How to Build a Digital Negotiation Factory
The pressure is on. You need to save the company cash, and fast! How can you negotiate with suppliers without burning bridges – especially over Zoom?
Your company needs cash fast. The CEO has asked you to contact all of your suppliers across the board and ask for a discount.
But you’re worried about harming the relationships you’ve spent years building. Plus, you know your suppliers are feeling the financial strain too after a year like 2020.
The good news is it’s possible to host widespread negotiations to get results fast. One solution is a “negotiation factory.”
What is a negotiation factory?
McKinsey says a negotiation factory is about “empowering negotiation teams with standardised best practice tools such as detailed RFQ pricing templates, best of benchmarking, negotiation scripts and role plays.”
It can take different forms, but essentially you define a short, intense timeframe for negotiating the best deals from your suppliers. It’s ideal for squeezing out cash when your company needs it quickly.
But don’t get overexcited here. It’s not about holding suppliers in a headlock until they meet your demands. It’s about having a “systematic and repeatable process for supplier engagement” in your toolbox.
Where do you start?
Look internally first.
Any savings crusade should start at the exec level, says McKinsey:
“In turnarounds, it is critical that the CEO and the top team commit to the importance of external-spend reductions early on and rally the organisation around the programme.”
Leading from the top could include flying economy instead of business, and rewarding individuals who make significant cost savings.
That should trickle down to all teams, who will then be motivated to find their own budget cuts.
Do your homework.
Before you start any cost-slashing talks, you need to come armed with information.
In fact, your preparation time should be at least three times longer than the time spent in the negotiation itself, says Cindy Rittel, a Senior Sourcing advisor at Una.
“It might be tempting to save yourself preparation time and come with the intention to ‘wing it,’” explains Cindy in a recent Procurious article. “But it will come back to bite you when you’re unable to answer key questions, stalling for time, and don’t have your BATNA (Best Alternative to a Negotiated Agreement) prepared.”
That means you should come prepared with going market rates, and thoroughly understand the total value of what alternative suppliers could offer.
And don’t be intimidated if you struggle to find strong alternatives. Just pick apart any existing bundles of goods and services you have, says the Harvard Business Review.
For example, say you use a supplier that provides data services and analytics services. By looking closer, you might realise the supplier has the monopoly on data, but actually there’s a competitive landscape for analytics.
That could give you more negotiating power than you originally thought.
Know your end goal.
It might seem obvious, but you should know what you want out of the negotiation, says Diego De la Garza, Senior Director of Global Services & Delivery at Corcentric.
“The problem with a strategy of ‘doing something and hoping for the best’ is that there really is no benchmark for what ‘the best’ is and whether it has been achieved,” Diego wrote in a Procurious blog.
How NOT to negotiate
How you ask can be just as important as what you ask, says Diego. That’s why you shouldn’t send out a blanket letter to all suppliers asking for a discount.
“If achieving a 5% discount was as easy as sending a letter, then procurement would likely be out of a job,” Diego says.
Even if you did send a letter, most suppliers can’t give you a straight yes or no, and you end up gambling with future relationships.
“Those suppliers who may be inclined to agree would expect more clarity and certainty on any future commitments from the company, which could turn discussions sour, quickly,” Diego explains.
“Those on the other end of the spectrum, however, may feel the need to explain why they can’t offer a discount, and may enter the conversation feeling defeated or exposed. You have to ask yourself what the small percentage gains you might secure are really worth.”
How to set up your negotiation factory
Get the boss involved.
The Boston Consulting Group (BCG) suggests dividing your suppliers into three groups.
They call it the “supercharged” approach to getting big results quickly.
Category A is the big one: these suppliers make up 50% of your company spend. That’s why you get your CEO involved with the supplier CEOs.
“This approach…moves fundamental business decisions from the company’s operations managers to its top decision makers,” explains the BCG. “Hemmed in by budget constraints and performance metrics, the supplier’s sales and account management people have little room to maneuver. But not its CEO. The supplier CEO will happily invest in a relationship with a customer if the opportunity is worthwhile.”
It works to the buyer’s advantage, too. “The more time the supplier spends thinking about how to generate mutual benefits with a customer, the more likely it is that innovative ideas will result.”
Set up negotiation calls.
The CEO can’t do all the work. Your job is getting in the thick of Category B – or 35% of your procurement spend.
The BCG recommends assigning each supplier to a procurement executive who is responsible for negotiating a better deal.
In an ideal situation, you would hold these meetings face to face. After all, research shows online negotiations mean fewer closed deals, less trust, and less rapport.
Ouch – not a promising start. But you may not have a choice, especially as travel could seem extravagant when you’re cutting costs.
So you need to make a convincing case over the internet. How do you do it?
Become an expert digital negotiator.
It starts by knowing what tools help you in a negotiation online, says Leigh Thompson, a professor at Northwestern University.
For example, turn your camera on. Yes, we all know the perils of ‘Zoom fatigue’. But research shows it’s crucial for connection.
“When I see you on camera, different parts of my brain are now activated [like the] release of oxytocin: the bonding hormone,” Leigh recently explained during an interview with the Harvard Business Review.
Also, don’t rush straight into business. When you meet in-person, you tend to casually socialise first. That opportunity to build rapport could significantly tip the odds in your favour.
Leigh conducted a negotiation study where one group got straight to business and the other spent five minutes “schmoozing” first.
Just those few minutes socialising “completely greased the wheels for more collaborative interactions, more trust in the other party, and of course, the economic indicators were absolutely astounding.”
That’s because in digital negotiations, timing is everything. “Plan your opening offer carefully,” says Leigh, “but resist presenting it until two things have happened: first and foremost, you have greeted the other party and hopefully even schmoozed a little and second, you’ve discussed with the counterparty how best to use their time.”
The other crucial part is your intention. When you come to the negotiation with the idea of a win/win outcome, everyone walks away happier. Relationships are about mutual benefits and trust – both of which are impossible if you only care about yourself.
How to move forward
That’s true even if you end up strong-arming your supplier into meeting your demands, says Einav Hart, a management professor at George Mason University.
“We remember the price we reached or some agreement we reached, but we also remember how we reached that outcome, and we form perceptions of our counterparts,” Einav commented during a recent podcast.
“These relationships can have long-term implications beyond the negotiation table.”
Say you buy a sofa from eBay. You negotiate hard, twist the seller’s arm, and eventually talk them way down on the price. That’s a great result on paper, but think about how much happens after you close the deal.
That seller can still decide how quickly to ship the sofa, how they package and send it, and if they include extras, Einav explains.
“In most cases, the economic value of the negotiation process is not limited to the agreement,” says Einav. “Imagine reaching a great price but then getting bad service. That’s not such a great deal, is it?”
Instead, always negotiate with long-term relationships in mind. And that might just mean not negotiating at all.
“You [may] actually get more value in the long term by building this relationship rather than damaging it by essentially trying to get more of the pie now,” says Einav.
How has such advice served you in recent months? Let us know in the comments below!
