The Untapped Power of Dynamic Negotiation: See the World from McKinsey’s Perspective
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With decades of experience, often behind the scenes, helping the world’s greatest brands identify, optimize, and execute on sourcing transformation projects, McKinsey & Co are perhaps the world’s experts on sourcing optimization, dynamic negotiation, and unlocking the value of supplier relationships. Join Teresa Liptak, Expert Operational and Digital Procurement, from the McKinsey Procurement Practice and Chetan Ghatge, Associate Principle at McKinsey.
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The Untapped Power of Dynamic Negotiation: See the World from McKinsey’s Perspective
- 1. The Untapped Power of Dynamic Negotiations See the world from McKinsey’s perspective TERESA LIPTAK Expert at McKinsey & Company
- 2. The Ultimatum Game… The game is a simple "take it or leave it" exercise played in pairs Player A is "given" $100 (Player B is aware of how much A has) Player A makes one offer how to split the money with player B Player B can only accept/refuse the offer There is ONLY 1 offer / response For a “deal” to happen – Player B has to accept the offer, otherwise both players get nothing 2SOURCE: “The Ultimate Game” teaching notes JK Murnighan (JL Kellogg GSM, NWU)
- 3. How Does the Game End? Only if an agreement is reached between you, you get to “keep” the money and split it in the agreed manner If agreement is not reached, then you have to return the money to the facilitator SOURCE: “The Ultimate Game” teaching notes JK Murnighan (JL Kellogg GSM, NWU)
- 4. Debrief From the Game Strategies Behavior SOURCE: McKinsey & Company Negotiations Institure
- 5. SOURCE: McKinsey & Company Negotiations Institute Adapting a negotiation to a dynamically changing environment in which either new opportunities appear or levers change
- 6. SOURCE: McKinsey & Company Negotiations Institute ArtScience
- 7. SOURCE: McKinsey & Company Negotiations Institure Learnings From the Game Pairs 3600 Fake money 57-59% Real money 59-63%
- 8. Raw Materials Machines Business Models SOURCE: Frank, M; Roehrig P.’ Print, Ben (2017) What To Do When Machines Do Everything 1800s Coal 1900s Oil, Steel, Electricity 2000s Data
- 9. Live poll result1-5A 6-10B 11-15C 16-20D 20+E How Many Negotiations Have You Done in the Past Year? 0A B C D E ScoutSpark.participoll.com
- 10. How Much Time Do You Spend on Average Preparing For a Negotiation? Live poll resultNoneA <1 dayB <1 weekC No more than 2 weeksD >2 weeksE 0A B C D E ScoutSpark.participoll.com
- 11. What is The Most Advanced Technology You Are Using For Procurement Today? Live poll resultSourcing toolsA RobotsB Spend analytics w/ artificial intelligence C eCatalogsD All of the aboveE 0A B C D E ScoutSpark.participoll.com
- 12. Historical spend data Total Cost of Ownership model Linear performance pricing Should-cost model What Do I Mean By Fact Base? Industry standard levers and benchmarks Post-bid analytics
- 13. Think of Your Fact Base Like a Movie Historical spend data Benchmarks and industry knowledge Representative market basket RFP Round 1 Post-bid analytics RFP Rounds 2+ Supplier feedback Award scenarios Negotiations ContractCategory specific levers Source-to-Contract Value Chain
- 14. Historical Data, Industry Standard Levers and Benchmarks Demand 6 7 8 9 Align variance of rates between similar roles Identify opportunities to allocate resources on high rate locations to cheaper areas (location optimization) Identify savings that can be realized by consolidating similar roles with suppliers to leverage volume discounts Identify savings if the overtime hours are shifted to standard time hours by hiring more temps 1 2 3 Commercial 4 5 Conduct comparison against market rates Align transactional pay rates to benchmark pay rates Align transactional mark-ups to benchmark mark-ups Develop harmonization of rates (rate arbitrage) Investigate the difference in cost if high-spend contractors are made employees Levers Process 10 Identify contractors by tenures who pose the risk of co-employment 11 Align overtime hours to acceptable user defined limits to realize savings 12 Rationalize and align contractual mark-ups, rates and service levels to identify gaps and capture value
- 15. Post-Bid Analytics Quickly pull up side-by-side comparison of supplier bids Automatically review bid coverage and pre-set scenarios to get a sense of the best pricing options Develop should cost modeling and compare prices to current or set pricing options Quickly provide custom feedback reports to suppliers on their competitiveness
