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Negotiation in Procurement -IQPC mining procurement and supply forum

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Gaining advantage in Procurement through effective negotiation …

Gaining advantage in Procurement through effective negotiation

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  • 1. Peter Spence SPANS www.spans.com.au 03/25/1403/25/14 11 Copyright © Peter Spence, SPANS 2013 Building Procurement Capability and Success through Effective, Systemic Approaches to Negotiation
  • 2.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 22
  • 3.  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. 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 33 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?
  • 4. If not, how do you validate, support and evaluate the level of competency in the approach you are taking? 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 44 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?
  • 5. 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 55 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
  • 6.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 66 What happens when demand picks up and supply is limited? Or is it? How well does your negotiation approach serve real issues beyond price?
  • 7.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 77
  • 8. 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 88 Interest Based Systems Sound and Strong Power/Rights based systems Distressed, fragile/weak
  • 9.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 99
  • 10.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 1010 why?
  • 11.  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. 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 1111
  • 12.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 1212
  • 13. Some procurement professionals find it difficult to break from 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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 1313
  • 14. ◦ 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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 1414
  • 15.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 1515
  • 16.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 1616
  • 17.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 1717
  • 18.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 1818
  • 19.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 1919
  • 20.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 2020
  • 21. Part of changing the game is shifting the mindset from thinking of suppliers/buyers as adversaries to approaching them as partners in the supply chain. Supply or procurement relationships that 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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 2121
  • 22.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 2222
  • 23.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 2323 How do we change the game to drive joint supplier/customer innovation and create value while still achieving substantial cost savings?
  • 24. Mutual Gains Negotiation is based upon the Principled Negotiation Theories of Fisher, Ury and Patton. 1. Separate people from the problem 2. Focus upon interests, not positions 3. Invent Options for Mutual Gain 4. Use Objective Criteria to set legitimate principles for decision making 5. Improve your BATNA 2424 Copyright © Peter Spence, SPANS 2013
  • 25.  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 2525 Copyright © Peter Spence, SPANS 2013
  • 26.  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 2626 Copyright © Peter Spence, SPANS 2013
  • 27.  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). 2727Copyright © Peter Spence, SPANS 2013
  • 28.  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 2828 Copyright © Peter Spence, SPANS 2013
  • 29.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 2929
  • 30. 1. Prepare for Negotiation – Most of the success of negotiation is attributed to preparation 2. Create Value 3. Distribute Value 4. 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) 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 3030
  • 31.  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
  • 32.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 3232
  • 33. Individual Barriers to Mutual Gains Negotiation – why the legacy and cost of distributional bargaining prevails:  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 3333 Copyright © Peter Spence, SPANS 2013
  • 34.  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) 3434Copyright © Peter Spence, SPANS 2013
  • 35. 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 3535 Copyright © Peter Spence, SPANS 2013
  • 36.  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 Copyright © Peter Spence, SPANS 2013
  • 37. 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 3737
  • 38. 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 3838Copyright © Peter Spence, SPANS 2013
  • 39.  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 3939 Copyright © Peter Spence, SPANS 2013
  • 40. 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 4040 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
  • 41.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 4141
  • 42. 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 4242 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)
  • 43.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 4343
  • 44.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 4444
  • 45.  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 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 4545
  • 46. 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: pmspence@bigpond.com website www.spans.com.au 03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 4646