced with the buyer's offer of £20
and delivery to the Nottingham factory.
If both parties agree to be bound by the
Uniform Law on the Formation of Contracts for the International Sale of Goods
(1967), then a reply to an offer which contains additional or different terms
which are inconsequential, and which are promptly agreed by the other party,
does constitute acceptance. Thus the buyer might accept the supplier's
offer to sell for £20 with the words Yes! But payment will be only
be made on the 15th of the month following delivery. Under the Uniform Law,
this would be an acceptance, provided the supplier concurs with this minor condition
(Yes! OK) But if both parties do not agree to be bound, then again the
further condition of payment on the 15th constitutes a refusal of the supplier's
offer and is a counteroffer.
Note that an enquiry is neither a
refusal nor a counteroffer. Continuing the example above, the supplier offers
to sell for £20, but now the buyer replies by asking whether the
goods could be delivered to Nottingham. He does not stipulate that they
must be. Whether ... could....? is merely an enquiry and the original offer
of £20 still stands (see text by J.C.Smith, pp 39 - 40).
The
Battle of the Forms
If
this were not a face-to-face negotiation but a purchase by post, the so-called
Battle of the Forms might determine offer and counteroffer. The supplier
offers to sell on his conditions, 'attached hereto', or whatever, hoping
the contract will be set up on his own standard terms. The buyer 'accepts',
agreeing the supplier's price, but does so by way of his own purchase
order document, containing his standard terms. This is a not acceptance
of the supplier's offer, including the supplier's standard conditions. Instead,
it is a counteroffer substituting the buyer's standard terms. If the supplier
now goes ahead and delivers the goods without more ado, the contract is formed
on the buyer's terms. Note that two traps are (1) knowledge
of the offeror - acceptance of revised terms cannot be deemed to have taken
place if the offeree did not know of them, and (2)silence is not acceptance.
Note also that the convention is followed
in law that if there is acceptance of an offer by post, it occurs at the moment
such acceptance it is posted (Such acceptance is still valid even though the
physical document might be lost in the post.) Note that this rule (of defining
acceptance as the moment of posting) applies only to acceptance of an
offer. It does not apply to making an offer, or revoking an offer, or any other
matter in negotiation. (Thinking otherwise is a trap many people fall into.
Note, however, that the contract itself may stipulate that acceptance is to
be made in some other way than posting, for example, by actual communication.)
Note finally that the problem the posting convention overcomes (ie delay) does
not apply when fax or email are used. Legally, then, acceptance is deemed to
take place when the fax or email is received. See J.C.Smith, pp 32 - 34.
3. The Written Contract
Perhaps the most important point of law in negotiation, however,
is the status of the written contract drawn up after the negotiation. First
let it be said that the outcome of the negotiation does not have to be put in
writing for the agreement to be a legal contract. Oral ('parol') agreements,
however, are clearly unsuitable for complex or lengthy agreements. (As Sam Goldwyn
said Oral agreements aren't worth the paper they're written on.) Assuming
on this on-line Course that the negotiated agreement is written up, then the
written agreement, when signed, takes precedence over anything that was verbally
agreed at the negotiation itself. Anything that was verbally agreed but is omitted
from the written agreement is lost. For example, suppose at the negotiating
table it was agreed among many other things (1) that delivery of the goods would
be made in specially strengthened crates, and (2) that payment would be made
10 days after delivery. The written agreement drawn up following the negotiation,
and duly signed by both parties, omits all reference to the strengthened crates,
and specifies payment 20 days after delivery. In this case, the contract is
what has been signed - ordinary packaging and 20 days. Neither party can claim
performance of what was agreed at the negotiation itself. Hence the importance
of noting down at the meeting everything that is agreed, and carefully checking
to ensure this is incorporated in the writen agreement. (See next Section,
also J.C.Smith, p.118).
