Acquis knows that strategy is nothing without execution. We help ambitious organizations design strategies and put them to work, paving the way for long-term growth and efficiency. We focus on driving sustainable results and ensure that knowledge and best practices are transitioned to our clients.
With strategic sourcing projects, our goal is not just a great contract but a valuable program with an empowered client team to maintain it. Since the negotiation process is a critical step in creating a supplier relationship, we wanted to provide our perspective on successful negotiation strategies and tactics to help you ace the negotiation.
1. How do you measure success in strategic sourcing?
VALUE should be the most common criteria for success in strategic sourcing, but too often it’s overshadowed by price, which is just one component of value. Other value considerations can include service levels, quality, ease of use, customer satisfaction, innovation, implementation, accessibility, and other value-added services. The best sourcing teams evaluate suppliers on a set of pre-defined and weighted criteria, tailored to each category to ensure the best overall VALUE for the organization.
2. Should your approach to sourcing differ from one category to another?
Truly understanding a spend category, and its importance to your business is critical. Certain spend categories are similar to commodities, while others are more strategic. Some suppliers can be critical to shaping your end product, some are partners in driving innovation, and others, just a cost of doing business. While the process for selecting a supplier is often similar across categories, the intended relationship is quite different and can be heavily influenced by the negotiation process and resulting contract structure.
- STRATEGIC: Joint investment from each party, focused on innovation that benefits both businesses. The contract outlines the joint commitment and is structured to incentivize each party to maintain rigor, momentum, and investment.
- COLLABORATIVE: Share is the keyword. Parties work together to produce a customized product/service based on information passed from one party to the other. Trust is paramount, and contracts should incentivize the supplier.
- TRANSACTIONAL: Think arms-length. Parties have few linkages, and the buyer is obtaining a fairly standardized product/service, usually with the ability to exit easily.
3. How does the supplier perceive your organization?
Understanding the supplier’s perspective is a critical input to successful negotiation strategies which help maintain control of the overall process and effectively predict the next steps. You must understand the suppliers’ business model, learn how they make their margins, and only then will you know if their “concessions” are truly meaningful. The value your organization brings to a supplier is not solely based on the volume of purchases.
Understanding the leverage balance is equally as critical since one party is always more ready or willing to walk away than the other. To determine your position, consider some of the factors below:
- What is your reputation as a customer?
- Are you viewed as a growth account?
- Are you a large/high-volume account but perhaps on the decline? If so, a supplier might be trying to maximize margin (while they still can).
- Do you enable a supplier to enter into a new market or industry?
- Will a relationship with your company increase suppliers’ credentials?
- Does your business open up a supplier to your extensive network?
4. How much should you wing-it?
Some people are good negotiators, either through natural traits or, perhaps more realistically, experience. However, the difference between being a good and a great negotiator will always be preparation. Successful negotiation strategies consider each interaction (email, meeting, request made of the supplier), evaluate the trade-offs and levers, and predict how each move might impact the end-game. Do you know your BATNA (Best Alternative To a Negotiated Agreement)?
5. Have roles been established?
You should carefully consider who participates in the negotiation process. The right team can bring complementary skillsets to the table and fosters camaraderie.
- Facilitator: The project task-master. A very organized individual who owns the schedule and has senior support to ensure that other stakeholders take this seriously.
- Functional or Business Representative: The team’s “good cop”. Always thinking about end-user requirements or downstream activities like implementation to ensure that the program will meet the business needs.
- Subject Matter Expert (SME): “Been there, done that”. Knows the process, the intricacies, and the marketplace. They help steer the team around pitfalls and speak the same language as the suppliers.
- Negotiator: “bad cop”, when necessary. The negotiator understands contract structures, total cost of ownership (TCO), and the difference between value and price. This is often a more senior person in procurement.
- Executive Sponsor: Senior support signals importance and compliance to a supplier, assuring them that the program will have some “teeth” in its adherence. Have your senior sponsor drop by a supplier meeting.
6. How do you want your suppliers to perceive you?
A critical part of negotiation strategies is deciding on the concessions that you are going to ask for. Whether it’s enhanced services, reduced prices, or even modifications to the contracting structure, help suppliers solicit concessions from their senior management by giving them the ammunition to fight for your requests. Tell them your story.
- Growth: Your company might be on-pace to significantly expand and become a very large customer.
- Brand Strength: Your brand and/or network/connections could help the supplier in its other sales efforts.
- Collaboration: Your industry or unique perspective can provide value and help the supplier innovate.
- Compliance: A company in decline may still tell a story of strong or even increasing supplier compliance. Suppliers want to know that their clients are well positioned to live up to volume commitments.
7. What message do you want to send to your prospective suppliers?
Carefully select your data set so that it helps reinforce your story. Don’t just send the last two years of data because that is what you have always done.
If you have a strong growth story, sharing 3-4 years might be more compelling, help drive credibility, and show sustainability around your growth.
8. Are you in the driver’s seat?
Impactful negotiation strategies ensure you stay in the driver’s seat. Suppliers love to play the lead role if you allow them to, and will naturally try to direct the conversation, set the next steps, and steer the negotiation – all to their advantage.
Three Tactics To Help You Maintain Control:
- Control the Agenda: Always set the agenda and let the suppliers know what you want to discuss
- Set the Negotiation Terms: If you don’t, the supplier will. Whether it’s round 1 or 2, you need to make it clear where you want the supplier to improve their value or else they may choose the areas most advantageous to them.
- Align Your Incentives: It’s important to get a great deal, but it’s equally as important to make sure your supplier is also happy. If your supplier isn’t happy, it will affect their performance or the cost. In what we call the “whack-a-mole” concept, an unhappy supplier will find a way to create disruption.
9. What is the post contract execution plan?
Sourcing is only half the battle. The other half is realizing the benefits of what you worked so hard for – the program adoption and compliance. Make sure you have the appropriate resources ready to implement the program and ask the supplier for help. Suppliers have done this before and will often have recommendations on the appropriate budget, skillsets, timing, and the overall plan. Suppliers are generally willing to and can always provide “free” tips and tricks. It’s often to their advantage to do so.
10. Should your involvement end after a contract is signed?
Switching costs are always high. In general, if companies put as much effort into Supplier Relationship Management (SRM) as they put into sourcing, they would realize much longer-term value from a program, and not need to go to market as frequently.
Supplier scorecards, frequent business reviews, and a strategy that segments your suppliers into various tiers (e.g., strategic, collaborative) are common tactics to effective SRM.
If engaged appropriately and with the right contracting structure (i.e., one that incentivizes both parties to improve), your company/supplier relationship will allow both parties to learn from each other and ultimately enhance their service/product offerings and improve overall efficiency. There are advantages to being an exemplary supplier or an exemplary client.