Strategic Relationship Negotiation
Methodology
Strategic Relationships Sourcing Inc.
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Strategic Relationship Negotiation Methodology

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The SRS Negotiations Process (SRNP) is a step-by-step methodology to negotiating significant and mutually beneficial business relationships. It is intended for use with the SRS Strategic Relationship Model (SRM). The SRM defines a framework for the sourcing, management and operational alignment of strategic relationships.

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  1. 1. Strategic Relationship Negotiation Methodology
  2. 2. Strategic Relationships Sourcing Inc. Strategic Relationship Negotiation Methodology – Version 4.2 Page 2 of 18 SRS Confidential Table of Contents BACKGROUND............................................................................................................................................ 3 What is a Strategic Relationship?............................................................................................................... 3 NEGOTIATIONS GAP – DEFINITION....................................................................................................... 6 SRS STRATEGIC RELATIONSHIP NEGOTIATIONS PROCESS (SRNP) .............................................. 7 STEP I – GETTING READY ........................................................................................................................ 8 STEP II – GROUNDING..............................................................................................................................11 Negotiation Strategy..................................................................................................................................12 STEP III – NEGOTIATIONS .......................................................................................................................14 Negotiating Gap Elements.........................................................................................................................15 GUIDING PRINCIPLES...............................................................................................................................17
  3. 3. Strategic Relationships Sourcing Inc. Strategic Relationship Negotiation Methodology – Version 4.2 Page 3 of 18 SRS Confidential Background The SRS Negotiations Process (SRNP) is a step-by-step methodology to negotiating significant and mutually beneficial business relationships. It is intended for use with the SRS Strategic Relationship Model (SRM). The SRM defines a framework for the sourcing, management and operational alignment of strategic relationships. What is a Strategic Relationship? SRS defines a strategic relationship as “any close, collaborative commercial relationship between two or more parties in which the partners seek to achieve measurable benefits by leveraging their complementary skills, assets and competencies for the mutual benefit of the parties.” This may include the creation of strategic marketing or operational synergies, joint development and exploitation of complementary strengths, products and services, lower costs, enhanced operational performance, new market penetration or other competitive advantages. Traditionally, business arrangements embodied in the form of contracts, were created to represent the roles, responsibilities, services, products, levels of performance and the incentives or penalties associated with over/under achievement. The accelerated rate of change in technology, business cycles and operating conditions, and changes in the parties’ strategic directions in response to ever increasing competitive challenges, strained these business relationships to the point where success was, and is, limited to the very few. Further, and generally speaking, the structure of the
  4. 4. Strategic Relationships Sourcing Inc. Strategic Relationship Negotiation Methodology – Version 4.2 Page 4 of 18 SRS Confidential traditional arrangements revolved around “what is to be done” and “how it will be done”, defining the specifics of each of these in great detail and structuring the complete procurement process around managing risks associated with their achievement. A “strategic relationship”, as we see it, is one that focuses on achieving a set of value-driven results and therefore cannot be structured around the “what” and the “how”. The SRS Strategic Relationship Model attempts to free the parties from the uncertainty inherent in such arrangements. Aside from the initial objectives the relationship is targeted to achieve, all other aspects of the relationship are dynamic, continuously influenced and shaped by forces of change, including business conditions, enabling processes and technologies. The SRS Strategic Relationship Model (“SRM”) is a process- centric framework that enables the structuring and management of strategic relationships where continuous alignment with business and best practices may be required on a continuous basis. In other words, the SRM is a process-centric model that enables the management and alignment of deliverables (projects, products, services, etc.) with relationship objectives, while continuously measuring and analyzing the benefits derived by deploying a specific set of enabling technologies. Even the stated objectives or the desired benefits articulated at the start are still subject to the forces of change and to the requirements of continuous alignment throughout the engagement. The SRS Negotiation Process (SRNP) begins with the assumption that an Arrangement In Principle (AIP) has been arrived at by the parties involved. Generally, the AIP is the result of a Sourcing initiative in the form of: Direct Engagements – An organization has engaged another to investigate potential benefits resulting from the supply of products and services. In
  5. 5. Strategic Relationships Sourcing Inc. Strategic Relationship Negotiation Methodology – Version 4.2 Page 5 of 18 SRS Confidential these types of engagements a value proposition has been articulated and a draft outline of the business arrangement including expected benefits has been developed and agreed to by both parties. J.V./Alliance – Parties have engaged in discussions, agreed on a go-forward strategy, developed the alliance business case and business plan and have signed a Memorandum Of Understanding. Common Procurement – This type of an open competitive process is usually centered on the construction of a Request for Strategic Relationship Proposal (RSRP), receiving and evaluating vendors’ responses, creating a short list of qualified vendors, and deciding to negotiate with the best respondent(s). The RSRP content (including requirements, anticipated results and Terms & Conditions) coupled with the vendor’s response (written and oral) to the RSRP, is in effect an Arrangement In Principle. The SRS SRNP can still be deployed even when the Sourcing process is carried out by means of a traditional competitive RFP. This is true particularly in the case where the RFP documentation and procurement process allowed for flexibility of the final business arrangement. Such flexibility may potentially impact business arrangement initial scope, solution requirements, and business & governance models of the business arrangement.
