Negotiations are an integral part of everyday life for procurement
Strategic business sourcing, annual price negotiations, make vs buy decisions, supplier claim management, and many more are all examples of what procurement departments need to tackle on daily basis. Procurement professionals must also negotiate internally with stakeholders from engineering, quality, marketing, and other departments to incorporate their needs and requirements and thus make sure that procurements initiatives achieve a successful outcome.
Our Negotiation Excellence (NEX) is a dedicated team of INVERTO negotiation experts who bring game theory and psychological insights to the negotiation table. This expertise ensures the right choice of the overall approach to the negotiation and of the tailored negotiation strategy that takes full advantage of leverage, accommodates business needs, ensures stakeholder collaboration, and proactively addresses challenges.
How we support all aspects of procurement negotiations
We help our clients to choose the right approach ranging from conventional negotiations to auctions and thus including process driven negotiations, which incorporate the best of the two extremes. We develop the tailored procurement negotiation strategy, wargame it with our client, and negotiate together. We also look at the big picture by classifying suppliers and strategically using negotiation timing and negotiated business.
Negotiations are run in a conventional way whenever we or our clients are involved in one-on-one discussions with suppliers. These discussions might follow a predefined agenda, but otherwise do not comply with any strict process. Human psychology becomes particularly important, and decision trees help run negotiations in a proactive and not reactive manner.
Process driven negotiations
Negotiations that are driven by a process follow a predefined set of rules and are based on game theory insights. Depending on the business needs, these negotiations might include auctions, exclusive discussions with incumbents or strategic partners, incentivized supplier requotes against strategically chosen target lines, and many more.
Auctions take many shapes and forms. They might be dynamic with several bidding rounds like English or Dutch auctions or static like one-time second-price sealed bid auctions. Depending on the strategic importance of the business, supplier landscape, and our client preferences, we can conduct auctions in person, via email, or using an online platform.
Tailored negotiation strategy
No two business situations are ever the same, because needs and requirements differ across industries, clients, markets, products, etc. That is why, we always tailor negotiation strategies and process designs to our clients’ particular business situations.
Wargaming a negotiation strategy means putting yourself in he shoes of those who will be involved in negotiations and conducting a roleplay. Challenging the strategy this way is not only a great pre-negotiation practice, but also one of the best ways to assess its strengths and weaknesses.
Active negotiation support
Actual negotiations are the climax of the overall negotiation journey, and we regularly support our clients in this area, too. It might be only providing background support or negotiating on our clients’ behalf as well as negotiating together with our clients, which is arguably the most efficient way.
Different negotiation strategies need to be used with different suppliers or different classes of suppliers, because this incentivizes suppliers to provide their best offers. Classification might be about incumbents vs. new suppliers or be along other dimensions like past behavior regarding price increases, claim management, etc.
Timing matters and can be a decisive factor for the outcome of the negotiation. If suppliers’ existing contracts are coming to an end or the market is uncertain and many of their orders are being cancelled or our clients have a significant new business coming up, then suppliers are in a weaker bargaining position, and it might therefore be a good time to open negotiations.
It might be tempting to focus only on one piece of business or one topic in negotiations, but it often results in a loss of negotiation leverage. Bundling the upcoming new businesses makes the overall offer more attractive and increases a company’s bargaining power. Negotiations are also an opportunity to leverage new business to get better terms on the existing one.
Any successfull procurement negotiation follows the following principles
Principles of negotiations➔ Competition meets collaboration: Competitive spirit is an intrinsic part of negotiating. It turns negotiating into an exciting process – or even a game. As a rule, however, the “players” in negotiations do not have all the information, they are not aware of the full extent of the other party’s interests and do not know what they could still offer or what might be of interest to the other party,
➔ Remember, companies are made up of people: It is as simple and as complex as separating the private and professional parts of everyday life. Businesses are led by people, but if things get personal rather than stay professional, particularly during tough and possibly heated negotiations, people might get into the fight-or-flight mode. This stops them from thinking rationally, makes discussions unproductive, and can ultimately damage business relationships. Being tough on business topics but considerate and respectful with people you are negotiating with will help you get what you want and need.
➔ Choose empathy: Negotiating can be an emotional business. You might think you have to choose between being tough and detached to keep a clear head in negotiations, or being sympathetic to the other party and their feelings, if you want to reach an agreement, but it is not the only choice. You can also choose empathy. It will allow you to assert your interests without being too harsh and to show understanding of the other party’s feelings without having to feel the same way.
➔ Be proactive rather than reactive: It is important to prepare for all potential courses of action if you want your negotiations to succeed. It is not only about having a plan of action, but also about being proactive in preventing unfavorable developments and in steering negotiations in the right direction. The right trade-offs, the right people, the right timing, and the right approaches are the key to success. Thorough preparation will help you to establish what “right” means in your business situation.
➔ Never lie: There are many reasons why lying is a bad idea. It is hard to keep track, both of the bigger picture and of the consistency of your claims. You will look foolish if your lies are discovered, because there is no easy way to justify them. It is a tempting strategy in the short term but detrimental to your reputation in the long term. You might feel you either have to tell the truth or lie, but that is not actually the case - you can simply decide not to share everything.
Game theory and psychology as key elements in negotiations
Why does game theory play a key role in negotiations?
How does psychology affect negotiations?
PROCUREMENT: LET’S GET REAL!
Interview with our expert Daria Khromenkova on the subject of negotiations in procurement