Best Practices in Supply Management Journal

73rd Edition, November/December 2015

Articles In This Issue

"Changing Strategies for Negotiating In-Person, via Telephone, or by Email"

"The Art of Price Indexing - Six Helpful Techniques"

Visit the Strategic Procurement Solutions Web Site

Founder Appearances and Articles for Our Readers:

Published in the October edition of Inside Supply Management Magazine, an article by Mark Trowbridge titled, Find the Truth in Statistics. The article can be viewed by ISM members by clicking Article Link

December 3rd to 4th, Mark Trowbridge will make a keynote presentation titled "Technology Contracting - Moving Into the Cloud" at the ISM Indirect/MRO Conference at the Rosen Shingle Creek Resort in Orlando, Florida.

February 9th to 10th, Mark Trowbridge will present a two day conference titled "Innovative Trends in Technology Contracting" in partnership with ISM Nevada in Las Vegas, Nevada. Click the following link for more information on that event Tech Contracting Info

This electronic journal is distributed bi-monthly to
nearly 14,000 Supply Management Professionals around the globe. Note that our educational articles are 'in depth', unlike most online publications. We hope you enjoy this edition. Feel free to forward to your SCM colleagues!

"Changing Strategies for Negotiating In-Person, Via Telephone, or by Email/Text" - by Mark Trowbridge, Principal, CPSM, C.P.M., MCIPS

Today's procurement professionals often find themselves conducting negotiations in a variety of mediums. Some complex negotiations take place in the same room as the supplier's representation (in team or individual forums). Other negotiations take place remotely via telephone or email. Each of these modes has unique variables which the procurement practitioner must consider...otherwise they may hand over an advantage to a skilled opponent.

This article presents a brief outline of variables to consider for each mode of negotiation:

Mode 1 - Negotiating "In Person" As a Team - Negotiations are generally most-productive when conducted in person. This is because the participants have the advantage of both verbal and non-verbal indicators from the other party. And they do not suffer from the technical limitations (discussed later) inherent in telephone or email communications.

Factors which help make "In Person" team negotiations most-beneficial include the following:

Group Synergy - The benefit of team negotiations is based upon the well-known principle that "The whole is greater than the sum of its parts". More simply stated, a group will usually make better choices together than would any of the individuals who comprise the group, working alone. This is very true in negotiations, as a well-prepared team can almost always achieve better results than a solo negotiator.

Strength in numbers - As participants in Strategic Procurement Solutions' negotiation onsite role-playing workshops learn quickly, a team will nearly always have an advantage over a single opponent. That's because different members of a negotiation team can play key roles that make their approach highly-effective.

Ability to handle complex negotiations - Team negotiations are the optimal format for multi-element, high-value, and sole/single source negotiations. These negotiations are more effective when conducted in-person by a group of people.

Facilitation of decision-making - Team negotiations are particularly-important when decisions must be made during the actual negotiation process. A team comprised of key stakeholders can use quick "caucus" or "breakout" discussions to make decisions which can immediately be re-introduced into the negotiation dynamic with the other party.

Mode 2 - In-Person Individual Negotiations: Many of our negotiations are one-on-one. This is especially true for standard procurement transactions. It's just not practical to pull stakeholders out of business operations for standard negotiations. Having the procurement professional represent stakeholders in standard transactions optimizes staff time and resources. They are truly a procurement "agent" acting on behalf of their entire organization.

But negotiating by oneself has disadvantages compared with acting as part of an empowered team. Factors to consider include the following:

Increased responsibility - A downside to one-on-one negotiations is that the mode increases responsibility of sole negotiator for preparation, success, and failure.

Greater advanced preparations - This format also may require greater communication time in advance (with stakeholders, internal customers, etc.) to gain consensus prior to the start of the negotiation event.

Not efficient for complex negotiations - Solo negotiations can be inefficient for multiple changing negotiation issues, as it may take too long to communicate concessions with decision makers. A procurement professional needs to be empowered to control the entire scope of the negotiation, which may not be practical in a complex high-value solo event.

