Negotiation Best Practices
VAGP Conference Spring 2010
Presented by:
Sonja Headley
VITA Policy & Compliance
Quan B. Myles
VITA Supply Chain Management
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INTRODUCTIONS
Who We are and Why We’re Here
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WHAT WE WILL COVER TODAY
• Negotiation Strategy Planning
• A Buyer’s Crucial Need-to-Knows
• The Risk Toss of Negotiations
• Wrap-up
• Questions
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NEGOTIATION STRATEGY
PREPARATION & PLANNING
“He who fails to plan, plans to fail”
~Winston Churchill
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NEGOTIATION STRATEGY BASICS
• Prepare! Prepare!! PREPARE!!!
• Research your market
• Have a “Negotiations Tool Kit”
• Know the most often negotiated terms
• Define your “Negotiations Team” and roles
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VITA Supply Chain Management
Category
Management
•Category contract
& sourcing plan
•SLA determination
•Strategy &
communication
Sourcing
•Sourcing process
•Negotiation strategy
•Contract negotiations
•Market analysis
•Pricing analysis
Contract
Mgmt.
•Develop custom
contracts
•Mitigate supplier risk
•Negotiate contract
modifications
•Monitor contract pricing
•Contract use review
•Cooperative contracts
Purchasing
Operations
•Contract administration
• Bids, small
procurements, quick
quotes
•Purchasing operations
•Order management
•P-card
•NG Partnership
transactions (P2P)
Supplier
Management
•Supplier relationship
management
•Monitor supplier
performance
•SLA tracking, reporting
& management
•Supplier relationship
methodology
Focus area
Policy Planning and Analysis
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MARKET RESEARCH RESOURCES
• Free Directories (examples):
– Yahoo Finance – http://biz.yahoo.com/ic/ind_index.html
– Ariba Network Discovery https://service.ariba.com/Discovery.aw/691258/aw?awh=r&aws=ZiJVYD7L0Pv4WgpV
&awssk=&dard=1
– Thomas Register /Thomasnet - www.thomasnet.com
– Global Spec – www.globalspec.com; engineering directory
– Special Issues - www.specialissues.com ; good for rankings, buyer guides, etc.
– Industrial Quick Search - www.industrialquicksearch.com
• Online Publications and Resources
– CIO e-Magazine www.cio.com
– ZD Net www.zdnet.com
– Purchasing.com www.purchasing.com
– Annual Reports www.annualreports.com
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Negotiation preparation builds on a solid fact base and
ensures effective negotiation execution
Negotiation Preparation
Establish Common
Vision and Objectives
Identify/Evaluate
Options
Select Negotiating
Team
Develop Negotiation
Messages For
Suppliers
Script Team
Members’
Participation
Plan Sequence
And Timing Of
Supplier Contacts
Coordinate
Negotiations with Other
Negotiations In
Progress
Negotiation
Execution
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Example
The first task is to refine and record team’s objectives
Category
Sourcing Objective
Potential Negotiation Levers
Product
• Guarantee of consistent quality at all facilities
statewide
• Commitment to the continuous design
improvement of new parts
• Relief for warranty costs
• Warranty recourse
• Regular component audits
• OEM testing lab costs and resources
Support
• Web-based access to product information
• Dedicated sales and technical staff
• 24 hour response to disasters/emergencies
• Web capabilities – current and planned
• Number of support personnel
• Emergency response systems
Availability
• Guaranteed availability within 20% of forecast
• Minimal transportation and inventory cost
• Availability guarantees
• Delivery and carrying costs
• Delivery frequency
Price
• Secure lowest market pricing – (target 15%
reduction)
• Pricing protection formula to protects against
market swings
• Pricing model and indexing
• Competitive Pricing clause
• Payment terms; Early Payment
discounts
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You need to understand key negotiation concepts to
leverage information and our analysis frameworks
Key Negotiation Concepts
MDO — Most Desirable
Outcome
• MDO is independent of what
the other party will accept
• MDO is an opening, not a
closing proposal
• MDO is the opposite of LAA
• We will never get more than we
ask for (i.e., ASK!)
