Global Leaders in Procurement & Negotiations (PSCMInstitute.com)

Author: OmidG

  • Procurement’s Fatal Flaw is Confusing Negotiation with Influence

    Let me be bold and pull no punches: The procurement function has possibly the least experience with driving influence of any major organizational function in large companies. 

    And you may find this counterintuitive, thinking “but all we do is negotiate huge high stakes deals, more than any other function, so how can this be true?”

    The answer is really simple: we’re the only internal department that has been exclusively taught to get their way *using money*. 

    Do you think HR or manufacturing or marketing influences other internal business units by dangling millions of dollars? Of course not.  They’ve been trained from the very beginning to influence without the presence of money. What a gift. 

    And we in procurement are accomplishing all sorts of marvelous things, largely because of the money.  But cut that money by 90%, and suddenly those marvelous things go away.  

    Procurement achieves external results using the criteria of what is best for them, which is what they’re supposed to do. 

    And suppliers fall in line with procurement’s needs and wants, which is what they’re supposed to do.  But this is a terrible training model for us.

    How many procurement organizations do you know that are accomplishing wonderful things externally, but struggle endlessly trying to influence business units internally?  The answer is every single procurement department out there. 

    And procurement has never been trained on how to negotiate under these circumstances.   We can therefore define INFLUENCE as the ability to negotiate without pushing mandates or dangling money.  This results in the other party falling in line because they want to, not because they have to. 

    Which brings us to the harshest reality of all.  Read this twice: the reason business units engage procurement late is because they don’t see the value of engaging them early. 

    If they saw the value, wild horses couldn’t stop them from engaging you early.  This doesn’t mean you don’t deliver value.  It just means that they don’t perceive it.  Big difference.  

    And if we peel all the layers of the onion, what it really comes down to is really good influencers focus on the other party’s objectives and really bad influencers focus on their own agenda.

    And in procurement, we’ve been trained that when you have money, you can focus on your agenda.  And it works.  Spectacularly. 

    But then we try to do the same when we go to influence internally, and it doesn’t work.  It hasn’t worked and it will never work.  Policies or not. 

    And so, the solution, the way out of this, is for us to drive influence by presenting an agenda that focuses exclusively on what’s in the best interest of the business units instead of what’s in our best interest.  

    This is what business units want to hear.   

    How we present ourselves to the business units, and how we present our strategies needs to demonstrate that we are focused on *enabling business unit success*.  Don’t forget, that’s the reason your company exists. 

    This also requires having a deep understanding of what your business units do, how their results are measured, what initiatives they have in flight, what keeps them awake at night, what’s working and what’s not, and much more. 

    When this is deeply understood and strategies are presented with these goals in mind, then we are no longer an organization that is trading money for goods & services. 

    We become an organization that is enabling PERFORMANCE RESULTS.  We solicit, negotiate, contract for, and receive PERFORMANCE RESULTS.  And we do that with full allegiance to our policies and procedures.  But that’s back office allegiance.  In the front office, where you are end user facing, the exclusive focus has to be on business unit outcomes. 

    I’ve worked with a number of Fortune 100 companies to help drive this transformation.  It’s truly incredible to watch.  The business units perceive procurement as enabling their agenda, and they engage procurement early because they see the value of doing so.

    Procurement in turn is able to not only ensure that a performance outcome driven model is negotiated for, but is also able to start driving upstream demand streamlining initiatives in collaboration with the business unit and suppliers – we’ve been seeing this result in 18% surgical removal of costs on average.  

    All we have to do is unwire everything we’ve ever learned.  Negotiating with money is COMPLETELY different than influencing without money or mandate.  Suppliers have to fall in line.  Business units don’t. 

    Now go off and do something wonderful.  Be your best!

    Omid G.

    “THE Godfather of Negotiation Planning” ~ Intel Corp

    P.S. if you want to engage in world class capability building of your procurement organization or are personally interested in getting rockstar skills with our CPSCM™ program, feel free to reach out to my office at support@PurchasingAdvantage.com to find out more.  

  • The Fatal Flaw in Negotiations Strategy

    Both procurement and sales organizations have been suffering from the same fatal flaw since the invention of currency.   And It’s killing us.  Our profession is leaving money on the table in every single deal.

    It starts really early.  When you were a kid in the playground, fighting over a toy in the sandbox.  Only one of you can have the toy.  You start hard bargaining for the toy, aiming for a winning outcome, resulting in the other child not having the toy and probably crying.

    And while still a child, you watched your parents haggle deals, bargaining for a lower price, resulting in the seller making less profit.   It was an exercise in negotiation asset transference. 

