Negotiation Skill Workshop
TES
CONFIDENTIAL
Workshop Document
Date
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AGENDA
Opening
Summary
Three basic elements
Negotiation Tactics and Negotiating with Clean Sheets
Negotiation Exercise
Closure
QUESTION: WHAT IS NEGOTIATION
Textbook answer
The process to confer with another or others in order to come to terms or reach an agreement
Your answer
Purpose of negation (and the action to realize)
AGENDA
Opening
Summary
Three basic elements
Negotiation Tactics and Negotiating with Clean Sheets
Negotiation Exercise
Closure
Summary
Broadly speaking, negotiation is an interaction of influences. Such interactions, for example, include the process of resolving disputes, agreeing upon courses of action, bargaining for individual or collective advantage, or crafting outcomes to satisfy various interests. Negotiation is thus a form of alternative dispute resolution.
Three basic elements of negotiation:
Process: The process refers to how the parties negotiate: the context of the negotiations, the parties to the negotiations, the tactics used by the parties, and the sequence and stages in which all of these play out
Behaviour: Behaviours to the relationships among these parties, the communication between them and the styles they adopt.
Substance: The substance refers to what the parties negotiate over: the agenda, the issues (positions and - more helpfully - interests), the options, and the agreement(s) reached at the end.
Skilled negotiators may use a variety of tactics ranging from a straight forward presentation of demands or setting of preconditions to more deceptive approaches such as cherry picking. Intimidation and salami tactics (分割包围，各个击破） may also play a part in swaying the outcome of negotiations.
AGENDA
Opening
Summary
Three basic elements
Negotiation Tactics and Negotiating with Clean Sheets
Negotiation Exercise
Closure
KEY MILESTONES IN THE NEGOTIATION PROCESS
Prepare
Close
Negotiate
1st round
2nd round
3rd round
Process
Milestones
1. Understand objectives and prioritize them
2. Develop negotiation scenarios
3. Think like a supplier
4. Build the team
5. Develop a leader and define roles
6. Employ tactics
7. Avoid pitfalls
8. Refine strategy
9. Close the deal
MILESTONE 1 – UNDERSTAND OBJECTIVES
What do we want from our preferred suppliers?
Price
Quality
Service
Technology/innovation
Risk avoidance
Improved payment terms
How do we prioritize each of these goals?
What is the range of negotiation points?
Are these variables low, medium, high, or top priority?
If we make a concession, what it is worth?
What to exchange?
What are our entry and exit points in the negotiations?
What is the best that we can hope for?
At what point do we just walk away?
MILESTONE 2 – DEVELOP NEGOTIATION SCENARIOS
Buyer’s RP
Seller’s RP
High Prices
Low Prices
High Prices
Low Prices
Seller’s RP
Buyer’s RP
There is no ZOPA and hence no deal is possible
ZOPA a deal is possible but not guaranteed!
