SME Guide to Negotiating with Suppliers

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Businesses of all sizes enter into commercial transactions with suppliers regularly in order to get the goods and services they need to operate, and generate a profit. Yet are we doing a good job of ensuring that we are getting the best possible deal?

This paper draws together the thoughts of purchasing managers and negotiation teams from a range of industries to help small to medium sized businesses better understand how to plan and conduct professional negotiations with suppliers. Negotiations which when done well can save thousands on the bottom line of a business each and every year.

Issues addressed in this guide include:

? Why sales and negotiation are not the same thing
? How to be polite and still get what you want
? Planning negotiations with suppliers
? Managing the negotiation process
? Tricks of the trade

Let?s face it: your bottom line will always benefit from smart sustainable deals to acquire the products and services you need to do business.

This guide has a single objective: helping business owners to improve how they negotiation with suppliers for a better outcome by using a structured negotiation process couple with some simple tools and techniques.

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SME Guide to Negotiating with Suppliers

  1. 1. An SME guide to negotiating with suppliers Accretive Pty Ltd July 2013
  2. 2. 2 CONTENTS 1 – INTRODUCTION ...................................................................................3 2 – WHAT ARE THE ATTRIBUTES OF A NEGOTIATOR? .................................4 3 - ARE YOU JUST TOO POLITE?..................................................................5 4 - AREN’T SALES AND NEGOTIATION THE SAME? ......................................7 5 – MEASURES OF A NEGOTIATION............................................................9 6 – PLANNING A NEGOTIATION ...............................................................10 7 – THE NEGOTIATION PROCESS ..............................................................14 8 – HOW DO YOU HANDLE YOURSELF? ....................................................18 9 – TRICKS OF THE TRADE ........................................................................20 11 - CONCLUSION....................................................................................28 12 - ABOUT ACCRETIVE RESEARCH...........................................................29
  3. 3. 4 2 – WHAT ARE THE ATTRIBUTES OF A NEGOTIATOR? Healthy, productive business relationships are said to be built on five key facets1 :  Respect  Concern  Humility  Generosity  Appreciation While it is true that any good relationship is built on these factors, you also need to remember that when it comes to negotiation, you don’t need to leave these personal attributes at the door of the conference room. 1 http://voices.yahoo.com/5-important-facets-healthy-productive-business-9140467.html
  4. 4. 6 Humble – Humility is not being proud, conceited, arrogant or servile. It is not about you. Being humble in negotiations can be hard, but it requires your needs to be considered alongside the needs of others. Your $10,000 software order may be important to you, but compared to the $10m contract of a hospital it is secondary in the eyes of the supplier. A humble negotiator will accept the relative size difference of accounts, and try to ensure they get a fair deal, not be servile to a large account. Generous – Where you can afford to be, give up on the things that don’t count to you. Moreover, be prepared to be flexible with vendors. Your generosity on some non- financial metrics can and normally will go a long way towards achieving a successful outcome which both parties are willing to accept. Appreciative – To enter into a negotiation requires courage. It means that you might not get everything you want (as a supplier or purchaser). You need to appreciate the particular circumstances of the business with whom you are negotiating, and show some appreciation of what it has taken them to get to the table, and once the deal is agreed to – show some appreciation. Bottom line, you have to be assertive, but not arrogant. You have to be polite, but not servile. You need to be respectful, yet determined. Sounds difficult? Good preparation and a sound understanding of negotiation theory can get you a long way towards this utopian goal… the rest is up to you.
  5. 5. 8 Negotiation is about achieving what you need from a transaction. Vendors often see it as a stalling tactic in order to put the salesperson off their pitch. Used poorly, it is. Used well, negotiation is an art which can deliver to the customer what they need, when they need it at a price which they accept in a way which enables both parties to feel as though they got a fair deal.
