One of the most important as well as one of the most interesting activities performed by buyers involves negotiating agreements with their suppliers. Until now, we have evaluated the offers from the suppliers and we are now ready to respond. Being able to negotiate the best possible deals with the suppliers can mean the difference between success and failure.
First, what is negotiation? Negotiation is broadly defined as “conferring, discussing or bargaining to reach agreement in business transactions.” To be fully effective in procurement, negotiation must be utilised in its broadest context — as a decisionmaking process. In this context, negotiation is a process of planning, reviewing and analysing used by a buyer and a seller to reach acceptable agreements or compromises. These agreements and compromises include all aspects of the business transaction, not just price.
Negotiations differ from a ball game or a war. In those activities, only one side can win; the other side must lose. In successful negotiations, both sides win something. The ‘winnings’, however, are seldom equally divided; invariably, one side wins more than the other. This is as it should be in business — superior business skills merit superior rewards.
While negotiation normally is thought of as a means of establishing the price to be paid and this may be the main focus, many other areas or conditions can be negotiated. In fact, any aspect of the procurement agreement is subject to negotiation. Figure 4.3 summarises some of these areas.
Figure 4.3 Procurement negotiation areas
With so many possible areas of the agreement to improve on, buyers having better negotiation skills can thus make an important contribution to the competitiveness — and the profit — of the organisation. Improved negotiation performance can lead to achieving one or more of the following:
1. Lower overall cost of supply
2. Better quality, durability and performance
3. Shorter lead times
4. Contracts that are implemented more effectively and on schedule
5. Improved supplier reliability and service
6. Fewer disputes with suppliers
There are a number of terms with which negotiators should be familiar: positional negotiation, principled negotiation, BATNA, position, interest, needs and wants.
1. Positional negotiation: Positional negotiation views negotiation as an adversarial or conflict situation in which the other party is the enemy.
2. Principled negotiation: Principled negotiation is fundamentally different from positional negotiation with an ethical connotation. It is used in a single-source situation or alliance where the two parties begin the negotiation by agreeing to certain principles, e.g., how the firms plan to grow together. It is an alternative to ‘hard’ or ‘soft’ bargaining. Soft bargainers may make concessions to cultivate or maintain relationships. Hard bargainers demand concessions as a condition of the relationship.
3. BATNA: A negotiator’s Best Alternative To a Negotiated Agreement is also known as the negotiator’s bottom line or reservation point. It is that point in the negotiation where it is most advantageous for the negotiator to walk away from the table and implement his or her next-best option. A negotiator should take extra caution to ensure that his or her reservation point or BATNA is never revealed to the other party because the final settlement is unlikely to vary much from that point. In addition, all negotiation settlements must ultimately be judged in light of the other viable alternatives that existed at the time of the agreement.
4. Position: A negotiator’s position can be defined as his or her opening offer, which represents the optimistic (or ideal) value of the issue being negotiated. A position is the stated demand that is placed on the table by a negotiator.
5. Interest: A negotiator’s interest is the unspoken motivation or reason that underlies any given negotiation position. In many negotiation scenarios, the negotiator’s underlying interests are unlikely to be expressly stated or acknowledged, oftentimes because they may not be directly connected to the stated position or may be personal in nature. Sharing the underlying interests behind a position may cause a negotiator’s power to shift towards the other party, resulting in a less-than-desired outcome. The negotiator must, in effect, play detective to try to discern the other party’s interest through a series of open-ended, probing questions. In order to reach a negotiated agreement using principled negotiation, a negotiator should always attempt to focus on the other party’s underlying interests, not his or her stated position.
6. Needs: Needs are considered to be those negotiated outcomes that the negotiator must have in order to reach a successful outcome to the negotiation.
7. Wants: Wants refer to those negotiated outcomes that a negotiator would like to have as opposed to those outcomes that must be achieved. Wants can also be exchanged as concessions to the other party during a negotiation because they are not as critical to achieving a successful conclusion to the negotiation.
