Procurement Negotiations: Posturing vs Facts
Negotiations between buyers and suppliers of goods and services is an essential part of any business. Both parties typically strive to secure the best outcomes for the respective businesses. The approach taken during the procurement negotiation process can have a significant impact on the final outcome.
One of the most critical decisions a negotiator can make is deciding whether to focus their procurement negotiation strategy to achieve the best possible outcome on the use of tactics and posturing or to put the spotlight on preparing a solid fact base with compelling arguments.
What is "Tactics and Posturing" in procurement negotiations?
Negotiation Tactics and posturing involve using various techniques to influence the other party's behavior and emotions to achieve a favorable outcome. These techniques can create tension and pressure in the negotiation and may lead to a sense of urgency for the other party to accept the terms offered. While tactics and posturing can be effective in certain situations, they also have several drawbacks. These procurement negotiation tactics can create a negative atmosphere, causing the other party to become defensive and resistant. They may also create a feeling of mistrust and damage the relationship between the parties.
And what do you mean by "Preparing a solid fact base"?
Preparing a fact base with compelling arguments to convince the other side involves gathering information and developing a well-structured argument to support the procurement negotiation position. This approach relies on presenting data and facts to support a logical and rational argument, focusing on the underlying interests and goals of both parties.
This approach has several advantages in procurement negotiations. Firstly, it creates a positive atmosphere by encouraging open communication and transparency. By presenting a logical and factual argument, it can build credibility and trust between the parties, leading to a win-win negotiation outcome. Secondly, it encourages collaboration and finding common ground by focusing on the underlying interests and goals of both parties. This approach leads to creative and innovative solutions that can benefit both parties in the long run.
Now, how do I best prepare a fact base for my negotiation?
To prepare for a procurement negotiation, it is essential to understand the dynamics of the negotiation and the other party's position. When the buyer has significantly less power than the supplier, such as in a single-sourced situation or oligopolistic market structure, it can be challenging to achieve a favorable negotiation outcome. However, with proper preparation, it is possible to succeed in such negotiations in purchasing. Before the negotiation, the buyer should gather as much information as possible about the supplier, their products or services, and the market.
This information should be used to develop a fact base to support the negotiation position. The buyer should also assess the other party's strengths and weaknesses and develop a strategy to address them.
Here are few exemplary analyses to get you started on creating a compelling fact base for your procurement negotiation position:
1. Spend Development
By analyzing the spend data over the past three years, you can identify any trends in the relationship between your company and the supplier. This analysis will allow you to understand the type of account you represent for your supplier and, maybe even more crucially, for the supplier’s account manager. For example, if you notice that your company's spend with the supplier has increased significantly over the past year, you can use this information to negotiate better pricing on the grounds of reduced managerial cost of handling your account and broader allocation of overhead cost to more units bought by you.
2. Share of wallet
This analysis involves understanding your company's spend with the supplier as a portion of the supplier's total revenue. By understanding your company's share of wallet, you can determine the importance of your company to the supplier and use this information to negotiate better pricing or terms.
3. Profitability Comparison
By analyzing the supplier's profitability, you can identify any areas where the supplier may be able to offer concessions or pricing reductions. This analysis involves comparing the supplier's profitability to your company's profitability to identify any areas of inefficiency or cost savings that can be addressed in the negotiation.
4. Market Dynamics
This analysis involves understanding the competitive landscape in which the supplier operates. By understanding the market dynamics, you can determine the bargaining power of your company and the supplier and use this information to negotiate better pricing or terms. For example, if you find that the supplier operates in a highly competitive market, you can use this information to negotiate better pricing or terms.
5. Supplier Production Costs
By understanding the supplier's production costs, you can identify any areas where the supplier may be able to offer concessions or pricing reductions and use these facts for a better negotiation outcome. In particular, you may want to look out for changes to raw material prices or labour rates by monitoring underlying indices and linking those to supplier price developments.
6. Supplier Performance
Use supplier performance data to identify areas for improvement:. Analyzing supplier performance data can help you identify areas where the supplier is underperforming, such as delivery times or product quality. By highlighting these areas, you can negotiate better terms or pricing by demonstrating that the supplier needs to make improvements in order to maintain the relationship.
So, what do I do if the other party resorts to "unfair" tactics and posturing?
During procurement negotiations, it is essential to remain calm and composed and to focus on the underlying interests and goals of both parties. The buyer should present a fact-based argument to support their position, highlighting the benefits to both parties. The buyer should also be prepared to listen to the other party's concerns and interests and be open to finding common ground.
When the other party uses tactics and posturing, the buyer should remain calm and focused on their objectives. They should not allow themselves to be drawn into an argument or be pressured into making concessions that are not in their best interests. Instead, the buyer should maintain a firm but respectful position, backed up by a fact-based argument.
In situations where the buyer has significantly less power than the supplier, it is essential to be creative and innovative in finding solutions that benefit both parties. The buyer may need to consider alternative solutions, such as developing a long-term relationship with the supplier or partnering with other buyers to increase their bargaining power.
The approach taken during a procurement negotiation can have a significant impact on the final outcome. While negotiation tactics and posturing can be effective in certain situations that are focused on short-term gains sacrificing longer-term opportunities, preparing a fact base with arguments to convince the other side is generally considered more effective for achieving an excellent negotiation result.
This approach creates a positive atmosphere, encourages collaboration, and leads to win-win negotiation outcomes. When the buyer has significantly less power than the supplier, proper preparation is essential to succeed in the negotiation. The buyer should gather as much information as possible, assess the other party's strengths and weaknesses, and develop a fact-based argument to support their position. By remaining calm and collected, you can make compelling arguments that are difficult for the other party to dispute.
We also recommend you read our Negotiations handbook, to dive deeper into the procurement negotiations process and how to achieve the outcomes you desire.