  6. 6. Strategic Relationships Sourcing Inc. Strategic Relationship Negotiation Methodology – Version 4.2 Page 6 of 18 SRS Confidential Negotiations Gap – Definition A ”negotiations gap” is the difference between the positions of the various parties involved in the business arrangement. The goal of the negotiation process is to bridge or eliminate this difference in a manner where all parties can achieve their respective objectives. At any instant in time during the negotiation process, “gaps” can be attributed to any number of factors, including different goals and objectives, failure of the parties to clarify their respective understanding of terms and how they are used in particular industries or business segments, or perceptions stemming from communications gaps and a lack of agreement or understanding (or one-sided understanding) of the fundamental conditions that would make the proposed business arrangement a great success for all. It is through the open good faith exploration of these issues by the parties seeking to learn about each others’ motives, objectives, expected benefits and risk mitigation factors, that the negotiations’ gap is narrowed and the desired benefits of value-driven strategic relationship are achieved.
  7. 7. Strategic Relationships Sourcing Inc. Strategic Relationship Negotiation Methodology – Version 4.2 Page 7 of 18 SRS Confidential SRS Strategic Relationship Negotiations Process (SRNP) The SRNP is a three-step process designed to provide a workflow template for negotiation activities:  Getting Ready – preparing for negotiations  Grounding – verifications of various negotiation positions  Negotiations – process for reaching agreement on gap elements The chart below outlines an overview of the SRS SRNP. The remainder of this document will delve into the process, issues and guiding principles of the SRS SRNP.
  8. 8. Strategic Relationships Sourcing Inc. Strategic Relationship Negotiation Methodology – Version 4.2 Page 8 of 18 SRS Confidential Step I – Getting Ready This is by far the most important step of the negotiation process. Each party must fully understand its own objectives before entering into the negotiation process and must be able to document its view of the arrangement that would be most suitable to achieve the desired results. Gap Identification – Depending on the procurement process used, and the market testing completed, evaluation and selection, the party is required to identify, understand and document the “base gap” as the difference between the following two items:  Desired business arrangement – base business arrangement at the lowest level of detail possible; and  Perceived business arrangement – what is perceived to date to be the other position based on written and verbal communications, RSRP response, evaluation and selection processes. The gap should be documented in the form of a table showing areas of difference as well as areas of perceived agreement. This will be used to keep a picture of the complete deal in mind at all times as well as for verification purposes described later in the process. Business arrangement (deal) and gap elements should be categorized as follows:
  9. 9. Strategic Relationships Sourcing Inc. Strategic Relationship Negotiation Methodology – Version 4.2 Page 9 of 18 SRS Confidential  Requirements/actions  Base service levels/metrics  Roles & responsibilities/division of responsibility  Operations management  Financial  Relationship management/governance  Terms & Conditions The areas above are interdependent and will in the end form an integrated business arrangement. However, and most likely, this interdependence will be used as a leveraging factor to resolve complex issues at negotiation time. Management Expectations – In a strategic sourcing engagement, the requirements and evaluation criteria are the means to identify the other party with whom a business arrangement is then negotiated to realize the desired business benefits. As well, and in common procurements where vendors are asked to come forward with creative solutions to a particular problem, it is understood that different types of solutions may require different business arrangement structures. In such cases, the negotiating team may have the ability to alter the scope or rollout of the solution so that overall risk of not achieving the desired results is contained. For this reason it is essential to capture management expectations in terms of the expected results and risk tolerance levels. Risk tolerance levels need to be identified and clearly understood for each element of the business arrangement and gap analysis. Interviews with senior functional managers is one way of understanding management expectations and how far they are willing to go on the risk scale. Negotiation Team – The next step is to identify and secure the skills and management roles required. The following guidelines should be carefully considered:  Negotiation teams require decisions to be made fairly quickly, and as such, the presence of decision-makers with functional responsibility for the business arrangement is ideal. Alternatively, a decision making process is defined, approved and communicated to the other party. At a minimum, the team should be composed of: – Team Leader – the role of the team leader is to lead the negotiation process. A team leader has a good vision of what the overall deal will look like, understands the gap in all areas, possesses the leadership, technical know how, and excellent communication skills – PE & PM – Legal Counsel – Financial Architect – Functional Management or Decision making process or both  Ensure that the Program Executive (management & P/L responsibility) and the Program Manager (operational responsibility) are present. This is very crucial to the success of the project. Significant numbers of arrangements, and particularly during the first 18 months, suffer due to
  10. 10. Strategic Relationships Sourcing Inc. Strategic Relationship Negotiation Methodology – Version 4.2 Page 10 of 18 SRS Confidential lack of understanding of what the “deal” is and how each party is able to achieve its objectives under the structure of the arrangement.  Inclusion of Subject Matter Experts. Outside of the core team, experts in the areas of industry norms, and technical support should be readily available to explore a particular technical issue in greater detail. Preliminary Schedule – A preliminary schedule should be developed based on the current understanding of what the gap elements are and how critical or deep the issues may be. The final date for reaching an agreement should be flexible. “Drop dead” dates are not recommended, since they could potentially cause the process to take over completely and negatively influence the team’s sense of objectivity. Other Party PE & PM – Ensure the other party’s Program Manager and Program Executive are present at all negotiation sessions. We estimate that in 90% of the cases the relationship will suffer beyond repair should the PE & PM be absent from the negotiating table. Their role is to continuously apply the capability test and ensure all discussed changes are technically feasible, manageable and fall within their P&L guidelines or corporate policies. Communication – Communicate Team Members and schedule.