• Aspiration level is one of the
most important factors in
determining success
• Be ambitious but have a
defensible rationale
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LAA — Least
Acceptable
Agreement
• The minimum we can
agree to without
sacrificing our
imperative interests
• Barring the emergence
of a better option,
settling for anything less
is not a viable business
option
BATNA — Best Alternative to a
Negotiated Agreement
• What we will do if we cannot get a mutually
acceptable agreement
• It’s a unilateral action on our part
• BATNA strengthens our position in the
negotiation
• BATNA helps protect against making an
agreement that should be rejected
• Knowing opponent’s BATNA will give us the
upper hand in the negotiation
• A BATNA helps us:
— Assess more realistically our relative
position
— Ensure that we do not settle at any cost
— Be more flexible
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Determine negotiation team roles prior to a negotiation, the
negotiations team requires a mix of skills
Team Negotiations: Potential Roles
Role
Negotiating Role
Points to Communicate
Lead Negotiator
Driver of Change
• Seeks alternative/options
• Team’s MDOs
• Need for change
• No sacred issues
Procurement
Representative
Neutral
• Seeks common ground
• Value of suppliers
• Value of good relationship in the long term
Functional
Representative
Good “Cop”
• Provides avenue for communication
• Seeks common ground
• Maintenance of day-to-day relationship
• Focus on specific details
• Implementation of changes
Expert
Process Decelerator
• Asks tough questions
• Challenges assumptions
• Leaves doubt in supplier’s mind
• Need for change
• Investigation of options
• Need to improve costs and service
Observer / Note
Taker
Facilitate Process
• Ensure discussions are positive/focused
• Manage pace of discussions
• Document agreements/messages
• N/A
Assigning team member roles should be based on skill set, NOT on title or position
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Prepare carefully scripted and agreed responses to anticipated supplier
questions so that the entire team is “on message” and consistent
Supplier’s Question
Your Answer
• How many suppliers are invited to
negotiations?
• The number of suppliers is not fixed at
this stage
• Will decisions be made on price
considerations alone?
• The award decision is based on data
measured by the Value to Cost ratio.
• Who will be making the final decision?
• The final decision will be made by the
Evaluation Team based on the data.
• How many rounds of negotiation will
there be?
• There is no fixed number of negotiation
rounds
• How did we rank in the last round of
quoting?
• Your supplier scorecard shows overall
competitiveness
• When will you award the contract?
• Contracts will be awarded early in the
new year
• Etc.
Think carefully about which questions are appropriate to answer and to
maintain a level playing field of information
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Example
Anticipate potential supplier retaliation and have appropriate
responses ready
Potential Supplier Reactions
Potential Responses
• Refuse to extend existing contracts/agreements
• Prepare to pay list prices in interim
• Increase negotiations with other suppliers who could
handle business
• Propose to increase all prices/fees/charges
•
•
•
•
• Retaliate by increasing prices on sole source
business
• Remove all discretionary business from supplier
• Divert sole source business to others who can be moved
immediately
• Begin actions necessary to divert all other sale service
business to other suppliers
• Reduce service levels
• Reduce product/service supply or availability
• Bring to senior supplier management attention
• Publicize supplier quality problems
• Initiate immediate business diversion options
• Reduce prices to your competitors
• Let supplier do it — reduces their revenues
• Initiate business diversion to alternate suppliers
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Initiate immediate diversion of discretionary business
Initiate supplier options
Initiate alternative product/services
Make competitive options even more attractive
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DOCUMENT YOUR NEGOTIATION STRATEGY
• Prepare your Negotiation Strategy Playbook
Resource: IT Procurement Manual: BUY IT
• Know the most often negotiated terms
• Develop negotiation messages for the Team and Suppliers
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A BUYER’S CRUCIAL NEED-TO-KNOWS
“The more you read and learn, the less your
adversary will know.”