- 16. LEAST MOST Most Desirable Outcome (MDO) • Your absolute best possible agreement for us and stands as a benchmark Least Acceptable Agreement (LAA) • Your walk away point, consisting of terms that we must achieve for the category. Settling for anything else is not acceptable These two extremes will define the opening position and the point at which further concessions cannot be made Should-Cost Models and Other Data to Define Strategy
- 17. Buyer Buyer MDOBuyer LAA Supplier LAA Negotiating Window Negotiation strategy Vendor Supplier MDO Use LAA to Define Your Negotiating Window
- 19. Just try it Quick prototypes Failing quick and often Measure results Market results Untap the power of dynamic negotiations Develop your vision Everything you do is data first Assess your digital maturity Technology Data and analytics Organizational culture Capabilities
- 20. What We Learned Today 20 A dynamic negotiation means being able to adapt to a dynamically changing environment Having a data first mindset and technology enables dynamic negotiation capabilities The untapped power of dynamic negotiations is yours for the taking; use technology to get you there Companies like Scout and others in the industry are leading the wave into digital transformation
- 21. 21 Why Dynamic Negotiation is Transformative Date: Tomorrow Time: 3PM Location: Joe Henderson Lab (JHL) Objective: Let’s talk Best Practice with regards to working with suppliers during the negotiation process. Join Jason Waller of McKinsey, and Sandra Tedt of Scout as they share lesson learned on sourcing optimization, dynamic negotiation, and how to unlock the value of supplier relationships. We encourage you to bring your tips and questions to this insightful discussion. Want to Learn More?
- 22. Thank You! Teresa Liptak| Teresa_Liptak@mckinsey.com
Editor's Notes
- Let’s start with a game (EXPLAIN SLIDE) We are going to play this in our heads
- How does the game end? (EXPLAIN SLIDE) If you were player A, what offer would you make? If you were player B, what offer would you accept?
- Strategy A usually adopts either a “50-50” or “less than half” strategy B rarely rejects 50-50 offers, deal is as equal and fair Often rejects offers of “less than half” Behaviors The do not make sense based on a rational economic point of view of the world. In this game, what didn’t player A and B have? Data Fact base Time to prepare I’ll come back to the game in a bit
- Now you are probably sitting here saying, what is a dynamic negotiation? (EXPLAIN SLIDE)
- Second, what do I mean by the untapped power of dynamic negotiations? Negotiations are a mix of art and science. Today = Science = what is needed to have a dynamic negotiation; data, a robust fact base, and technology to get you there People are not tapping into the power of dynamic negotiations today because they do not have the data, fact base or technology needed to drive them ART: softer side of negotiations (including the decisions we take based on the facts)
- Let’s go back to our game for a second and look at some metrics. (EXPLAIN SLIDE) Imagine walking into a negotiation knowing you only have ~60% chance of making a deal Let alone whether or not that deal is favorable to you. You must be well prepared for a negotiation. Understand that… Only a very small number of people actually act in an economically rational manner People have very different views on what win/win means Only a very small number of people actually have a fact base and prepare appropriately for negotiations This is a quick game, but it isn’t that far from reality for some people. It was an extreme example of what not to do
- Now that we know what a dynamic negotiation is and why people aren’t tapping into them Take a look at history (EXPLAIN THE SLIDE) 1800s = coal, steam engine, and rail 1900s = oil/steel/electricity, the automobile, and mass assembly or the production line 2000s = data, systems of intelligence that combine hardware/AI/software/data to create value, monetization of services and solutions based on systems of intelligence is the business model We are in the 4th industrial revolution and data is our raw material. Now many of you may be very underwhelmed at this point. You are probably thinking ‘Tell me something I don’t know’. To be honest, I may not (laugh). I will however share with you a perspective on how to use data and technoloty to get ahead
- I am now going to ask about you (EXPLAIN THE SLIDE) Reflection: Getting good at negotiations takes practice How many negotiations do you believe your counterpart on the supplier side is conducting per year? 10x what you are at least
- (EXPLAIN THE SLIDE) Reflection: How many ‘accounts’ do you think your counterpart manages? 10% of you do. Can you imagine the data and fact base they have on you? As ‘buyers’ or procurement leaders, why are we not setting ourselves up for success?
