negotiation in procurement - iqpc mining procurement and supply forum
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Negotiation in Procurement presentationTRANSCRIPT
Peter SpenceSPANS www.spans.com.au
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Copyright © Peter Spence, SPANS 2013
Building Procurement Capability and Success through Effective,
Systemic Approaches to Negotiation
Negotiation is an essential skill for all Procurement Professionals who expect to lead negotiations with suppliers required by the organisation
Investment in professional development appears low despite the high risks and costs to an organisation of having untrained professionals undertake significant and complex negotiations
If you expect or are expected to lead negotiations and negotiation teams, particularly across boundaries and functions, knowledge and experience in more contemporary negotiation theories and practice will put you at a distinct advantage
OTJ learning and following the lead of others may not cut it – you may only become proficient at doing the wrong thing
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So how do or would you know if your Negotiation capability is fit for purpose?
Firstly, it may help to challenge the perception of what negotiation is or should be – answers to the following questions may help.
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How do you measure negotiating success as an individual and organisation?
Does your procurement or supply group follow a standard negotiation theory or approach? What is it?
If not, how do you validate, support and evaluate the level of competency in the approach you are taking?
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Has your organisation invested in developing negotiation as a core competency within your procurement and/or supply group?
Do you have incentive systems and support structures that reward group as well as individual negotiation performance?
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How strong is your internal and external procurement and supply relationship networks?
The competency to Negotiate will determine the successful performance of the procurement and supply functions
Price and short term cost reductions/savings appear to be the current main measure of success for mining procurement and supply functions – reflecting downturn demand in the industry and a glut of supply.
Money is the only bottom line There may be other real issues that you need
to address to ensure high quality, innovation, reliable, safe and cost effective supply, strong, stable and secure supply relationships
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What happens when demand picks up and supply is limited?
Or is it?
How well does your negotiation approach serve real issues beyond price?
You may be tasked with getting the best deal for the organisation while your performance is only measured on short term cost reductions
You may be provided with little authority or mandate to negotiate beyond price yet will need to satisfy various demands from multiple users in the organisation that you are accountable to.
Sound familiar? You can change the situation. Our focus and measures of success define our
negotiation styles and approaches Successful negotiations deliver agreements that
satisfy the interests of each party involved; preserve relationships, are efficient and durable
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Interest Based SystemsSound and Strong
Power/Rights based systems Distressed, fragile/weak
Despite the high costs, its seems we are locked into a traditional negotiation approach that is pre-occupied with exerting rights and power more than satisfying interests
Positional or Distributional Bargaining still appears to be the prevalent Negotiation approach within the mining procurement and supply field where competition and adversarial bargaining based upon positional claims (rights and power based) is preferred to collaboration (interest based)
‘Soft skills’ associated with collaboration often seen as a sign of weakness by hard bargainers in the mining industry
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Positional or Distributional bargaining is aligned to an adversarial or competitive ‘sum/lose’ negotiation approach – the more you win the more the other side must lose
Aligned to a scarcity mentality - an assumption that resources are in short supply and fixed drives this hard, competitive bargaining style
More suited to market haggling over single, simple issues
Not equipped to handle the complexity of mining procurement and supply - yet it persists
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why?
Culturally understood Requires little preparation and is easy to use Outcomes are predictable Used to divide scarce resources when
long term or future relationships are not important or unlikely
Suited to simple, single dimension and party issues It is a process we are familiar with as a traditional
form of negotiation.
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Not suited to complex or multiparty negotiations Tendency to focus upon positions rather than
underlying interests of each party Rights and power based adversarial approach that
promotes conflict and undermines long term relationships
Resulting agreements may not be durable Leaves significant money or value behind at the
negotiators table (claiming but not create value) Tendency to negotiate around a single issue (price)
only may compromise other important interests – i.e. quality, safety and relationships
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Some procurement professionals find it difficult to breakfrom the status quo and continue to pick and squeeze the life out of low lying fruit while leaving considerable value behind to waste on the tree.