Know who's coming to dinner -Being the sole negotiator may put the buyer at a disadvantage if supplier brings multiple negotiators.

Mode 3 - Negotiating "by Telephone" - Many of today's B2B negotiations occur over thetelephone. But it's important for the procurementprofessional to remember that things happen more quicklyon the phone (than in person). Small talk is minimized, and participants are more-inclined to take extreme positions (people are less-inclined to take extreme positions in

person). So be prepared!

Some other important factors to remember are:

Losing non-verbal clues - You lose 80% of the communication content (nonverbal) when speaking over the phone.

Concentration is critical -Telephone negotiations make it very important to focus upon everything said. A poor connection (cell phone) may further complicate the clarity of communication. So be ready to ask the other party to repeat themselves when they've said something critical. It is also a good idea to take notes, and confirm key discussion points via email to the other party. Some skilled negotiators actually turn off their computer, dim the lights in their office, and close the door when involved in a telephone negotiation, so as to make sure nothing distracts them.

Conference call risks -Conference calls allow the other party to have advisors in room (on mute, etc.). You may not know the other people are there, until it's too late. Listen carefully for a change in background noise indicating you may be on mute. If I sense a change in background noise, I act instantly by simply saying, "Am I on mute?" If the supplier representative admits they are sorry to have put me on mute, I then make it a point to ask the supplier's person whether they are the only person in the room.

Conference bridge call services also allow the host to record the conversation (sometimes without your knowledge). If that is a concern, use your own conference service and be the host.

Being caught by surprise -Don't be caught by surprise by an unplanned phone call. Phone interaction allows the supplier to call you without an appointment. If a supplier calls you on phone without warning, you may not be prepared to negotiate. Instead, ask them if a later time would be acceptable...and schedule a later time which allows you to be prepared.

Do catch the supplier by surprise - Calling by surprise can work to your advantage. The person who initiates the call is often at a distinct advantage. They have time to prepare, are not taken off guard, can prepare a checklist, and can organize support data and materials. You can also use the surprise to "set the agenda" and thus control the issues being discussed.

Don't multi-task while negotiating via phone!

Mode 4 - Negotiating "by Email" or "Text"- Email is often used today to barter pricing and key transactional points. Complicating this is the increased use of texting via cell phones (in which case the communications are often truncated significantly).

A comedian recently observed that everyone would use the voice features of cell phones if texting had come first. The comic said people would be more excited about the ability to have a real conversation rather than sending short typed sentences.

But good or bad, email and texting unfortunately are a norm today for communications. Here are some things to remember when negotiating via email or text:

Email negotiations happen really fast - They go even faster than those on the phone, because there is less "give and take".

Backing into a corner - The medium also makes interaction more "positional" because the parties are putting everything in writing. This means there is less ability to change your position once the other party has seen your position in writing.

Detailed messaging -Email does allow exact details to be proposed and received with a good amount of certainty.

Bypassing gatekeepers - Email allows the negotiator to bypass "gatekeepers". If you can't get past lower level sales people or an administrative guard dog, email can allow you to interact directly with a decision maker.

No time constraints -Email encourages prompt and direct response, and can be utilized 24/7.

Ready, fire, aim - Some people get in trouble because they answer too quickly via email. This is especially true in the new "texting" universe. Don't reply without thinking. One of my favorite bosses once made fun of me because I can type very quickly. He, on the other hand, typed with two fingers. He commented that too often, I shot off too quick of a reply to problematic emails, while he had 'cooled off' by the time the message was drafted (he would delete the message and pick up the phone to speak with the other person). Good advice I've tried to remember since.

Why is the supplier sending an email? - An opponent choosing to use email may be a clue that they're not comfortable negotiating in person (and may be escalating points to a senior decision-maker before replying).

Lack of body language AND audio clues -Even more so than in telephone negotiations, emails lose the advantage of both body language and auditory clues.