Zone Of Potential Agreement (ZOPA) and Reservation Price (RP)
NEGOTIATION SCENARIOS
Parties
Potential scenarios
Potential outcome
Company
Supplier A
Company
Supplier B
Company
Supplier C
Company
Supplier D
No deal reached; exit points do not overlap
Deal reached if well-negotiated
Deal reached; advantage goes to the best negotiator
Deal reached; advantage goes to seller, unless buyer changes strategy
Entry
All reason-able options should be considered
Fully-developed scenarios need to be worked out in advance
Increasing price
Exit
Entry
Exit
Entry
Exit
Entry
Exit
Entry
Exit
Entry
Exit
Entry
Exit
Entry
Exit
BEST ALTERNATIVE TO NEGOTIATION AGREEMENT (BATNA)
Agreement: A & B are at a better position than their BATNAs
Pre-negotiation position of Party A
Pre-negotiation position of Party B
BATNA of Party A
BATNA of Party B
A rejects
A accepts proposal
B rejects
B accepts proposal
Understanding the other site's BATNA is crucial in navigating through the negotiations and avoiding to "overpay"
Always know own BATNA
ADDITIVE UTILITY MODELS (AUM)
Navigating the pay-off space
Their Pay-off
Our Pay-off
Efficient solution frontier
Starting positions
Negotiated agreement
Progress in negotiations is achieved by increasing the pay-off of both sites
The goal of each site is to move as parallel to it's pay-off access as possible
Understanding how the other party's pay-off function computes is crucial to achieve the best possible deal
EXERCISE 1: THE USD 10 AUCTION
Auction rules
Highest bidder receives USD 10 and pays the amount he/she has bid
Second highest bidder also has to pay but does not receive anything in return
All other bids (3rd, 4th, …) are irrelevant
If there is a tie in the highest bid they all have to pay and each gets a portion of the USD 10
If there is a tie in the second highest bid, then each pays a portion of that given by the bid divided by the number of equal bids
Minimum increase is USD 1
ESCALATION ANALYSIS CAN AVOID DISASTERS
Therefore I should not bid and so should the other players
Therefore I should not bid
If I bid and I am the 2nd highest bidder, I will have to raise so I don't loose
The other bidders are in the same position as I am
So we will end up escalating and one or two of us will loose
There is a lost opportunity, with $10 on the table
Escalation analysis often involves circular thinking
Escalate only up to a preset limit and with a well defined exit strategy in mind
Assess other players' escalation limits
Estimate risk vs. potential payoff
Clearly understand implications of escalation by thinking 2-3 steps ahead of the game and assessing competitive moves
UNDERSTANDING THE LEVERS
Avoid overkill
Know how much materials and services are actually used
Internal analysis of process improvements
Avoid over-specification
Identify minimum possible specification fit for purpose
Request quotation only for minimal specification
Create win-win situations
Increase own attractiveness for suppliers by
Volume bundling
Medium-, long term contracts
Concentration on a few suppliers only
Establishing reference customers
Reduction of logistic requirements
Quantity
Specifications
Price
DEVELOPMENT OF COST MODEL
Knowledge of cost structure is prerequisite to set price and cost targets
Cost driver analysis
Linear Performance Pricing
Benchmarking
Cost comparison on basis of cost drivers
Prices in correlation to performance parameters
Price comparison considering differences in factor cost
Performance
USD
-%
-%
MILESTONE 3 – THINK LIKE A SUPPLIER
How important is your current business to the supplier?
How important may your future business be to the supplier?
What other options does your supplier have?
What drives your supplier's entry and exit points?
What negotiation style will they use?
What services are highly valued by you but low cost to the supplier?
What can you offer at low cost that will be highly valued by the supplier?
MILESTONE 4 – BUILD THE TEAM
Jointly understood objectives, strategy, and priorities
Clearly understood responsibility for each team member
Well-defined chain of command for the verbal negotiations
Right mix of people
Orchestrated approach
Well-delineated role for each team member – single speaker
Ability to react smoothly to verbal and nonverbal signals
Best-in-class negotiation teams act and react like a trained sports team or dance group
NEGOTIATION TEAM COMPOSITION
Core team
Min. 3-max. 6
5-20 people
Support members
Department managers
Sourcing team part-time members
Regional operations/finance/ legal managers
Supply management representative
Sourcing team leader
Commodity expert
UNDERSTAND OPPONENT BACKGROUND AND AGENDA
Description
Who are they?
Negotiators’ personality, roles and responsibility
Who is the decision maker for which part of the MOU?
Who would be the trouble maker?
Why they are here?
What they want to get from this meeting? . volume increase?
What is their perspective?
What is their normal practice and perspective?
What is their perspective to our upcoming MOU negotiation?
How much they know us?
Do they really care about us?
Do they feel “too comfortable” to deal with us?
