Unlocking value in procurement negotiations

There is a real and on-going challenge for many procurement people when thinking about who we represent in a negotiation. Sometimes we are able to represent the business, but many times, we are forced to represent only a part of the business.

How can this be? Well, consider how many other people are representing the business in negotiations with the supplier. We might find that a technical-focused colleague is having a specification-led negotiation. Our finance team may be having a payment-approach negotiation discussion with a supplier. Supply chain may be focusing on delivery approaches, while operations may be talking about volume, and the legal team is working on specific terms and conditions. Senior managers could be holding up aspects of the relationship with a supplier, and may hold a power of veto over other discussions. In this sort of situation, procurement may be in a position of looking at price as a part of an overall mix of areas for negotiation.

Our challenge in procurement is then to make sure that the negotiation takes a coherent approach which incorporates all of the different aspects at play, and to make sure that there is balance between the different areas. 

To be able to do this, we need to influence our stakeholders to allow us to guide the negotiation, and make sure that the many internal sets of negotiables are clearly understood. If we can build a broad picture of the various matters being negotiated, we are more able to see links between different these aspects, and to seek balanced trading and positive outcomes.

An even stronger approach is to build this picture of the negotiation as a combined team, looking at the strengths and weaknesses of our overall position and finding ways to both exploit and defend against these issues. When we can do this, the overall picture we build may be quite different from the one created when individual teams or people focus purely on their own priorities. This approach could unlock whole new areas of value creation, particularly when we can get internal alignment on what is actually important for the business as a whole.

Extracting value
Taking a strategic and holistic approach such as this creates an opportunity to consider how we extract value from our negotiation. There are two possible directions negotiations can go: Either we are seeking to claim value from the other party, or we are seeking to create value with the other party. Value creation is an approach where we identify new approaches to generating value for ourselves, and for the supplier. Value claiming negotiations are more focused on defining the share of available resources that each party can have. 

As procurement organisations or teams, we often face a set of targets which are more about value claiming (delivering a saving) than value creating (finding new streams of value). If we can find those new streams of value with our stakeholders, and lock them into the negotiated outcome and contracts, we will have delivered a greater benefit than we would otherwise achieve.

Helping stakeholders understand this, and coaching them to help us work in this way, can be a significant challenge. We find that procurement professionals often spend a significant amount of time helping stakeholders understand this change in roles, both for procurement and themselves. However the benefits of working this way can be considerable. Studies in this area suggest improvements of 50% in value delivered can be achieved. In a world when finding a 3-5% contribution is a real challenge, large improvements in outcomes are most welcome.

For more information and guidance in this, download Future Purchasing’s free “Negotiation Advantage” guide here.

Contributed by: Mark Hubbard,the negotiation practice director at Future Purchasing

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