  6. 6. 10 6 – PLANNING A NEGOTIATION A rather crude, but time-honored approach to negotiation has been a simple 3 step process:  Get the vendor into your offices (the home ground advantage)  Beat them up  Get as much as possible for as little as possible This is a somewhat simplistic view of negotiation which does not apply the principles of respect discussed in chapter 4. The principle issue with this approach is it sets up an adversarial relationship where one party typically feels “screwed down”. This often leads to growing resentment and a feeling of lack of respect fostered by one party exerting their dominance on the other. The outcome is often a “work-to-rule” mentality which is dominated by a culture of not giving anything away – simply because it does not make economic sense to do so. The ideal situation is far more elegant than a mere price-led agreement. It sets up an environment where both parties are willing to work together. It might not be a total “win- win”, but where one party is willing to give a lot more than another and still feels the agreement is both palatable and sustainable, and then it is a great negotiated outcome for both parties. HOW TO PLAN A SUCCESSFUL NEGOTIATION? First, you need to do considerable homework. Best way to prepare is to be able to answer a series of questions:
  7. 7. 12 an outcome (i.e. tell your colleagues you got a “great deal” and actually be telling them the truth).  What if they won’t come to the party (BATNA) – Have a clear view of what to do if you don’t get your deal (especially the LAA). In some situations (e.g. dealing with a monopoly) you may need to “suck it up” and pay. Otherwise, be clear on how to walk away (and to whom). WHO ARE YOU DEALING WITH? Who is on the other side of the table in the negotiation? What drives their business? What is their reputation? What homework have you really done on their ability to deliver what you want? On multi-million dollar deals the process of researching your counterpart in a negotiation can take weeks. For smaller deals, you still need to be aware of who you are dealing with to ensure you get a great outcome for your business without increasing your risk profile.
  8. 8. 14 7 – THE NEGOTIATION PROCESS By the time you get to the actual meeting(s) you should have completed all the research necessary to successfully complete the negotiation. Your information should be in a format you can quickly review during the discussion. Sometimes printing it in a slightly larger font makes it easier when reviewing details at speed – avoiding costly mistakes. So what’s next? THE NEGOTIATION PROCESS  There are normally three phases to any successful contract negotiation: Offer, Consideration and Acceptance. As such your negotiation process should follow this same process: First meeting (understanding the offer);  Subsequent meeting(s) if required (considering the offer); and  Reaching agreement (accepting the offer). THE FIRST MEETING Here is where you establish the rules of engagement. The first meeting should be well planned and executed. It lays down the framework for all future conduct the discussions. Thus, the first meeting should have an agenda
  9. 9. 16 ready for the meeting (based on the action items from the previous meeting). If somebody isn’t ready – reschedule to avoid wasting time. If a vendor is consistently rescheduling, question why. Are they simply delaying to get you into a position where you are forced to sign a less than satisfactory agreement? Don’t over old ground – Don’t revisit territory you have already agreed. Move towards a completed negotiation. If you are dealing in a complex matter, use a checklist to help keep track of what has been agreed and what issues are outstanding. Allocate responsibilities – at the conclusion of each meeting ensure an action plan is produced and circulated. This should include both the tasks and who will be completing the activity by when. It avoids miscommunication and work avoidance when tasks are documented and circulated to all present. This includes who will distribute the minutes (and by when). YOU AGREE – NOW WHAT? Congratulations. After meetings and the occasional tense moment, you will eventually get to a point where you are in agreement with both the terms and condition of the purchase and/or the price. Move quickly to ensuring you agree the terms of the contact. Sign it – pay for it and move forward. It is unlikely this is the only issue pressing on your agenda. Letting the size and magnitude of the deal be a guide, acknowledge that you have achieved something meaningful when you successfully conclude a negotiation. It may be as
  10. 10. 18 8 – HOW DO YOU HANDLE YOURSELF? It can be difficult to separate what goes on in a meeting room to what goes on outside. The conversation and tone you take outside the physical meeting can be very different from the tone and messages that you need to deliver within the meeting room environment. A person that separates these two environments will perform much better than a person who cannot. This does not mean you have to be less than genuine in all circumstances. Transparent “fake” behaviour can and will be exploited by others. Remember, being genuine in the meeting room often will catch your counterparts by surprise, as they typically expect less than forthright behaviour. In all circumstances you need to retain a professional demeanour. Some people are renowned for table thumping, shouting, and other confrontational behaviour to get their way in a negotiation. Remember it is a tool they are using. Remind them their behaviour makes it difficult to conclude an agreement and if they persist, ask yourself why you want to deal with a business where this is the behaviour they demonstrate even before you are a client!