Our negotiation strategy is:
……
What kind of tactics would work:
We will ask for Supplier to define their negotiator’s role upfront to avoid Supplier play “Hot Potato” game
……
EXAMPLE
MILESTONE 5 – DEVELOP A LEADER
Hallmarks of a successful negotiator
Outstanding understanding of company strengths
Strong understanding of vendors' strengths and weaknesses
High capabilities in influencing vendors' views because he or she
Deals with pressure
Listens and observes well
Handles confrontation
Has sound business judgment
Sticks to objectives
Handles time effectively
Asks questions
Understanding of the value of each concession or amendment
Trust and backing of senior management or key stakeholders
SELECTION OF NEGOTIATION TYPE
Key questions
What is the volume of the category
How complex is the category
Is the category of strategic significance
How sophisticated are the suppliers
Alternative approaches
Key characteristics
Minimal preparation negotiations
Very small categories
Low complexity
Non-strategic
Non-sophisticated suppliers
Few/single rounds of talks
Focus is directly on price/costs
Reasonable internal fact base in place; external fact base on ad-hoc basis
Standard prepared negotiations
Medium to large categories
Low to high complexity
Strategic or non-strategic
Reasonably sophisticated suppliers
Several rounds of talks
Focus is directly on price/costs and other components of TCO
Comprehensive internal and external fact base and negotiation strategy in place
Potentially cross-functional participation
Supplier workshop approach
Large categories
Low to high complexity
Strategic categories
Sophisticated suppliers
Several rounds of talks
Focus is ideas for reducing costs through both commercial and technical levers; price/cost issues not discussed initially
Comprehensive Internal and external fact base in place, and improvement ideas identified
Cross-functional participation
Be aware of human bias - look for integrative solutions
Actively apply integrative bargaining strategies
Exchange information;
Fractionate issues;
Make tradeoffs;
Propose multiple offers simultaneously;
Use post settlement settlements.
Co-operate in order to expand the pie of available resources - compete on how to divide the pie
Try and maximize their own position, not the difference between their own and the other players score.
Integrative solutions:
Expand the bargaining zone (can create a positive zone)
Are more stable (compromise agreements are often unsatisfactory in the long term)
Strengthen the relationship between the parties (mutually rewarding)
What can negotiators do…...
Source: “New Car” Teaching notes L Thompson (JL Kellogg GSM, NWU)
BREAKOUT 1: NEGOTIATION LEVERS NEED TO BE CLEAR STATED BEFORE IT START
TES
…
Supplier
A contract put in place not only protect TES’s interests, but also Supplier’s
Supplier REAL EXAMPLE
Common interests
…
BREAKOUT 2: UNDERSTAND BOTTOM-LINE AND THINGS TO EXCHANGE
Key Points
Supplier
Thing(s) to exchange
TES
Quality, Warranty & Service
Supply Chain & Delivery
Commercial Terms & Conditions
Others
Supplier REAL EXAMPLE
BREAKOUT 3: ROLE DEFINITION IS THE LAST BUT NOT LEAST IMPORTANT STEP WE NEED TO GO THROUGH
Lead Negotiator
Trouble Maker
Time & Record Keeper
Ice Breaker
Quality, Warranty & Service
Supply Chain & Delivery
Commercial Terms & Conditions
Others
EXAMPLE
The person leading the negotiation in terms of content, process and timeframe
High authority manager, or final decision maker
Tough team member, chief assistant of Lead negotiator
Track the process and give the pressure to the supplier
OUR SUBSTANCE: THE AGENDA, THE ISSUES (POSITIONS…), THE OPTIONS, AND THE AGREEMENT(S) REACHED AT THE END
Source: TES Purchasing Team
TES EXAMPLE
NEGOTIATION PREPARATION
Negotiation agenda and prioritization
The opponent background and agenda
Negotiation levers and common interests
Own Bottom-line and things to exchange
Role definition
Reverse role play and practice
Process flow
Content
Tactics