~ Sun Tzu, The Art of War
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A BUYER’S CRUCIAL NEED-TO-KNOWS
• Understand your procurement’s business needs/budget
• Understand the supplier’s market, challenges and concerns
• Your non-negotiable points (statutory, technical/functional,
other)
• Your targets and walk-away issues
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Your Non-Negotiable Points (statutory, technical/functional, other)
• Statutory
– Code of Virginia
•
VPPA
– Executive Orders in Effect
• for Executive Branch Agencies
– ARRA
• Reporting requirements, unique Federal grant requirements
– Confidentiality
• Examples: HIPAA, personal data, construction design (security), IP, trade secrets
– Federal Flow-Down Terms
• If Federal funds are paying for the acquisition
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Your Non-Negotiable Points (statutory, technical/functional, other)
• Technical/functional (examples)
–
–
–
–
–
–
–
–
Product specifications, engineering standards, building codes
Service levels, performance requirements
Security requirements
Hosting requirements
Integration with certain legacy systems
Installation times
Days required for testing
VITA Technology Standards (COVA standards for technology projects)
• Other (examples)
–
–
–
–
–
–
–
Schedule (based on federal grants, fiscal year restrictions or other dependencies)
Budget (contingency, outyear)
Indemnification/liability (uncapped or limited)
Special insurance requirements, bonds or certification/licensure requirements
Escrow agreement (for technology)
Reporting requirements (subcontractor, DMBE, performance, project status)
No “Evergreen” clauses
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Your Targets and Walk-Away Issues
Before you release the solicitation, “begin with the end in mind” 1
•
Know the negotiation targets for your procurement
–
•
Study industry, market, references to know many of the supplier’s target
issues
–
–
–
•
Business, management, technical, functional, performance, price, etc.
White papers, industry publications
Other agencies’ and states’ procurement experience
Your previous experience with same or similar vendor or procurement
Burn up a white board with pros and cons, risks and mitigations, this for that
thinking
–
Be creative, flexible, balanced and in the end, certain
IT Procurement Manual: BUY IT
1 Steven R. Covey, The 7 Habits of Highly Effective People
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Your Targets and Walk-Away Issues
•
Know your walk-away issues
–
•
Know as much as you can about the supplier’s walk-away issues
–
–
–
•
Non-negotiable terms and conditions, mandatory requirements
They will vary based on the procurement category (construction vs. IT, product vs. service,
COTS vs. developed)
They will vary based on the size the supplier (IBM or Oracle vs. small business)
They may vary depending on client (check in with other clients)
Negotiating with 2 suppliers will increase your success
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THE RISK TOSS OF NEGOTIATIONS
“Imaginative, sanguine men will never recognize that in
negotiations the most dangerous moment of all is when
everything is moving according to their wishes.”
~ Honore de Balzac
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THE RISK TOSS OF NEGOTIATIONS
•
Negotiations Should Maintain a Balanced Project
(or Risk Re-assignment)
•
Warranties – Supplier Promises
•
Negotiating Performance Criteria — Service Level
Agreements
•
It’s Give and Take, Nothing is for Free
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Negotiations Should Maintain a Balanced Project (or Risk Re-assignment)
•
•
•
•
•
•
Your solicitation and negotiation strategy compose the baseline from
which to negotiate, so ensure these documents are balanced in the
beginning.
Ensure balanced risks for both parties are maintained throughout
negotiations.
Ensure no compromises are made to impact mandatory compliance
and procurement requirements, the project’s business, technical and
functional requirements, or the supplier’s financial viability or
performance ability.
Ensure the scope of the original solicitation does not change during
negotiations (can you change that without protest liability or do you
have to resolicit?)
What new or hidden risks will emerge if supplier doesn’t accept
certain terms, conditions, or non-mandatory/desired scope
requirements?
The more complex the procurement, the harder you must scrutinize
interrelationships between negotiation points and outcomes.
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Negotiations Should Maintain a Balanced Project (or Risk Re-assignment)
• What risks will buyer assume and what risks does
supplier assume for each negotiation point? These are
only a few areas where risks may shift.
 Supplier’s financial viability  Warranties
 Buyer’s needs
 Project schedule
 Project budget
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 Security and confidentiality
 Indemnification or liability
 Performance expectations
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Warranties – Supplier Promises
•
Warranties/warranty services should always be free, but are normally built
into supplier pricing.
•
Maintenance support starts when the warranty period is over.