  11. 11. Strategic Relationships Sourcing Inc. Strategic Relationship Negotiation Methodology – Version 4.2 Page 11 of 18 SRS Confidential Step II – Grounding The purpose of this step of the SRS Strategic Relationships Negotiation Process (SRNP) is to establish a common understanding of what the ”gap” really is. The analysis and preparations of the “gap” performed in Step I is merely The best available estimate of what the difference in positions is and, in most cases, does not reflect the real agreement or disagreement of the parties in relation to specific elements of the gap. This step is conducted via the first face-to-face meeting between the teams. The following is a draft agenda for the first negotiation session lead by the negotiations Team Leader:  An overview of the negotiations process. Ensure that all members of both sides are in agreement with it.  An overview of the Schedule  Describe the desired arrangement at very high level focusing on the objectives and expected benefits The next step is for the Team leader to walk through the documented Base Business Arrangement and for each element:  Obtain common understanding of the element  Obtain acknowledgement of no issue if no perceived gap exists  Obtain acknowledgement of the existence of an issue if gap is perceived to exist
  12. 12. Strategic Relationships Sourcing Inc. Strategic Relationship Negotiation Methodology – Version 4.2 Page 12 of 18 SRS Confidential  Do not engage in solving any issues at this time. It is too early to put a cohesive strategy together that combines multiple issues at this time. The objective is to obtain a clear understanding of what the issues are. Once the verification scan is completed, go back and jointly rank the issues agreed to (to be issues) into: deal breakers, majors, and minors. In some cases one may choose to conduct this process in parallel with the verification scan exercise. In complex situations, we recommend the negotiating parties to perform the ranking in a separate step as it will give negotiation teams a chance to come back and revisit the areas of concern. We believe you would receive a different, more reliable reaction or assessment if done separately rather than in one single step. It is recommended that a soft copy of the Business Arrangement be updated in real-time and distributed at the end of each session. The first session of negotiations is most likely where members of the joint teams have met for the very first time. Scheduling a social function is a way for members to get to know each other a little bit better. This will definitely have a positive impact on the overall negotiation process. Negotiation Strategy Now that we know what the real gap is, the team (our team) will begin putting together the Negotiations Strategy. For each gap element identify what we will call the minimum and maximum tolerance or impact levels. Gap elements could either be positive or negative. Positive if the other party has already offered in their communications a level that is higher than that expected at some level of additional effort or cost. Negative is clearly when they fall short on the requirement. Minimum – The furthest the team will go before the issue at hand would begin to negatively impact the objectives or the results desired (unless persuaded otherwise by the other party). Maximum – The point where additional gains would add little or no value to reaching the objectives or the desired results (unless persuaded otherwise by the other party).
  13. 13. Strategic Relationships Sourcing Inc. Strategic Relationship Negotiation Methodology – Version 4.2 Page 13 of 18 SRS Confidential For each gap element document the driving factors or rationale used to arrive at the minimum and maximum tolerance levels. These will prove to be instrumental during the face-to-face negotiation discussions. Armed with this analysis the team can now build a real strategy. The team will now develop an Enhanced Business Arrangement based on what the tolerance levels are and keeping in mind what the real issues are. This Enhanced Business Arrangement, developed in this phase is the deal we really want. Now let’s go and negotiate it.