At least 2 parallel negotiation will be the best leverage to each other
FRAME WORK
KEY MILESTONES IN THE NEGOTIATION PROCESS
Prepare
Close
Negotiate
1st round
2nd round
3rd round
Process
Milestones
1. Understand objectives
2. Develop negotiation scenarios
3. Think like a supplier
4. Build the team
5. Develop a leader
6. Employ tactics
7. Avoid pitfalls
8. Refine strategy
9. Close the deal
MILESTONE 6 – EMPLOY TACTICS
Possible tactic
Approach
Capture control of the meeting
Use your agenda
Take charge of the white board or flip chart
Continuously return to your bargaining points
Throw the other team off guard
Use "Good cop/bad cop" approach
Call time outs
Use non-verbal negotiations
Body language
Charts
Analysis/plans on wall
Develop psychological edge
Demonstrate thorough under-standing of the market
Drop hints about other options
Appear to know more about the future than you do
Increase pressure
Use "brinkmanship" or near ultimatums
Use time to your advantage
Provide a room setting that favors you
Take advantage of the historical relationship
Cite prior work to build support for current needs
Bring up old acquaintances
SUCCESSFUL NEGOTIATIONS
Stick to clear and ambitious targets
"A shut mouth catches no flies"
"Carrot and stick"
Absolute unmovable targets
Quantifiable targets
Up-front clarification on quantum leap negotiations, not boni or sconti discussion
Let suppliers talk; talk yourself significantly less than suppliers
Include supplier in problem solution process
Insist that suppliers explain price quotes on the basis of target prices and cost
Targeted use of benefits for suppliers (. volume bundling)
Let suppliers feel that there are alternative suppliers on hand
Golden rules
HINTS FOR ACTIVE LISTENING
Characteristic
Target
1. Paraphrase
Check, whether I understood the topic/issue
4. Stay with your discussion partner
Refrain from telling own experience
Stay with the topic of your discussion partner, keep your own comments for yourself
2. Verbalize
Verbalize and check of what has been told "in between the lines"
Show that you want to understand the other
3. Clarifying questions (no conclusion, judgment or request!)
Check/show that I want to understand the topic/issue
Assist the other by asking questions to come to insights or to conclusions
5. Show empathy
Try to understand feelings and problems of the discussion partner
ELEMENTS OF ACTIVE LISTENING
Active listening
Leading the discussion
Structured Discussion: Come to conclusion before moving on to the next topic
Stay calm confronted with allegations or criticism
Respect feelings and positions of discussion partner
Ask open questions
Encourage to talk by using phrases like "Hm"
Do not interrupt, as interruptions make people feel insecure
(Exemption in case of evasive answers)
Allow pauses (Making notes can create pauses)
Thinking (instead of talking)
What was the answer?
Why is he evading?
Why does he smile at this question?
Why does he tell this story?
Body language
Eye contact
Nodding etc.
Positioning (sitting upright/leaning slightly to the front)
Making notes
ASKING QUESTIONS
û
General Questions
Specific questions
Clarifying question
Scaling question
Hypothetic question
Suggestive question
Open questions
(W-questions)
Closed Questions (Alternative- or Yes/No-question)
?
OPEN QUESTIONS
Characteristic
W-questions (Why?, What?, When?, Where?, How?)
Cannot be answered with Yes/No, requires an explaining answer
Target
Activate an open the discussion partner
Gives food for thought
Example
"What can we do to ...?"
"Why do you want to ...?"
"What else is important for you, besides ...?"
"How do you like this offer?"
Use
Exploring requirements
During the opening of the discussion
Hint
Normally used too rarely. However, use careful with excessive talkers
CLOSED QUESTIONS
Answer "Yes" or "No"
One word answer
Get a specific piece of information
"Let me check if I understood you correctly, that it is especially important for you to … ?"
“Did you already know that you...?"
