My colleagues and I frequently present training workshops to corporate and governmental client groups and at conferences around the world. One of our most popular workshops is titled The Negotiator Challenge™. In just about every training session, a common problem is raised by the participants... How can we change the balance of power in Sole Source situations?
As every procurement leader knows, negotiations become much more complicated if the supplier knows they are the only provider of a needed solution. When just one supplier can provide the solution, it is known as a "Sole Source". When there is competition but there exists a legitimate business reason to use just one supplier's solution, that circumstance is similarly known as a "Single Source". In both instances, the balance of power is tipped strongly in favor of the supplier.
So how can we change that balance point so that we can leverage the negotiation to our advantage? This article will describe five techniques used by top negotiators (many more exist but these fit into a short article):
Technique #1 - Have a Strong Relationship with Procurement's Internal Customer. My sourcing group at one of the largest global financial services firms had a phrase whenever our team became involved in a transaction too late to properly-source and negotiate the deal. We called those a "PTD" situation, which stood for "Paper-the-Deal" (i.e. with a contract or purchase order). A PTD is sort of like being hired to drive a train, but when we get to the train station the train is already leaving on a particular track. The best procurement can do in those situations is often just to run down the station and dive to catch the railing on the caboose. There is little chance to alter the track the train is on; that choice has already been made.
Sourcing metrics tell us that IF procurement can get involved in a spend category early enough to take it through the entire strategic sourcing process, the average savings will be between 10% and 17%. But if procurement learns about the situation after the supplier has already been chosen (i.e. a Sole or Single source), savings generally range between 0% and 5%.
So one technique to change the balance of power in negotiations is to develop strong relationships with our internal customers, so that we can become involved in their acquisition projects early enough to be able to influence the preparation and planning leading into the negotiation with the Single/Sole Source supplier.
Technique #2 - Prepare Our Team to Fight a Tough Battle: It is said that 75% or more of the negotiation process should be spent in preparation, with tasks like proposal evaluation, cost modeling, marketplace analysis, and even research on the backgrounds and personality styles of the supplier's own negotiation team members. But no portion of negotiation prep is more important than ensuring our stakeholders are ready for the battle.
This means the procurement negotiation leader should meet with all key stakeholders to make sure they are in agreement about the negotiable targets to be pursued. All negotiation team members should also be in uniform agreement about the negotiating objectives (if they aren't, the disagreement must be escalated to senior management for a decision before the negotiation event). Failure to prepare our team can allow a clever supplier to split off team members to our disadvantage.
Technique #3 - Use "Should Be" Cost Modeling: Even though we may have to negotiate with just one Sole/Single Source supplier, we can still create a cost model for their firm's costs and profit margins involved in providing the desired product or service. "Should Be" costing involves researching the supplier's industry costs of doing business and potential profit targets, so as to create a comparison for use in actual negotiations.
Sources for cost modeling data can vary widely. For manufactured products, many buying organizations' own engineers can often accurately estimate costs for materials and processed elements. Published cost indices such as those on the "Research Links" site page at www.StrategicProcurementSolutions.com can be another source of information for cost modeling.
Another source of information can be benchmarking companies similar to the Sole/Single Source provider. Several years ago, I was asked to negotiate seven-digit project with a specialty construction firm on behalf of a large client in the mining industry. The unique technical capabilities of the specialty firm made them a Single Source, but we still were able to compare their general operating costs for the project with those of other contractors doing more-generalized work. Our negotiation then centered upon those cost factors which varied too widely from comparable norms, and allowed us to reduce the project expense by a significant amount.
Technique #4 - Research the Supplier and Industry Trends: Too often procurement groups fail to properly understand the business opportunities, challenges, and plans which influence their supplier's decision processes during negotiations. Similarly, failure to understand the competitive forces (Porter's Model) and trends affecting the supplier's business can also undermine the opportunities that may be available in a well-planned negotiation.
By googling (yes, it's a word now), we can find a myriad of information about most supplier organizations. If they are a publicly-traded company, even more information can be gained through brokerage resources like Thompson Reuters and Bloomberg, or credit rating agencies like Standard & Poor's, Fitch, and Moody's.
There is also a world of information available from persons who are "stock analysts" who are given full access to interview company executives, analyze financial strength, evaluate marketing plans, and assess business challenges. That is great information to have in your hip pocket before entering a critical supplier negotiation. If you have a personal brokerage account, you can pull up many of those reports yourself.
Great negotiators have the ability to put themselves into the other party's shoes. This cannot happen unless we take time to research what factors affect the supplier's company and how changes in their marketplace may influence their future planning.
Technique #5 - Shifting the Paradigm for the Negotiation: The American Heritage Dictionary defines a Par·a·digm as being "a set of assumptions, concepts, values, and practices that constitutes a way of viewing reality for the community that shares them". Simply stated, their Paradigm is how someone views reality. So how can we alter the Paradigm the supplier has about our Sole/Single Source business relationship? How can we change their viewpoint? There are numerous methods, but here are two that often work...
One way is very simple, but it goes against everything we want to do when locked into a Sole/Single Source situation. The tendency we have as buyers is to limit the exposure we have to this supplier. But one way to shift the Paradigm is to dangle a larger carrot in front of the supplier's team by lengthening the contract term. See what pricing changes might occur if we offer a five year agreement rather than one year!
A second way also strains our desire to limit expenditures to the Sole/Single Source supplier. This method is to look at "other things" which that supplier can provide which may have competition; and even if we have to pay a slight premium on those "competitive" products or services, intentionally offer that additional business to the supplier in exchange for gaining concessions on the Sole/Single Source business we must buy.
Information about Strategic Procurement Solutions' professional development services (like Online Supply Management Employee Skills Diagnostic testing and Onsite/Online Training) can be requested at Info@StrategicProcurementSolutions.com