It is not difficult to identify hard bargaining styles:
◦ Traditionally competitive and opting for rights/power solutions before interests
◦ Presents arguments emotionally and not on merits◦ Seek multiple concessions before reducing demands ◦ Use intimidation to make unreasonable demands◦ Use what you say against you◦ Reluctant to disclose/share information on real
interests
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◦ Competitive, hard bargaining tactics are not the answer
◦ Hard bargaining strategies undermine trust and relationships needed for joint problem solving and value creation
◦ A narrow focus on value (success measures) and competition over fixed or limited resources results in missed opportunities for mutual gains and expanding the value proposition
◦ Hard bargaining processes limit communication, disclosure and sharing of important information that is essential for innovation, value maximisation, early risk identification and management
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A process dominated by auctions and competitive tender bids that determine the value of goods and services
Little room allotted to negotiations that create the value of goods or services supplied
Competitive tender processes that lock out opportunities and benefits derived from negotiations
Use of the higher cost rights and power solutions (default to contract compliance and performance remedies) that are indicative of stress in the supply relationship management system
Increased conflict over rights and power positions leading to high costs in disruptions, delays, withdrawal of supply and litigation
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Auction bidding (competitive tenders) more suitable for simple procurement projects - more complex projects require a higher level of negotiation involvement
One way transactional processes such as competitive tenders or auctions do not support the two sided, two way processes of negotiation
Pure auction or tender bidding processes can stifle communication between buyer and seller resulting in poor trust, mutual understanding, reliability and commitment
Buyers risk missing out on accessing the sellers/suppliers expertise on improvements to the supply chain function, process and/or shared complementary resources that may deliver further savings or cost benefits
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Mining Procurement and supply functions seem to struggle to extend their focus beyond cost containment and onto other value creation opportunities
The majority of Negotiation efforts may be attributed to price, yet other areas of value creation are ignored – surety over supply, quality, timing, safety, innovation etc.
Serious money and value may be left at the table To create value beyond cost savings, procurement and
supply leaders need to change their approach toward more contemporary theories and practice of negotiating supply agreements
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Balancing traditional power and rights approaches with more cooperative negotiation strategies will enhance supply relationships to deliver more strategic value to the organisation.
Shifting our thinking from purely transactional, distributional negotiations to more contemporary mutual gains and collaborative negotiation approaches
Developing Soft skill development in areas such as negotiation and collaboration competencies to deliver stronger value propositions for procurement and supply functions
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Ensure the procurement and contracting function is flexible enough to enable pricing and conditions to be negotiated if required to manage emerging supply risks – also allows you to search for and negotiate post settlement settlements
There may be strength in leaving contracts incomplete in terms, so that they may be reviewed and renegotiated during the contract lifecycle for mutual benefit
Consider the option of introducing an invitation to negotiate process as a pilot – inviting supplier participation in outlining the procurement scope and framework for negotiations
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An invitation to negotiate process provides an opportunity to access information that may improve supply chain processes
Consider conducting negotiations with buyers or suppliers around areas for cooperation beyond traditional contract terms and conditions – cooperation may lead to each party revaluing the criteria and opportunities for negotiation success
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Part of changing the game is shifting the mindset from thinkingof suppliers/buyers as adversaries to approaching them aspartners in the supply chain. Supply or procurement
relationshipsthat are well developed and strong are more likely to:
Increase access to expert and leading edge knowledge to improve innovation, efficiency and cost benefits
Improve Innovation - sharing and co-creating knowledge Improve trust, commitment and reliability Strengthen performance management through collaborative
development, alignment and commitment to KPIs Produce reliable quality suppliers
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Deliver soft skills that complement and leverage technical skills
Prevent and resolve conflicts more efficiently and cost effectively
Increase the company's Relationship Capital – brand, reputation, scalability of networks etc.
Early identification and coordinated response to potential supply chain failures or threats – risk management
Increase efficiency and safety for not only the supply chain but wider business operations
Promote joint problem solving and more innovative value add solutions
Strengthen the durability of agreements and performance
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Now that we understand the high cost of positional or distributional bargaining what do you intend to do: Surrender, play their game, quite the game or change the game.
Changing the game is the most effective response.