Secure intermediate results
When closing the discussion
Excessive use may appear like cross-examination
Characteristic
Target
Example
Use
Hint
MILESTONE 7 – AVOID PITFALLS
Dos
Don'ts
Understand RFQ responses in detail
Know the facts about the existing contracts
Consider starting the meeting with an introduction by senior management
Draft written contracts early on
Project confidence and assurance
Demonstrate knowledge and understanding of their predicament
Arrive early
Remain calm and poised
React positively to adjustments in your favor
Provide data that is proprietary to you
Make concessions, unless you fully understand their consequences
Allow time pressure to affect your judgment
FIVE METHODS TO DEAL WITH OBJECTIONS
Partial agreement
When the discussion partner has a justified objection, agree in just this single point
.: "I agree with this specific point, but …"
1
Idle-method
Let your discussion partner present all his arguments - then he is prepared to listen to your position
Caution: You must be sure that you do not get impressed by the supplier's arguments!
3
Anticipating-method
Mention an objection you anticipate from a supplier up-front - then your discussion partner cannot use this any more!
.: "A possible problem may be that ..., but …"
4
Cushion-method
Put another topic between an objection or your discussion partner and your own argument
.: "By the way, yesterday Mr. Miller said …"
5
Boomerang-method
2
Take up the objection and turn it into your own advantage
.: "I tend to disagree with you because I have different information ..."
DEALING WITH NEGATIVE NEGOTIATION TACTICS (1/3)
Tactic
How it works
Strengths
Weaknesses
How to respond to it
Good cop, bad cop
One negotiator is very aggressive, other stays your friend
Uses public disagreement to coax extra concessions out of you
Can be very effective, especially when used against inexperienced negotiators
Not effective with good negotiators
If done badly, can weaken your credibility
Call them on it
"You seem to have significant differences. Why don't you sort them out and come back when you have a unified position"
"This is the best good cop/bad cop routine I've seen in a long time"
Making a low/very low first offer
Low-balling
Very effective
Low risk – most people expect it
Can't make an offer that is way too low, otherwise other side may walk
If this happens and you make another offer, you will lose credibility
Respond in kind back – if they say they'll give you £2,000 for your car, say that it will cost them £10,000
If you do not respond you will wind up paying more than you wanted to
Person negotiates with you then says that we can't sign-off, must get higher authority
Comes back saying that boss says deal is too generous; uses upwards appeal to extract further concessions
"I'll have to ask my boss" or 2-level negotiations
Low risk – I can play the good guy and blame any problems on my invisible boss
Can make negotiator look weak
Can only really work once
At the start of the negotiation, ask if the person is empowered to sign-off a deal themselves, if not, demand to negotiate with someone who can
Pull the same trick back
DEALING WITH NEGATIVE NEGOTIATION TACTICS (2/3)
False deadline or false alternative
Negotiator uses a false deadline or a fake alternative to rush you into making extra concessions to close a deal
Very effective with those who are keen to reach an agreement
Moderate risk – if they call your bluff, you will lose all credibility
Beware of appearing too keen to deal at the outset
Have good research back up so you know what kind of offers they might get
Be cool towards their deadline but offer them a way out – "I can't say yes within this time frame, but if we can wait a few days, I'm sure we'll be able to work something out"
‘Take it or leave it'
Negotiator gives you a ‘final offer' that you must take or leave
Way of extracting most concessions from opponents
Understand the background. How credible is the threat, what are the alternatives
Probe for understanding – ask them why they can make no further concessions, and keep pushing. Brainstorm ideas for overcoming the price barrier – turn aggressive move into a joint problem-solving approach
How important are they to you. How early is it in the negotiation if they are not so important and its early on, call their bluff if all else fails
Very high risk – if it does not work, negotiations will collapse or you will have to make very significant concessions
Damages long-term relationships
Tactic
How it works
Strengths
Weaknesses
How to respond to it
DEALING WITH NEGATIVE NEGOTIATION TACTICS (2/3)
‘Bait and Switch'
Negotiators set up one deal and then substitute it for another
Uses the offer of a good deal to hook the people
Claims offer is identical or close to previous one, but is in reality, worse
Subtle – can often go almost unnoticed
Can damage future credibility