5.7
Writing the Agreement
The exact details of the finally negotiated
agreement should be put in writing either in the form of a draft contract, to
be tidied up later, or in a letter to the buyer (which will then constitute
the legal offer). The importance of this task and the need for exactitude were
made clear in sub-session 5.6 above. The buyer should take charge of the task
of writing up, and indeed should do so authoritatively. There are a number of
benefits in his so doing as follows:
1. It is his version and layout, and the
choice of words can reflect his understanding where there is a shadow of difference
(although it must be faithful to what was agreed);
2. Writing up will involve others in the
organisation;
3. It is a way of ensuring that the specific
detail has been covered from his own point of view - writing concentrates
the mind;
4. It is self-evidently a helpful thing
to do;
5. It enhances the buyer's image;
6. Knowing he is to write things up makes
the buyer anticipate difficulties of interpretation at the meeting itself.
The draft or the letter must spell out clearly
and at length the services and goods to be provided, their quality; the costs,
discount structures and, in particular, any general understandings that have
been reached. This work is often likely to involve the company's legal personnel
or the company secretary.
The buyer must work tenaciously to ensure
the agreement is implemented. No negotiation is complete until it is correctly
written down, the document agreed, and then finally signed, or until the letter
is accepted without further discussion.
Finally, make sure that everyone in the
purchasing company involved in the agreement understands what has been agreed
and is committed to its success. Failure on our part to confirm what was agreed
or failure then to implement it will sour the relationship and tarnish the company's
image.
5.8
Compliance by the Supplier
Checking compliance with the agreement in
the longer term by the supplier is usually referred to simply as 'supplier evaluation'
(as opposed to 'vendor appraisal'). The starting point of supplier evaluation
is the official set-up by purchasing department staff of a supplier computer
record on the company's supplier database, and its subsequent maintenance. From
this point, the company must take steps to measure the supplier's performance
on an on-going basis as part of a robust, well-maintained recording system.
Thus when on order is placed with a supplier,
it should be entered onto the database so that subsequent information about
it can be accumulated on its record and its progress tracked. The order record
then tracks the date and quantity ordered, the date and quantity delivered,
quality and returns, the price agreed and the price invoiced and other 'hard
facts' relating to the supplier's performance. The order obviously also carries
the supplier's code and the code of the material. Consequently, the computer
is now able to relate specific suppliers to their performance and, through the
product record, analyse performance over all suppliers by, say, commodity code
or product class. Many companies print the (computer) results of analyses such
as this, and send them to the individual suppliers direct, inviting each supplier
to comment on his results, and perhaps write in with reasons for poor performance,
if that is relevant. Another approach is to keep records on the database, and
provide a means of accessing and analysing them on-line through a user-controlled
'query language'. If relevant also, details of service received should be recorded.
For example, supplier engineers may have undertaken to repair breakdowns within
so-many hours, so that actual performance should be measured.
Suppliers which fail to honour their contracts
by subsequently providing poor performance not up to the standard agreed have
made a mockery of the process of negotiation, and should be penalised accordingly.
Course
Motto: In negotiation, no good deed will go unpunished!
Finis
The facts, tricks
and messages of this on-line course cannot be absorbed simply by skimming through
the text once. The next step of the diligent buyer must be to commit the material
to mind and memory, by self-study of these Notes. Only when the material is
fully absorbed and at the student's fingertips is the Course complete. When
it is so complete, the student will be able to call on his or her new knowledge
during the preparation and conduct of real-world negotiations, and - after each
such event - to evaluate and improve his or her negotiating effectiveness.
Course
Motto: In negotiation, no good deed will go unpunished!
Last date of amendment 18th November 2006
The
End
(c) The copyright of this site belongs to David
Crabtree, formerly managing director of GMCS
Ltd, at one time located in Garstang, Lancashire, UK, phone 01995-601535. The
site is maintained by the copyright holder on an occasional basis. Apart from
fair dealing for the purpose of personal and in-company study, the text of this
on-line course may not be reproduced for commercial reasons without the express
written permission of David Crabtree. Permission and suggestions relating to
alterations, additions and amendments should be made by email to info@gmcs.co.uk.
The copyright holder does not guarantee the accuracy or completeness of the
information in the course.
(c)
Copyright David Crabtree 2006
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