    And your parents frequently commanded you to do things with no perceptible gain for you (“Go clean up your room”, “Go take out the trash”, “Turn off that music”, “That’s enough TV”, etc.).  It’s what we do as parents.  We have authority and we use it. 

    Then you grew up watching TV shows where hardball negotiators, the hero in the plot, got what they wanted against a hapless negotiation victim, who received no concessions in return – other than the loss of their own humility.

    These are all normal experiences, and you had them 100,000x before you finished grammar school.  You were fully programmed by this time.   And it’s really unfortunate.  

    Everything you’ve learned from the time you were a kid was focused on PARASITIC negotiation strategy.  The movement of value in negotiations.  Give up the toy so I can play with it.  Give up profit so I can report more savings.    

    Then one day you got a procurement job where you were supposed to actually do negotiating.   And you hold all the cards, because you have the money and the other party wants it.  You can do all sorts of things, and the seller has to go along with it.  Kind of like the parent-child relationship. 

    And your success in forcing the supplier’s hand may have nothing to do with your skills at all.  They just want your money.  Really bad. 

    And the consultants and trainers are making it worse for the most part, as they are teaching us how to get better and better at parasitic negotiations.  Why do they do that?  Because that’s what sells.  But our body of knowledge is working against us.

    I’ll never forget the negotiation training advertisement from a very well-known company that I saw on a plane, showing a businesswoman leaning back in her black leather executive chair, feet up on the table and crossed, wearing smart high heel shoes, and smoking a cigar – while sporting a wry smile.  The caption indicated something like “THIS is what it feels like to get an Unfair Advantage in negotiations”.  

    It saddens me to see that.   Is this really an accomplishment?   Is that what our profession has come to?  Demonstrating excellence in Parasitic Negotiations?   Is this how the supply chains of the future will operate?  Each supply chain link getting an unfair advantage over the next link? 

    We’re better than this.  

    Time to unplug everything you’ve learned, and probably are still being taught. 

    There is Value Transference and there is Value Creation.  Everything we’ve been taught about in negotiations has been focused on Value Transference.  Give me the sandbox toy.   You won’t have it anymore. 

    Value Creation strategies find out what keep the suppliers awake at night, followed by the inventing of solutions to help resolve them, in return for a steep discount.  

    For instance, one of our clients is a major potato chip manufacturer that was at a stalemate in pricing with their biggest potato supplier.  They hammered each other for years to no avail.  The buyer was extremely frustrated. 

    The buying company was advised to do Investigative Negotiations.  They discovered that while they needed potatoes all year, their supplier only harvested once a year! What a fiasco this must create! They surely thought that this issue must be keeping their supplier awake at night.

    The buyer came back with the unsolicited proposal to solve this problem for the supplier – a problem that never came up in negotiations, but the buyer researched on his own.  The buyer proposed to shift potato cold storage to the buyer’s facilities, which had capacity for such.

    The result?  The potato farmer was both surprised and thrilled at this new approach, and was delighted to offer an additional 20% discount to the already aggressive pricing schedule.  This after the buyer couldn’t even get 1% in traditional at-the-table negotiations.  

    When was the last time you had a supplier delighted to deliver a 20% additional discount?  There are endless other examples of this that we have seen and worked on with our clients. 

    The other area of opportunity is driving savings in the actual design of the product or service, BEFORE supplier negotiations.   We call this Upstream Design for TCO. 

    One of our clients is one of the biggest healthcare companies in the US.  In looking at their purchase strategies, we found their biggest money on the table was not in pricing, but in what they were purchasing. 

    We found for instance that they were buying 140 different types of catheters.   Their internal medical board, which approved all medical product purchase decisions, was presented with this information and they were so embarrassed and apologetic and promised to fix it. 

    They then came back with 8 catheters that they would request exclusively moving forward.  Reducing from 140 to 8 catheters resulted in dramatic savings from the supplier, because now economies of scale by product improved and order fulfillment, logistics, and inventory management all became much easier.  

    This was then replicated across many other products they were purchasing for significant savings.

    Again, there are endless examples of driving Upstream Design for TCO.  We’ve been finding 18% savings on average in such cases, and that’s before going to supplier negotiations!  

    Do these things well and be the Rock Star in your department, and put your career on the CPO Fast Track. 

    P.S.   Our CPSCM™ Certification Program does a deep dive on Investigative Negotiations, Value Creation, and Upstream Design for TCO.  No other program does.  Almost 50% of the Fortune 100 have invested in it.  Get your department certified or invest in getting yourself certified.  You’ll be glad you did. 