Demand concessions, if package of goods changed
Demand written specifications etc of goods so they can't be changed
Pull the same trick back – agree and then switch terms
Tactic
How it works
Strengths
Weaknesses
How to respond to it
Tactical early concession
Negotiator makes small concession early on and then uses that to demand multiple concessions
Tactic exploits peoples' propensity to return concessions
Very subtle – people do not realise they are being fleeced
Very low risk
Can be seen as a sign of weakness by aggressive negotiators
Make small concession but don't be pushed into more
Lying about your interests
Negotiator demands something he doesn't want which he knows his opponent can't give him
Uses failure of opponent to give him the concessions he asked for to extract huge concessions in other areas
Creates great leverage and makes you look like the good guy
You may get what you ask for
If they really can't give you concessions, may cause negotiations to collapse
Moderate-to-high risk
Damaging to long term relationships if discovered
Probe their positions to understand the underlying interests. Push them to explain why they want what they want
Turn it on its head – say you can give them what they're asking for, but only in exchange for massive concessions elsewhere
NEGOTIATION GOAL 8 – REFINE STRATEGY
Provide preliminary written agreement at the end of each round
Follow up with written summary of discussion
Review progress
Refine negotiation approach for next round
Check appropriateness of team composition
What are the three key learnings / takeaways from this negotiation?
1.
2.
3.
Who were today’s participants
Name Position Role Exhibited in Negotiation
SUPPLIER: __________________________
What facts or information did we learn today?
1.
2.
3.
4.
5.
6.
7.
Key decision makers not included today that we need to ensure are present in the 2nd round?
Name Position
Supplier 1
Aggressive pricing can be pursued, they are earning too much on us today
Key leverage point is to stress future opportunity, they are “hungry”
Supplier 1 has significant capacity to fill - they will be delighted to pick up any volume
John Smith Senior VP Sales Eager to get increase sales,
Jane Doe VP Marketing Cautiously optimistic,
Hayden Fox President
Operating at 65% utilization
Can not provide lower pricing due to promises to other customers, but can get creative (. rebates, one-time payments, etc.)
Consider Acquirer to be critical / strategic customer
Acquirer is Supplier 1’s largest customer, representing some 15% of total revenue
Hayden Fox will be true decision maker in the end, John and Jane kept referring to him
Will easily give in on 45-day terms and retroactive pricing
RECORD OUTCOME OF EACH NEGOTATION ROUND (1/2)
EXAMPLE
Based on today’s discussion, what negotiation tactics do you recommend we use in the 2nd interview?
1.
2.
How would you classify the tone of today’s negotiation?
1
5
3
Hostile, Non-cooperative
Enthusiastic
SUPPLIER: __________________________
Based on your first meeting, what response do you anticipate from the supplier?
1
7
4
No Savings Likely
Reach Stretch Target
Attain Realistic Target
What are the specific next steps we need to take before the next negotiation?
Next Step Team Member Ownership
Supplier 1
Determine WW opportunity for products Supplier 1 can provide Team Member A
Ensure President is involved (attends) next meeting Team Member B
Stress additional volume that could be theirs if they meet / exceed our expectations
Be aggressive on demands. Make sure we expect more than they can deliver. They’ll tell us when enough is enough
RECORD OUTCOME OF EACH NEGOTATION ROUND (2/2)
EXAMPLE
RFQ ANALYSIS - SUPPLIER 2
Overall reduction
~ 4%
$350,000
Specific discussion points
Terms: 3-year length
Delivery: N/A
Price protection: 2004 fixed/quarterly
Price index:
European price: old pricing for first 6 months of 2004 (peroxides)
Existing product
Current offer
Exp. price
Competitor product
Price quote
Product A
Product B
Product C
Product D
Product E
Product F
Product G
Product H
Product I
Product J
Product K
Product L
Product M
Product N
Product O
Product P
Product Q
Product R
Opportunities ($/LB)
Other
Current offer
Expected outcome
Our starting point
Length
European pricing
95% Product A commitment
I MM lb. (NA plants)
Product A (90% NA commitment
3-year
2nd half 2004
1-year
RFQ REVIEW FOR NEXT NEGOTIATION ROUND
EXAMPLE
FINAL NEGOTIATIONS WITH SUPPLIER 2
CHEMICAL CO’S Requirements
Price protection:
1st year price fixed
+/- 5% annually after year 1 (adjusted quarterly)
Prices in Europe start 1/1/04
Mutually agree to specific performance requirement
Need Product A to be $ (same as price we can get from Supplier 3 or Supplier 5)
CHEMICAL CO’S Concessions
CHEMICAL CO Reactions / Support
Acquiree current 60 days payment terms
Pleased with effort in response to help us achieve our synergies savings goal, however….