  14. 14. Strategic Relationships Sourcing Inc. Strategic Relationship Negotiation Methodology – Version 4.2 Page 14 of 18 SRS Confidential Step III – Negotiations This step of the process is carried out during face-to-face sessions and individual team breakout sessions. At the first session an agreement among joint team members would need to be reached as to what type of issues the team will begin to address. There are two strategies that can be implemented here.  Begin with minors, majors, then deal breakers This approach is typically used where small measurable steps have great positive impact on the politics of the negotiations. It can be used where the parties are negotiating an arrangement in which “trade offs” are expected to be necessary to reach agreement, or where the parties do not know each other and it is important to build relationships of trust and confidence during the negotiation process. This is a “soft” approach where the main purpose is building a collaborative strategic relationship early.  Begin with deal breakers, majors and trade off the minors This approach is generally used when a party does have other options or potential alternatives and where the prospect of not having a deal has a greater impact on the other party. It is true that this team’s intent and spirit is channeled towards a win-win result, particularly via this process, however, the other party may still be adhering to old negotiating practices. Removing the deal breakers early in this case will provide: – speed of negotiations – signify required commitment – a no-deal scenario is determined very early in the process The risk with this approach is that it may strain relationships early which may require greater relationship building attention later in the negotiation process.
  15. 15. Strategic Relationships Sourcing Inc. Strategic Relationship Negotiation Methodology – Version 4.2 Page 15 of 18 SRS Confidential Negotiating Gap Elements For each element, attempt to understand the underlying reasons causing the issue to appear as it is. Further attempts should be made to understand the conditions driving the underlying reasons, which are in turn manifesting themselves in the form of an issue. The superficial answer is always given first either because people just simply don’t know (un-communicated Corporate Policy), or do know but avoid the answer. One can’t resolve an issue if this step is not undertaken. It is an attempt to open up and understand the motives behind the issue. Just as important, is “who” the issue is important to. For example: Is it a technical or delivery issue? Is it a company deal approving body guideline breaker? Or does it lie outside the risk envelope defined by management? All these are possible reasons, but one will need to understand which part of the organization is concerned with the issue at hand. This holds true for both sides of the negotiating team. The team now begins to develop mitigation strategies for the drivers of the issue in the form of “what if we implemented an operational process to....” or “what if we refrained from performing this particular function”. The idea is to test the “what ifs” with the other team and gauge their level of support for the mitigation strategy. This process continues until an agreement in principle is reached, but decision is not yet made. If the issue is a stand- alone issue then a decision can be made and the issue is then removed from the gap list. Otherwise a formal decision may be delayed until other relating issues are also agreed to. Joint negotiation sessions are very intense and can be strenuous on the people involved. It is recommended that more than half the time be allotted for each team to re-group separately and engage in discussions with respective management outside the core group. They may find many
  16. 16. Strategic Relationships Sourcing Inc. Strategic Relationship Negotiation Methodology – Version 4.2 Page 16 of 18 SRS Confidential answers to a lot of questions at hand. The reason being, and in particular large corporations, the policies and guidelines are numerous and executives outside the core team can reflect on their experiences to assist the team in reaching resolution to issues at hand.
  17. 17. Strategic Relationships Sourcing Inc. Strategic Relationship Negotiation Methodology – Version 4.2 Page 17 of 18 SRS Confidential Guiding principles Open communications – team members on both sides need to be open to answering any questions, particularly those that attempt to go behind the scene in order to understand the driving factors of a particular issue. Positive orientation – team members on both sides need to keep in mind the concept of “Sustained Mutual benefit”. Not every issue may be resolved into a mutual benefit, but the complete arrangement must be seen and understood to be mutually beneficial tactically and strategically for both parties. If at the end of the exercise one party believes to have had the better deal and cannot clearly articulate the benefits received or will be received by the other party, then something went wrong along the way. Understanding – “Seek first to understand then to be understood” from “The 7 Habits of Highly Effective People” is key. Listening leads to understanding, which will lead to resolution. Apply the Capability Test – do not accept the resolution of an issue in your favor until you fully understand that the other party has the capacity and ability to deliver on it. Failing to do so is a sure path to failure. The other party might be pressured by the political environment (the deal will help their stock price, or improve their market image) to accept the resolution of an issue knowing that they will have difficulty delivering it. The burden is on the recipient of the service, product or solution to investigate and feel comfortable with the ability of the other party to deliver. Emotions – always deal with the issues, not the personalities communicating the issues. Social discussions – end every negotiation session with a social discussion or event.
  18. 18. Strategic Relationships Sourcing Inc. Strategic Relationship Negotiation Methodology – Version 4.2 Page 18 of 18 SRS Confidential Appendix A – Negotiation Process Presentation

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