Legally-binding offer and acceptance - You may technically have a legally-binding "contract" if you agree to something the other party offers in an email. That's because a court can interpret a contract being formed by a written offer and corresponding acceptance indicate a "meeting of the minds" occurred.

Poor medium for resolving problems - Contentious subjects or complex elements are much-better handled in person. If things aren't going well in an email exchange, STOP, and pick up the phone or schedule an in-person meeting to speak directly with the other party.

Who is watching? - Lastly, always be aware that email communications or text communications may not be kept confidential (forwarding, blind copies, etc.).

The last few months, I've presented multiple training workshops in the USA, Asia, and the Middle East to corporate and governmental audience. One programs presented to ISM groups in the San Francisco and Los Angeles areas is a one of our most-popular master classes called

The Negotiator Challenge - Advanced Procurement Negotiations™. This article is an extract from just one small portion of that interactive training program... More information can be requested at Info@StrategicProcurementSolutions.com

About the Author - Mark Trowbridge, CPSM, C.P.M., MCIPS is one of Strategic Procurement Solutions founders. His 30 years in procurement leadership began in the Manufacturing, Airline, and Financial Services sectors...culminating in a role leading three-quarters of the strategic sourcing activities, and all of the contracts management responsibilities, for Bank of America (then, the USA's third most-profitable company). During his final two years with Bank of America, Mark's areas of responsibility delivered a Quarter Billion Dollars in cost reductions. During the last 16 years, Mr. Trowbridge has worked in the consulting field with many leading corporate and governmental clients. His business travels have taken him throughout North America, Europe, the Middle East, and Asia. He is a frequent author on supply management topics, with articles appearing in publications like Supply Chain Management Review, Inside Supply Management, IFPSM's eZine, eSide Supply Management, and Strategic Procurement Solutions' own Best Practices in Supply Management Journal. Mark's is among the top 1% Most-Viewed LinkedIn profiles.

"The Art of Price Indexing - Six Helpful Techniques"... by Robert Dunn, MBA, C.P.M., Principal

In the practice of Strategic Sourcing, the consolidation of key supplier relationships under long-term contracts is a foundational element of supply chain performance and security. But some products or services cannot be optimally priced over an extended time frame, if certain underlying costs fluctuate due to market forces outside the control of the supplier.

Examples might be fluctuations in fuel costs in a transportation agreement, changes in metal pricing in a manufacturing contract, or alterations in labor costs in a long-term technology services arrangement.

Some procurement practitioners insist on "fixed costs" in their RFx packages; thinking the supplier will bear the risk of cost fluctuation. And the suppliers frequently seemingly comply. What the buying organization often fails to recognize is that the suppliers are "padding" their proposed prices to offset the risk of underlying cost changes. And the longer the fixed cost timeframe, the more "padding" the suppliers build into their pricing.

A methodology used by more-sophisticated buying organizations is to tie reasonable periodic price changes to a beneficial market "index". This article will discuss 5 helpful techniques for indexing of pricing in sourcing agreements:

Technique #1 - Fix Initial Pricing for an Initial Period: Suppliers should bear some risk for pricing their products or services for an initial contract period, before any adjustments are allowed. For products with a frequently-adjusted cost component, it is still reasonable to "fix" initial pricing for 6 to 12 months. For services having high reliance on labor costs, 12 to 24 months is a reasonable time to expect pricing to be fixed before adjustment is allowed.

Technique #2 - Adjustments Should be Calculated Only On a Fixed Schedule: Don't let the supplier tell you when an adjustment is needed. Because they'll wait for the index to hit an unusual peak, and then tie the product change to that peak. Instead, your adjustment language should be set for a set timing, and should "average" the cost index over the preceding period (3 months, 6 months, 12 months, etc). Using an average of price adjustments over an extended timeframe will limit peaks and valleys.

Technique #3 - Adjustments Should Go Up AND Down: It's interesting that many suppliers propose cost adjustment language which only allows upwards price changes. But in commodity markets costs fluctuate up and down based on supply and demand factors. The procurement organization should be able to capture downward cost movement just as the supplier should be relieved of upward cost changes.