Adopt a more collaborative, mutual gains approach to negotiation
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How do we change the game to drive joint supplier/customer innovation and create value while still achieving substantial cost savings?
Mutual Gains Negotiation is based upon the Principled Negotiation Theories of Fisher, Ury and Patton.
1. Separate people from the problem2. Focus upon interests, not positions3. Invent Options for Mutual Gain4. Use Objective Criteria to set legitimate principles for decision making5. Improve your BATNA
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Emotions become tied to positions Positions often mask our underlying interests
– fighting over positions causes us to lose sight of what we really want (core strategic intent)
Don’t waste time and money trying to get even or over the other party – instead, focus on getting what you really want
By analysing, identifying and focusing to resolve underlying interests, any resulting agreement will be based more upon merit
Positional bargaining undermines relationships
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Avoid searching for a single answer and bargaining over a fixed pie - enlarge the pie and increase value
Work with supply partners to generate options without judging them – brainstorm ideas and possible solutions without deciding or committing = innovation and value creation
Search collaboratively for mutual gains – this results in Win/Win outcomes, increases value to the agreed outcome – avoids the win/lose outcomes associated with unilateral gains
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Search for shared interests Search for different but complementary interests that
build value – concept of integrated diversity Don’t avoid or compete over differences – ask
questions and seek out differences that you can trade across to ‘package agreements’ that meets the interests of and increases value for all parties involved
Identify and offer something that may be of little value to you but of considerable value to the other party – seek the same from your supply partner (i.e. spare warehousing capacity; transport; billing preferences, technology; branding as preferred supplier etc).
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Without rational, objective standards on which to base your negotiation, the process degenerates into bargaining over positions and not upon the underlying principles or interest of either party
Insist that the outcome reflects some reasonable or fair standard that is independent of the will of either party – i.e. cost modeling based on industry standards to determine fair supply margins; mining industry logistic, safety or quality standards.
Outcomes based upon fair principles tend to be more durable, enforceable and preserve relationships
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A BATNA provides you with a guide to what is minimally acceptable as an agreed outcome
Provides a ‘walk away’ surety that you can do better elsewhere without having to accept a poor outcome or concede to pressure from a more powerful negotiator.
The BATNA should set your (value) zone of possible agreement (ZOPA)
A BATNA should improve upon your acceptable ‘bottom line’ to strengthen your negotiation position and improve your negotiation power
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1. Prepare for Negotiation – Most of the success of negotiation is attributed to preparation
2. Create Value3. Distribute Value4. Follow through – use nearly self enforcing
agreements, monitoring arrangements; agree on mechanisms to deal with surprises; continue to build relationships
(Adapted from source: Lawrence Susskind: Consensus Building Institute)
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In the end the value that has been created must be distributed
Can lead to an impasse to reaching an agreement Mutual Gains or ‘win/win’ negotiations do not
necessarily translate to equal outcomes, rather the objective is for all parties to gain (win) more
Create value first and then approach value distribution using the mutual gains approach to preserve long term relationships and trust in shaping the final agreement
Use objective criteria that each side supports to divide value
The mutual gains approach balances the tension between creating and claiming value
Copyright © Peter Spence, SPANS 2013
Avoid intervention by or changes to ‘new’ third parties at the 3rd stage of claiming value – introducing complex process issues not previously discussed or agreed risks undermining the strategic intent of the agreement (i.e. Legal Department developing and formalising contract terms and conditions after scoping and pricing has been negotiated)
This is where agreements can become unstuck, incurring the significant delays and high costs of conflict
Consider a one text arrangement to record consensus over terms and conditions (including risk management ‘contingency bets;) as negotiated from start to finish
Involve all relevant parties in preparing for and conducting negotiation from the outset
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Individual Barriers to Mutual Gains Negotiation – why
the legacy and cost of distributional bargainingprevails:
Uncertainty of the problem Own fears or assumptions (expectancy theory) that
you are going to be ‘taken’ causing defensiveness, hard bargaining and attracting similar competitive approach from other party (self fulfilling prophecy)
Their hard bargaining style Being under prepared for Negotiation or preparing
in the wrong ways Lack of confidence in your ability to negotiate
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Disproportionate amount of preparation time on planning for what we want to get out of negotiation