    #purchasing #procurement #negotiation #procurementtraining #purchasingtraining #negotiationtraining #purchasingcertification #procurementcertification #negotiationcertification

  • Procurement Leaders – Take This Performance Test

    If you are a procurement leader, the onus is on you to make a difference.  I’m seeing a lot of CPOs getting better results at traditional activities, but is that what we really want?  Just meeting and exceeding cost savings goals is a very 1990’s accomplishment. 

    Here’s a quick questionnaire (Yes = 3 points, Sometimes/Maybe = 2 points, No/Unlikely = 1 point)

    1. Does your company have a CPO, and does that CPO report to a CXO, giving procurement a seat at the table with the C-Suite?
    2. Is your organization viewed and minimally funded like a cost center, or more fully funded as a profit center, such as the with the sales organization in your company?
    3. Do the business units pull you into deals early not because they have to, but because they see the tremendous value that procurement brings to the table?
    4. Sales people spend 20% of their time in training.  Is your organization, who is negotiating with sales, keeping up with this in a fashion that systematically elevates organizational capability?
    5. Are your procurement professionals adept at driving influence of product and service designs for cost and total cost reductions with the business units?
    6. Are your procurement professionals trained in how to architect Value Creation negotiation strategies through investigative negotiations, allowing them to achieve greater savings than through traditional supplier profit compression strategies?
    7. Are you soliciting innovation ideas from your suppliers as a regular course of business, including inviting feedback on every spec and SOW to see if they know of a better way to solve that problem at a lower total cost? 
    8. Have you transformed your procurement processes/templates/tools from end to end to negotiate and contract for PERFORMANCE RESULTS instead of goods & services? 
    9. Do your procurement professionals know how to surgically identify and remove unnecessary costs from the supply chain?
    10. Are your procurement high level strategies, savings, and accomplishments clearly listed by the CEO in your company’s annual report?

    How to score:

    25 – 30: World class procurement organization with a CPO that is driving a leadership agenda

    20 – 24: Above average procurement organization with CPO leadership results and opportunities.

    15 – 20: Improvement required procurement organization with CPO needing to take significant actions to elevate organizational capability.

    < 15: Back-office procurement organization with legacy practices and legacy results.  Overhaul required on all fronts.  

    These 10 areas above are the core focus areas of the CPSCM™ Certification Program, which almost half of the Fortune 100 have invested in over the past 5 years. 

    How did you score, and what are your learnings from taking this quiz?

    Now go off and do something wonderful.  Be your best!

    Omid G. “THE Godfather of Negotiation Planning” ~ Intel Corp

    www.PSCMInstitute.com  

    #purchasing #procurement #negotiations #CPO #purchasingcertification #procurementcertification #negotiationcertification

  • Negotiating with Suppliers that have ALL the Bargaining Power

    I have more and more clients that are struggling with pandemic negotiations with suppliers who hold all the bargaining power.  There’s really only 2 things that can be done to address this:

    1. Change the bargaining power dynamic
    2. Drive Investigative Negotiations and Value Creation

    Or you can keep hammering the supplier on price, but you are already doing that, and you were doing it before the pandemic too.   And right now it’s not working, or you wouldn’t be reading this I suppose. 

    Changing the bargaining power dynamic comes down to identifying the source of the supplier’s bargaining power, and then taking steps to reduce the value of that source and/or increase your bargaining power in turn. 

    The end goal of changing the bargaining power dynamics is to create a circumstance where your offer is perceived as being more desirable than it was previously. 

    I remember something Carlsberg Beer did with their soda ash suppliers (glass bottles are made of 70% sand and 30% soda ash).  The sand was plentiful, the soda ash was not.  They were dealing with a powerful oligopoly – almost a cartel of sorts.

    The soda ash suppliers were dictating the terms and getting them, because there were few alternatives.  Carlsberg didn’t know what to do.  The source of the supplier’s bargaining power was the oligopoly and Carlsberg’s lower volume. 

    Carlsberg couldn’t change the oligopoly, they couldn’t use something other than soda ash, and they couldn’t wave a wand and suddenly increase their volume requirements.  

    Or could they…..

    Carlsberg decided to take a disruptive sourcing move and talk with supply chain partners buying soda ash as well.  They put their requirements together and went to the oligopoly with a massive volume that was irresistible.  All in one take it or leave it contract offer.

    Now the oligopoly companies were going head to head for the business and a sweet deal was landed.  The bargaining power dynamics, once hard as steel, were melted away and the tables were turned.  