- (EXPLAIN THE SLIDE) Reflection: These results are not shocking. Two big issues that CPOs face with technology is adoption and achieving the ROI they were told they would achieve from having a fully integrated system Until many crack these problems, they are hesitant to advance technology
- Going back to data and the fact base that you can create with it What do I mean? Let’s look at some examples (EXPLAIN SLIDE)
- When and how do I build this fact base? Think about your fact base over the lifecycle of a category, product, or service “like a movie” CLICK FIRST BUTTON: Formal negotiations take place near the end, but the data and the fact base is developed through out You should be adapting your negotiation to a dynamically changing environment as new opportunities appear or levers change Every step and interaction is a piece of the negotiation
- Example: USE HISTORICAL DATA AND INDUSTRY LEVERS BENCHAMRKS (EXPLAIN SLIDE) Proprietary solution that ingests millions of rows of historical transaction data. Algorithms run in the background to produce a fact base or set of opportunities to go after. This is done in a matter of hours, not a matter of weeks. With technology, I can introduce new data and adapt our negotiation at a touch of a button
- Example of a post-bid analytics Scout is developing additional analytics features that will help you develop a fact base on your bid data very quickly You can developing a robust fact base to drive supplier feedback and improve negotiations
- Example of using should-cost models to define LAA and MDO (EXPLAIN SLIDE) LAA Examples: Maximum cost, Delivery terms that offer market advantage, Product meeting all specs, Consistent service, Fixed price for as long as necessary MDO Examples: Lowest price in the market, Shortest possible delivery time, Performance above specification, Superior service, Long-term guaranteed prices
- Once you have your LAA, you can define your negotiating window based on the fact base EXPLAIN SLIDE Our negotiation window is defined by the LAA of both parties
- Pre-video: To drive a dynamic negotiation, you need technology. Look at examples Post-video: Scout or other technology solutions enable real-time insights Imagine - alter existing resources and go through whatif scenarios at a touch of a button. Imagine - provide feedback to suppliers or stakeholder instantaneously based on logic Imagine - robot trigger a new analysis based on a change in one suppliers bid Dynamic negotiation means adapting to a dynamically changing environment in which either new opportunities can appear or the availability of levers can change, I need to be able to assess tens of thousands if not millions of rows of data in a matter of minutes in order to be effective Doing so enables me to drive deeper, faster, higher impact negotiations with the suppliers. My impact is hard dollar savings, efficiency gains, stakeholder happiness
- You are probably thinking, what do I do first? (EXPLAIN THE SLIDE) FIRST HORIZON: Start by assessing your digital maturity in terms SECOND, develop your vision THIRD, just try it
- Here is what we learned today. I am really excited to be here today in the Bay Area There is a lot of innovation with a lot of data focus
- I am around this afternoon if you would like to go deeper. We have a round table discussion @ 3:00PM tomorrow in Joe Henderson Lab (JHL). We will go deeper into the powers of dynamic negotiations and our perspective on how to set yourself and your organization up for success.