Expected these prices with 1 year duration (as specified in RFQ), longer contract involves more risk and thus requires deeper discounts
Senior management doesn’t want to lock into long term deals without significant savings to compensate for additional risk
Have up to $ to $4MM to give in volume
Facts to Clarify / Information to Collect
Are rebates all back to pound 0?
Why fixed pricing in Europe in 1st half of 2004?
Feasibility of replacing Product A with Product D?
Feasibility of replacing Product C with Product E?
Feasibility of replacing Product G with Product F?
CHEMICAL CO’S Must Have’s
One of 2 contract length options:
1 or 2 year contract with current pricing
3 year contract with additional 3% price reduction
Restructure global rebates (in addition to above)
% $10MM total sales
% 11MM “
% 12MM “
NEGOTIATION STRATGEY DETERMINATION FOR EACH ROUND
EXAMPLE
INTERACTION TRACKING TOOL DURING NEGOTIATIONS
EXAMPLE
KEY MILESTONES IN THE NEGOTIATION PROCESS
Prepare
Close
Negotiate
1st round
2nd round
3rd round
Process
Milestones
1. Understand objectives
2. Develop negotiation scenarios
3. Think like a supplier
4. Build the team
5. Develop a leader
6. Employ tactics
7. Avoid pitfalls
8. Refine strategy
9. Close the deal
POST SETTLEMENT SETTLEMENT (PSS)
Rational
Their Pay-off
Our Pay-off
Efficient negotiation frontier
Starting positions
Negotiated agreement
PSS agreement
Untapped value from initial agreement
Concept
Agree that after reaching and signing an agreement to investigate further improvements for both parties by being more open about positions and hidden benefits
NEGOTIATION GOAL 9 – CLOSE THE DEAL
Finalize written agreement
Review decision with legal staff
Define performance/ compliance criteria
Put contract management plan in place
AGENDA
Opening
Summary
Three basic elements
Negotiation Tactics and Negotiating with Clean Sheets
Negotiation Exercise
Closure
DMO NEGOTIATIONS TYPICALLY INVOLVE 3 TYPES OF INTERACTIONS WITH SUPPLIERS
Source: McKinsey
Kick off / Informational
Objective
Provide overview of DMO process to supplier
Demonstrate senior level commitment (., kick off pitch from the CPO)
Explain data requests for future meetings and negotiations
Review supplier data request and clarify assumptions and cost levers
Jointly problem solve on cost reduction ideas, if appropriate
Highlight gaps between supplier’s and the client’s assumptions
Challenge supplier’s assumptions with facts and data
Move the supplier into accepting the reduced cost proposal through a combination of “carrots”, “sticks” , and the clean sheet analysis
Working Session
Negotiations
Final output
Data request issued
Agreed upon calendar of interactions
Joint cost reduction activities
Mutually agreed upon list of assumption differences
New prices and a “cut in” date
THE APPROACH CAN VARY DEPENDING ON THE AMOUNT OF INFORMATION AVAILABLE
Source: McKinsey
Approach
Example
Requirements
Pros:
Cons:
“Question and Investigate”
“Direct confrontation”
Probe suppliers and dig into assertions with 2nd and 3rd order questions
Used the supplier’s contradictory facts against them as they are revealed
“Help me understand why your yield is so low? During our plant tour, your metrics didn’t indicate this?”