•
Suppliers generally prefer to disclaim all implied warranties of
merchantability and fitness for purpose in favor of specific repair or replace
warranties that give little or no recourse to the buyer. To protect the buyer:
–
•
reinstate implied warranties or avoid supplier’s implied warranty disclaimers by including
language that exchanges supplier disclaimers for specific express warranties; such as:
“Should such product/solution not perform as warranted, the supplier will be responsible for
fixing and repairing the product and if the supplier fails to do so, the agency has the right to
(get credit/remedy from the supplier, etc.)”
All express and implied warranties should be clearly stated in the contract.
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Warranties – Supplier Promises
A few express warranties:
•
Supplier has the right to enter into the contract and to perform its obligations (or provide the
products and/or services or software) under the contract.
•
The product and all enhancements (and new versions for software) will contain no known
defects.
•
Supplier’s software, services or products shall not infringe on any third party’s intellectual
property rights, including, but not limited to patent, trademark, copyright or trade secret.
•
The supplier is not currently the subject of any litigation or pending claim that would materially
affect the supplier’s ability to perform.
•
Unless approved in advance by agency, no information supplier discloses to agency in providing
the services that are the subject matter of the agreement will be confidential to supplier or any
third party.
•
The contract is its legal, valid and binding obligation.
•
For software: The supplier, if a licensor, has the right to grant a license to the software free and
clear of any liens and encumbrances.
And many more . . .
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Warranties – Supplier Promises
IT Procurement Manual: BUY IT
Chapter 25, IT Contract Formation, includes
more critical express warranties for software procurements,
as well as warranty discussion/tips usable for all procurement categories.
Chapter 26, Negotiating IT Contracts, provides additional best practices that
can be adopted for most procurement categories.
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Negotiating Performance Criteria — Service Level Agreements
•
How are buyer’s baseline performance goals and metrics in the RFP affected by other or
ancillary negotiations? For instance, the RFP’s performance criteria or SLAs may have
included:
–
–
–
–
–
–
–
–
•
•
•
Desired technical, functional and business outcomes
Defined performance objectives and timeframes
Performance incentives, retainage
Percent of time services should be available
Number of users to be supported
Performance benchmarks, usage statistics
Schedule for advanced notification of system changes, upgrades, downtime
Help desk response time
Is what was important to your original performance needs affected by other negotiation
points?
Is it necessary to change who will capture data, who will analyze/report data or, how
frequently? How does this affect pricing, staff availability, etc.?
Do the incentives or corrective actions need to change?
IT Procurement Manual: BUY IT
Chapter 21 includes more PBC/SLA discussion/tips usable for all procurement categories
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It’s Give and Take, Nothing is for Free
In the end strive for:
• A balanced contract where neither party must assume unhealthy risks
• A clear agreement that documents the business relationship (a 4-corners
contract)
• Meaningful service levels or performance criteria tied to business
performance
• Strong warranties with business remedies
• Significant attention to Intellectual Property rights, if any
• Contract commitments tied to the procurement category:
Solution: the overall solution not the products, services or components that make it up
Services: deliverables that meet the requirements, not how the services are accomplished
Products: supportability, upgrade and maintenance
Maintenance: the annual cost increase; service levels that support business continuity
•
Satisfaction with the Total Cost of Ownership at the end of negotiations
What is .com
http://searchdatacenter.techtarget.com/sDefinition/0,,sid80_gci342316,00.html
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WRAP-UP
Strategy Planning & Preparation
Before your team walks into negotiations, you should have:
– Completed your market research
– Established the vision & objectives
– Developed MDOs, LAAs, BATNAs and assess other party’s MDOs, LAAs, BATNAs
– Identified and evaluated options/alternatives
– Developed scripted messages for negotiation & develop roles of team members
– Planned the sequence and timing of negotiations
Assessment & Allocation of Risk
– Maintain a balanced project
– Reallocate risks fairly
– Develop meaningful service levels or performance criteria that tie to business performance
– Negotiate strong warranties with strong business remedies
– Ensure the final contract is a “Win-Win” for both parties
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QUESTIONS?
THANK YOU
Send other questions to:
SCMPolicy&Compliance@vita.virginia.gov
VITA Supply Chain Management website:
http://www.vita.virginia.gov/scm/
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