Preparation for negotiation
An astute negotiator must be able to distinguish between the other party’s needs and wants. Equally, when a negotiator is planning an upcoming negotiation, it is imperative to prioritise all of the potential issues to be negotiated into needs and wants, thereby knowing what must be achieved and what can be exchanged for something else of value.
Your textbook on page 253 identifies three key considerations in preparation for negotiation as written by Kennedy (1991). We could summarise them in Figure 4.4 as mentioned below:
Figure 4.4 Three key considerations of negotiation preparation
• 1st consideration: Determining and formalising the negotiator’s specific goals and objectives for the upcoming negotiation. Being specific with one’s expectations and writing them down helps the negotiator to remain focused on his or her predetermined priorities during the negotiation. Having them written down also allows the negotiator to refer back to them during the course of the negotiation, when it is often easy to be distracted by the other negotiator’s tactics and the pace of the give-and-take process. The more clearly a negotiator can define his or her priorities, the more likely he or she is to obtain them in the final agreement.
• 2nd consideration: How valuable is each of our ‘wants’ to us? For example, quality compliance could be high priority, prompt delivery is medium priority and pricing is low priority. By identifying this, you would not compromise or trade your high priority item during the discussion or agreement stages of negotiation. However, you may trade your lowest priority item for gaining your highest priority item.
• 3rd consideration: What are your entry and exit points? Your entry point is really our ‘opening bid’. Once disclosed, you are unlikely to make it better and thus, the bid requires careful thought. The exit point is our ‘walk away’ position. It is clearly desirable that this should be identified and understood at the preparatory stage, if only to obviate the possibility of striking a bargain, which we may regret later. For example, our entry point of a commodity unit price could be RM6 and exit point RM7. That means your ideal price is RM6 and the highest price you could accept is RM7. If your exit point and your opponents exit points do not overlap then it would be harder to close a deal. For example, your opponent’s entry point may be RM9 and exit point RM7.50. However further negotiation may achieve an overlap. For further details, please refer to your textbook pages 253 – 254 under the subtopic of ‘Features of preparation’.
Negotiation strategy and accompanying tactics
Negotiation strategy refers to the overall approach used to reach a mutually beneficial agreement with a supplier that holds different points of view from the buyer. Negotiation tactics are the short-term actions employed to execute a strategy, cause a conscious change in a counterpart’s position or influence others to achieve negotiation objectives. We can think of strategy and tactics as two dimensions of the same negotiation process. The ideal situation is to have a well-developed negotiation strategy with appropriate and ethical tactics that support that strategy. As an analogy, consider a military battle. The best-developed strategy will fail unless a commander has the tactics and the resources to implement that strategy in the field.
Some tactics used by buyers and sellers are actually ploys and tricks to get the other party to agree to an issue or contract without question. There are also many legitimate and ethical tactics that a buyer or seller can use to persuade the other party to endorse a particular perspective.
Negotiators develop tactics to persuade their counterparts to endorse a certain position or agree to a preferred outcome. Furthermore, a negotiator must learn to recognise and understand the type of tactics a counterpart is using. An awareness of a counterpart’s tactics usually mitigates the effectiveness of those tactics. A tactic used during one negotiation may not be successful or applicable to another negotiation, even with the same counterpart. When negotiating, effective negotiators must be willing to modify tactics that are not effective and prepare for responses to tactics that are likely to be used against them. Tactics are most effective when the other party is unprepared, stressed, under severe time deadlines, inexperienced, fatigued or disinterested.
Negotiation is an art. The difference between a good procurement agreement and an excellent one is often more a function of the level of preparation, and interpersonal and relationship-building skills of the negotiator or the negotiating team. Individuals who are skilled at negotiation are destined to be among an organisation’s most valued professionals.
|Please read about ‘Negotiations’ on pages 248 – 271 of Chapter 10 from your textbook Procurement Principles and Management, 10th edn, England: Prentice-Hall, Pearson Education Limited by Baily, P, Farmer, D, Crocker, B, Jessop, D and Jones, D (2008).|
|Question to activity 4.2
||Suggested answer to activity 4.2