Technique #4 - Adjustments Should be Pro-Rated to the Portion of Product/Service Cost Applicable to the Indexed Cost Element: Don't let the provider increase the entire product price based on changes in just one contributing cost element. Just because plastic raw ingredient prices increased, doesn't mean the finishing labor, capital production, and overhead factors in the completed product price should change by the same percentage amount. Calculate the portion of the product price which is influenced by the indexed component and have product price fluctuations tied only to that portion of the price.

Example Utilizing Techniques 1 through 4: "After the initial one year term of this Agreement, within ten days after each subsequent calendar quarter, Supplier shall notify Customer if the average price for 24# Card Stock in the Producer's Paper Weekly publication throughout such calendar quarter has increased or decreased by more than 3.0%, and the parties shall adjust the then-current Product pricing upwards or downward during the subsequent calendar quarter by 52% of that same percentage amount."

Technique #6 - Research the Index Carefully: The highest-priced technology labor market in the world is that around San Francisco, California. Bay Area firms like Apple, Google, Intel, Oracle, Adobe Systems, SanDisk, and others compete for skilled technical expertise at compensation levels which out-accelerate much of the world (note, most of these have been clients of Strategic Procurement Solutions J ). So is it any wonder that many software providers tie their maintenance cost changes to the labor rates in the San Francisco area?...even if most of their employees are located elsewhere? Make sure you research various commodity indexes and their historical ranges in order to determine the most-accurate one for each contract.

For labor cost tracking, many global indexes exist. For example the USA Consumer's Price Index (CPI) is the most-developed global index, but has general comparability to the Harmonized Index of Consumer Prices (HICP) in the European Union, the Canadian Consumer's Price Index (CPI), and the United Kingdom's Consumer Price Index (CPI). Less-mature indexes like the Chinese CPI are utilized in commercial contracting, but must sometimes interpreted to offset governmental influences.

The trick is to choose an index that incorporates reasonable cost-of-living factors which actually impact the supplier's labor employees performing our contract work. Try to use a general index for a province, state, or country rather than for a metropolitan area (average urban/rural labor rates are lower than those just for an urban center).

And finally, place a safety cap on the maximum increase...just in case.

An example might be, "Fees for Services in any Renewal Term may increase by the lesser of (i) a percentage increase proposed by Service Provider at least 90 days before the end of the prior Renewal Term which shall not be greater than 3%; or (ii) the net percentage movement during the prior Renewal Term in the US Department of Labor Statistics, Consumer's Price Index (CPI), for Professional, Scientific, and Technology Services (NAICS 54) for the State of Florida, USA."

Strategic Procurement Solutions helps corporate and governmental organizations revise and optimize their procurement contract language, whether optimizing existing agreements or creating new template/clause libraries. We also train groups in contracting techniques in our Strategic Contracting™ and Innovative Trends in Technology Contracting™ onsite workshops (2 days each). Our instructors also teach online eLearning courses (6 weeks) on these topics. Contact us for more information at Info@StrategicProcurementSolutions.com

About the Author: Robert Dunn, MBA, C.P.M. is one of Strategic Procurement Solutions' founders. His 40 years in procurement leadership covered management positions in the Government, Technology and Financial Services sectors; culminating in a role directing all of BankAmerica Corporation's procurement operations. He has served as President of two ISM/NAPM affiliates, and taught supply chain management at the post-graduate level for California State University - Hayward and St. Mary's College - San Francisco. He has also worked with major corporate and governmental clients in the consulting industry for the past 18 years, and was one of the founders of Strategic Procurement Solutions. Robert has worked on major procurement initiatives in North America, Latin America, Europe, and Asia. He is a noted author, with articles published in publications like eSide Supply Management and Strategic Procurement Solutions' own Best Practices in Supply Management Journal (the latter of which is now distributed to over 13,000 readers).