Doing Deals: Challenges in Negotiations

Author: Larry Berglund

Negotiation competencies are a must in procurement. Whether in the private or public sector, you are always negotiating. Some of the challenges to expect include:

The Day you meet Goliath

It’s inevitable that you will be involved in doing a deal with an oligopolistic market leader. Characterized as one of a few players in a market which control pricing or supply such as foods, communications, airlines, or office supplies. Or, you have entered into a long-term agreement which morphs into a sole source situation such as your ERP system hardware and support. Not easy to justify moving from one ERP to another IT service simply because you couldn’t find ways to negotiate better value.

Where can you find leverage? You may not be able to do much on the pricing but there are many more issues which can be quantifiable and an advantage to you. You may want to set service improvement targets through a service level agreement. You may have introduced a social procurement policy and want to know how your contractor will be able to contribute to increased local employment or apprenticeship programs. These may not cost you any more dollars and may not be a significant cost to the contractor either.

By creating value – making the pie bigger, instead of claiming value – fighting over the same size of pie, the parties can realize mutual gains. Relationships can be enhanced rather than having one of the parties feel they are in a take-it-or-leave-it situation. Oligopolistic players use these wins for their other clients too. They have a vested interest in working with all their clients to improve the service experiences. Customer retention is critical to their business plans and building market share.

Las Vegas or Bust

Where price movement is expected due to market conditions beyond the parties’ control, it’s literally gambling to enter into a deal with firm pricing. Inflation, material shortages, or labour rate adjustments are the wild cards in the deck. If the seller has to submit firm pricing, they pad them in their favour. The buyers may feel good they have firm pricing but have little idea as to how much extra this is costing. If prices slide the buyer doesn’t gain and the advantage goes to the seller.

The parties could negotiate 3rd party indices in the public domain to measure incremental pricing shifts. If prices rise or fall greater than 2%, for example, then the pricing for the next quarter or review period is adjusted accordingly. Or create an in-house price index on your major commodities or consumables and track by triangulating with the Industrial Producers Price Index and published finance rates. This gives the parties objective information to resolve contentious pricing issues in advance and puts in a position of strength.

Where there is no reasonable justification for higher than market pricing, at least you know that you are in a seller’s market. We see this where cities host major events such as the Olympics, Grey Cup finales or annual fairs. Local hotel rates and consumables at these events seem to climb inexplicably and subside after the fact. Indexing doesn’t eliminate the risk of price variances but it acknowledges they exist, can be dealt with, and the parties can work on other areas of their relationships.

Homework Again?

It sounds agonizing but homework is a prerequisite before entering into negotiations. Clarify and fully understand your goals, positions and where you could concede and where you may need to hold fast. What strategy might work best? Multiple party negotiations? Mutually exclusive deals? Two-step process with a prequalification, negotiations, and then move into a best and final offer?

Being clear on needs vs wants can be perplexing in team negotiations. To a researcher, pricing may not be too important but getting their hands on a new optical microscope is. The research person needs to focus on the technical attributes and the buyer needs to ensure the other commercial considerations including pricing, warranties and service are within the funds available. The microscope sales company may be trying to enter your market sector and will forgo profits with a foot-in-the-door pricing proposal. Trying to understand what motivates the other party is a critical part of the homework.

Many team negotiations will involve a considerable number of players, who may come and go throughout a prolonged period of market sounding and the ensuing negotiations. They play various roles and are not required throughout the entire process. The team leader has to keep the negotiation process moving through to executing a contract or realizing it is an untenable situation.

Identify your weaknesses – the other party is going to try and exploit them. Perhaps you need to bring in a more experienced negotiator for a special project. The party with the more relevant information tends to be in a greater power position. Doing the homework reduces the angst in the negotiation process and reduces many of the surprises.

Being familiar with nascent construction management options such as Integrated Project Management or Progressive-Design Build methods require expertise. Addressing the knowledge gap mitigates this weakness. Homework is a bridge to successful outcomes.

The Ice is Always Tilted

Construction projects are costly, complex, contractually challenging, and fraught with unforeseeable factors. Ensuring a high-level of proficiency with construction projects would be considered de rigueur, yet for many buyers, it can be another off-the-side-of-the-desk task. You can be assured the contractors will arrive fully armed.

A construction company with 20-years of experience has seen most of the things which can go wrong or go their way. A buyer in a large municipality may have 20-years of procurement experience with no actual construction project experience. The ice is tilted against the buyer.

It only makes sense to ensure that your organization provides the appropriate level of resources to negotiate a final contract and manage the project. Adding focused talent builds bench strength when negotiating.

Luck favours the prepared. Doing your homework helps to level the ice.

Author: Larry Berglund

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