Not enough time spent on what we may end up with if there is no agreement (need to spend more time on analysing and developing your BATNA)
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Organisational Barriers to Mutual Gains Negotiation:
Negotiators often do not prepare as organisations do not allow them to (insufficient resources, time etc)
The organisation is not familiar with analysing its own BATNA
Lack of internal communication and understanding within the organisation on what the negotiators objectives are
The organisation only rewards hard bargainers
Lack of internal cooperation in advance of the negotiation task
The organisation does not provide negotiators with a clear mandate to negotiate
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Adopt a collaborative, mutual gains approach and build your competencies and confidence in this approach
Prepare, prepare, prepare – over 80% of successful negotiations are attributed to preparation
Invest in developing Negotiation as an organisational rather than individual capability alone
Conduct a negotiation audit to compare current capability, challenges and opportunities]
Develop Negotiation and Collaboration as core organisational competencies – the following steps drawn from the work of Hallam Movius and Lawrence Susskind in their book ‘Built to Win: Creating a World Class Negotiating Organisation’ provide a useful guide
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Before negotiating with external parties you may
need to get your own house in order first by:
Negotiating with internal business partners on how you will negotiate – engage internal partners to work as a team toward an agreed strategic intent to create value for the organisation –
Negotiating Negotiation back tables – negotiating with internal people in the organisation to who we may be accountable away from the negotiation table (those not directly involved in negotiations but influential
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Clarifying roles, responsibilities, authority, mandate (often these may be vague, processes are unclear and decision making rules not agreed to)
If you are directed to seek unreasonable concessions or adopt hard bargaining there is a need for you to renegotiate your negotiation mandate and criteria for success
Engaging key internal partners in the Negotiation process from preparation to completion to ensure cooperation and alignment of decision making
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The following example of a ‘mapping negotiations’ kindly provided by Ray Fells, Professor at the Western Australia University illustrates the complexity of negotiations within the company
Consider a simple network analysis exercise to visualise and evaluate both internal and external partner relationships – your ‘negotiation affiliation network’
Network Analysis mapping will also enable you to see who is influencing who in the network
Identify partners you will need in the network and of those, who you have got
Identify network structural holes that you may need to bridge (whether across Departments, Organisations or functions) to secure partner engagement
Identify key influencers or brokers that can connect you to needed partners, resources etc., provide an alternative bridge to bypass network blockages that impede negotiations, or act as allies/intermediaries
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Internal and external networks link to form the complete procurement and supply negotiation network
Red labels denote internal; Blue labels external
Connection strength between partners (nodes) denoted by width of links (vertices)
Supply networks are a negotiated order – we have to negotiate connections, roles, responsibilities, resources
Identify and engage connections that may provide alternative solutions to manage potential supply chain disruptions and minimise dependencies
Negotiation networks allow you to build winning coalitions
The strength of your supply network relies upon the negotiation strength within it
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While you are busy negotiating the deal you should be aware that there may be negotiations going on elsewhere within the network that will impact upon the outcome of your negotiations
It is important to map and get all parties involved in the negotiation process from beginning to end
The deal is not done until performance is delivered Securing the agreement and contract is just the
beginning – performance will still require ongoing negotiations and performance management
Link individual performance criteria to the network negotiation process – giving partners a stake in the process ensures their interests align with the strategic intent of your negotiation
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Business partners who only become involved in the implementation of the agreement during the later stages can still derail a contract and incur significant costs
The power of preparation – time spent preparing for negotiations at the front end adds value and saves considerable costs of renegotiating or seeking remedies for breach of performance during implementation
Investing in Negotiation as a core organisation or group (network) competency will assist to identify and engage all parties in the preparation/planning and implementation process
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Peter Spence is the Principal of Strategic Planning and Negotiation Services – a consultancy that provides negotiation competency training and development,
coaching and advisory services.
Peter welcomes your inquiries to discuss negotiation training or advisory needs and can be contacted on
MOB 0457 941188 email: [email protected]
website www.spans.com.au
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