    This is just one example of how to change bargaining power dynamics.  You have to dissect the source of the bargaining power and take moves to undo it.  

    The other thing you can do is to drive Investigative Negotiations and Value Creation.   I have endless client examples of this.

    One example is with Tata Steel.   Tata is probably the biggest company in India – a massive conglomerate that has no equal elsewhere in the world that I’ve seen.  You can’t breathe air or drink a cup of coffee in India without Tata being involved.      

    They were negotiating with a German mining equipment supplier, the best in the business.   The Germans tend to do business cut and dry.  They had a hard as steel fixed pricing schedule.  Tata wasn’t going to get a single penny deviation from that schedule. 

    Tata thought about this problem, did some research – Investigative Negotiations – and realized that the mining equipment supplier had zero foothold in India.  How could this be?  But it was true. 

    That meant that they didn’t understand how commercia precedents worked in India.  They explained to the supplier that the volume at stake was not just that of Tata’s. 

    They explained that when Tata buys from a given supplier, this is an implicit seal of approval that the entire country of India uses to start buying from that supplier.  They then went through a myriad of examples. 

    They explained to the supplier that whichever company wins this business also wins the whole of India’s mining business.   This suddenly made the pie much bigger – Value Creation. 

    The rigid German supplier came back on their hands and knees with an incredible proposal to win the Indian marketplace.  Their first deviation ever from their hard pricing schedule.  

    Tata signed the deal, whereby the German party made far less money at the transaction level, but stood to gain FAR more in the aggregate from this new marketplace.   Both parties were thrilled with the outcome. 

    That’s exactly  how you do Investigative Negotiations and Value Creation. 

    If you are trying to solve your supplier bargaining power problems with management escalations and hammering the supplier, you’ll lose a lot of hair, but you won’t accomplish much else.     

    Read this Twice:  Doing what you’ve always been doing in negotiations will only deliver you the same results that you’ve always been getting.  And that’s not good enough.

    Now go off and do something wonderful.  Be your best!

    Omid G.

    “THE Godfather of Negotiation Planning” ~ Intel Corp

    www.PSCMInstitute.com 

    P.S. If you want to be a ROCK STAR at driving strategies like the above, check out the 100% online CPSCM™ Certification Program at https://pscminstitute.com/certification/.  You will see the materials and hear my voice throughout, as your own private instructor.  With almost 50% of the Fortune 100 having invested in CPSCM™, there is no equal in the marketplace.  Invest in your career and results today.  

  • Negotiating with Rainmakers

    There’s an existential crisis in procurement.  One we never talk about. The crisis is this: companies invest probably 10,000 times more in the sales function than they do in the procurement function. And procurement is negotiating with sales.

    If you pay really close attention, your sales negotiation counterparts, when coming from a company of similar size, will have more resources, better systems, better data, more insightful market research, more budget, more training, and all of this…. is because they are positioned as rain makers inside their respective companies. 

    Anytime you are negotiating with a large supplier, their resources are more than yours. Period. They might even know more about your company and your demand requirements than you do. The main thing we have in our bag of tricks, at the end of the day, is money. How good of a negotiator would you be without it?

    I’ve read an excessive number of “woe is us” articles on procurement in LinkedIn and elsewhere. Too many, in fact. This is not one of those. 

    This is a reality check. Up to 82% of every dollar that comes into companies in the form of revenue goes straight back to procurement. Sales makes revenue, not profit. Procurement delivers savings straight to EBIT.  

    So why are we viewed differently, and more importantly, funded differently? Why is sales a rainmaker function while we are not? 

    There are so many answers to this question. Get us in the C-Suite, with a seat at the table. Force policies that require procurement involvement. CPO leadership. Involvement in corporate planning cycles.  Etc. All valuable, but I don’t think any of them are the right answer. 

    I actually think the problem, and the opportunity, is much simpler than any of us recognize. 

    Right now, procurement reports Monopoly savings to the C-Suite. “We saved you $226.5 million dollars last year”, we proudly tell our executive management chain.   So where’s the money? The CXO is excited and wants that money, now. The sad truth is it doesn’t exist. It’s all Monopoly money. 

    Why doesn’t it exist? Because we gave it back to the business units in the form of residual budget, and they used all that money to buy more stuff. And so all those “savings” don’t actually exist. We just bought more goods and services than we thought we could have. 

    So the problem, and the answer, is how to deliver cost savings to the CFO instead of back to the business unit. That’s the only way to get procurement out of the back office. 