A skilled negotiator who
Understands the cost drivers
Plan a sequence of logical questions
Can change direction as new information is revealed
Minimizes exposure if the fact base is incorrect
Time consuming in negotiations and preparation with lead negotiator
Quickly reveal your own facts and evidence of price discrepancies
“When I calculate your implied yield, I get 50%. I know you run at 70% and world class is 90%. Clearly, you’re overcharging me.”
A strong, robust fact base
A skilled negotiator who
Has process expertise and can withstand supplier challenges
Has comfort with direct confrontation
Comparatively faster, when it works
Is not collaborative, and may damage the supplier relationship
Opens up the analysis to full inspection and puts you on the defensive
Depth of information
CREATE A LIST OF QUESTIONS FOR EACH MAJOR COST DRIVER, BASED ON CLEAN SHEET ANALYSES
Source: McKinsey
Best Practice
Questions should be based on current assumptions
Teams should assign questions to different meeting participants
CREATE BACK UP CHARTS THAT EXPLAIN MAJOR DRIVERS IN THE CLEAN SHEET
Source: McKinsey
Best Practice
Identify key cost drivers based on clean sheets and prioritize questions
Ensure that client team members have a solid understanding of the calculations and can change questions based on supplier responses
MANAGING TIME AND INFORMATION
The side with the most information will usually “win” the negotiation
Build a fact base
Clean sheets
Industry analyses
Create a “story” and identify carrots and sticks
What does the other party want?
What pressures are they facing?
Learn their hidden agenda by talking with anyone possible
Who, what, when, where, why
Use open-ended questions
The party with the least time will likely “lose” the negotiation
Compromise on items in order to meet deadlines or show arbitrary measure of “progress”
Fail to pursue alternative solutions or options for fear of “starting over”
WE NEED A TRUST BASED RELATIONSHIP
“It is difficult to negotiate where neither will trust!”
-Samuel Johnson
English linguist in 18th century
AGENDA
Opening
Summary
Three basic elements
Negotiation Tactics and Negotiating with Clean Sheets
Negotiation Exercise
Closure
An agreement is made and then you get to “keep” the money and to split it in the agreed manner
Agreement is not reached and you have to return the money
How does negotiation end ….
Steps in playing the game:
Form up in pairs
Flip a coin to decide who is to be Player 1
Player 1 is in control of the RMB 100 and decides on how much is to be offered to Player 2.
Player 1 makes a “take it or leave it” offer to Player 2
Player 2 accepts or rejects the offer.
If the offer is:
Accepted then the Players get to share the money as agreed
Rejected then neither party gets any money, player 1 need to pay me back RMB 200
Playing the Game
Play the game!
Strategies:
Player 1 usually adopts either a “50–50” or “less than half” strategy
Player 2:
Rarely rejects 50–50 offers, deal is seen as equal and fair
Often rejects offers of “less than half”
Behavior:
The patterns of behavior for both Players 1 and 2 do not make sense based on a rational economic point of view of the world:
Why should Player 1 offer more than RMB 1?
Why would Player 2 not accept something that improves their current financial position, even if it is only RMB 1?
Source: “The Ultimatum Game” Teaching notes JK Murnighan ( JL Kellogg GSM, NWU)
Ultimatum Game Debrief
You cannot rely upon people acting rationally:
Only a very small number of people actually act in an economically rational manner.
A substantial number of people will reject an offer which they feel isn’t good enough, even though it means they walk away with nothing
Human emotions and sense of fair play often over-ride rational economic analysis: for example a 51:49 offer is more likely to be rejected than a 55:45 offer
Ultimatum Game – Debrief
Source: “The Ultimatum Game” Teaching notes JK Murnighan ( JL Kellogg GSM, NWU)
AGENDA
Opening
Summary
Three basic elements
Negotiation Tactics and Negotiating with Clean Sheets
Negotiation Exercise
Closure