  11. 11. 20 9 – TRICKS OF THE TRADE Let’s now have a look at some tricks of the trade which can help both move a negotiation along and also bring about disclosure of information you need to make a decision: DON’T PUT AN OFFER ON THE TABLE FIRST It’s a generalisation of course, but the simple phase “make us an offer” is used in everything from used cars to donations for “free” software. While tempting to get the price discussion rolling, a better approach is to respond “give me a price and let’s take it from there”. Discipline is required to not be the first to put a price on the table. Why? You are being forced to disclose a position which you are comfortable with (which in turn gives away a lot of information about your budget). In giving away the first price point, you also avoid a vendor having to reduce their sale price by more than is necessary in order to get a deal. The benefit to you as the consumer is you have disclosed nothing and you have not needed to haggle over price. Ultimately, you have received a great insight into how flexible the vendor is. Conversely, if you are the vendor, you have forced the customers hand without having to give anything away.
  12. 12. 22 THE VTP PRICING MATRIX A simple tool which can help you get a better understanding of how an item is priced is a Volume/Tenure Pricing Matrix (or VTP). This simple chart can help you gain an understanding of how and where economies of scale start to generate better pricing outcomes. Order Volume/ Tenure One-Off 1 year 2 years 3 years 4 years 5 years 1 unit $X.00 (base price) $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) 10 units $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) 100 units $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) 500 units $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) 1000 units $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) $X.00 (disc X%) Even when a vendor is reluctant to utilise a VTP tool, you can create your own, simply by understanding the single unit price, and what volume/tenure discounts you are offered. It is then a case of looking at the table to see if pricing is advantaged at the quantity and tenure you require. WHAT ARE YOU OFFERING? It is unusual that you cannot offer something which is value to a supplier. It can range from being referenced on a website, a customer list, a referral… there are many creative opportunities to provide something of value with little cost to yourself.
  13. 13. 24 simple as an auto-renewal of a contract or a financial bonus payment for delivering ahead of time and below budget. In short, using sticks and carrots can be a great way to balance out a contract negotiation. Think about it… if somebody delivers more than you ask at a price no more than you agreed, isn’t that worth something to you? LEAVE SOMETHING ON THE TABLE While it might be counter-intuitive, never try to make all the money that’s in a deal. Let the other party make some money too3 . If you gain a reputation for making all the money on the deals you make, you won’t make many deals. A negotiation should always seek reasonable middle ground between to two parties. In a commercial sense it is all about finding a place that sustainable for both parties. 3 J Paul Getty antiquity collector
  14. 14. 26 o What is considered up front and what is considered reoccurring costs?  Competition o Who do they compete with o Why did you select this company over them o What would you need to do to use the competitor  The Sales Team o Did they approach you or did you approach them o What is their method of remuneration o What is the industry standard for mark-up  Economic & Environmental Factors o What is the fixed component of the negotiation o What is the variable component o What may impact production/delivery – how do you manage this? o What is happening in world markets that may impact your vendor? o Are exchange rates a factor? How do you limit their impact?
  15. 15. 28 11 - CONCLUSION The role of negotiation in business cannot be under- estimated. In an economic environment where slender margins are coming under increased pressure; the ability to extract additional value from vendors is critical to the survival of many businesses. In addition, the need of vendors to have a realistic negotiation practice in place can be the difference between reaching and missing sales targets. By employing some simple tools and ensuring appropriate preparation, the art of negotiation can successfully be incorporated into business practices. The objective: creating an environment where vendors and customers can have an open, honest conversation about delivering utility.
  16. 16. 30 ©2013 Accretive Pty Ltd PO Box 756 St Ives NSW 2075 AUSTRALIA www.accretive.com.au info@accretive.com.au
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