    That’s the only way to show our value. That’s the only way to get our resources, budget, systems, training, capabilities, and much more beefed up to where it should be. 

    That’s the only way to make procurement viewed AND funded as rainmakers inside of our companies. As we should be. 

    Solve this problem, and we will be sitting at the table with the C-Suite, instead of being on the menu for lunch.

    Now go off and do something wonderful. Be your best!  

    Omid G. 

    “THE Godfather of Negotiation Planning” ~ Intel Corp

    P.S. The CPSCM™ certification program has been invested in by almost half of the Fortune 500, and we’ve made entry level pricing for individual procurement professionals more affordable now, with a new 60% lower entry price that is irresistible. This is the ONLY procurement and negotiations certification program in the world for which you have your own private instructor throughout. You will see the materials and hear my voice throughout. And we don’t skim the A-Z like other procurement programs. We do a deep dive only on those areas that catapult procurement careers. The alternative is, you can keep doing what you’ve always been doing, but you’ll keep getting what you’ve always been getting.   Join the best in the world today at www.PSCMInstitute.com

    #procurement #purchasing #negotiations #procurementtraining #purchasingtraining #negotiationstraining #CPO #procurementcertification #purchasingcertification

  • Writing the Other Party’s Negotiation Victory Speech

    Something we focus very little on in negotiations is how to make the other party look and feel successful out of the deal.  All of our focus is on how to make ourselves look, feel, and actually be successful in negotiations – and letting our management chain know. 

    But the other party has a management chain too.  And do you know what happens when they look and feel cleaned out in negotiations?  The other negotiator may get demoted.  They may get a bad performance review. 

    Additionally, their management chain may deprioritize your account.  They won’t pick up the phone. And every single time you ask for something small, you’ll get an invoice for it.  They’ll get their money back. 

    You have to have a CONSCIOUS STRATEGY to ensure that the other party looks and feels successful out of the deal.  It’s good for them.  It’s good for you.  They’ll treat your account better, and they’ll service you better.  They’ll want you to be successful.  

    Probably the best example of this you’re going to find is in the National Football League.  Even if you’re not into sports, you will learn endlessly by watching sports negotiations play out.  If you want to be a world class negotiator, this has to be part of your ongoing training regimen.

    I just saw an announcement from a football team that they signed a much better than average football player to the richest deal for his position in NFL history – 5 years, USD $100 million.  It’s a mind blowing deal for someone who is very good but not the best at his position. 

    But the details have not yet been made available.  This is intentional, to let the player and his agent both bask in the limelight. 

    The player gets to say that nobody in the history of the NFL has ever gotten more at that position, and the agent gets to say that they were the one who brokered such a deal – enticing other players to sign up with him.

    And the NFL team gets to bask in the limelight too.  The message is “We pay our players above market value.  Come play for our team.  We pay more than anyone else.”

    Now what will the details of the deal look like?  I can tell you without them ever having been announced. 

    It’s probably in reality a 3 or 4 year deal that has been structured as a 5 year deal.  The last 1 or 2 years will have a ridiculous salary that the team will never pay, because they will have put a termination for convenience clause just before those years kick in. 

    The team knows it, the player knows it, and the player’s agent knows it.  They all know that it’s really, say, just a 3 year deal for $52M – fair market value for the player.

    All 3 parties agree to add artificial years and compensation the backend that all 3 parties know will never happen.  It’s all about writing each other’s victory speech. 

    And when the actual details go out, nobody will talk about them, because it’s not to anyone’s benefit to do so. 

    And when year 3 or 4 rolls around and they release the player or renegotiate a new and more reasonable salary, nobody in the public will remember what was announced when the deal was first struck.  Nothing lost.

    This is just one of many strategies that can be employed to write the other party’s victory speech.  We go through this in detail in the CPSCM™ Certification Program.  Contingency agreements can be put in place.  The way in which concessions are captured and communicated can be modified. 

    There are many ways to go. But this has to be part of your arsenal.  It’s good for all parties involved, and you’ll get better results as well.  

    Now go off and do something wonderful.  Be your best!  

    Omid G.

    “THE Godfather of Negotiation Planning” ~ Intel Corp

    P.S.  We are constantly making CPSCM™ even better.   Two new game changing modules (Module XIII & XIV) have been added to the CPSCM™ Certification Program.  Have you seen them?  Check it out!  https://pscminstitute.com/cpscm-for-individuals/

  • Here’s Why Your Legal Dept Holds Up Negotiations

    Here’s Why Your Legal Dept Holds Up Negotiations

    I’ll cut to the chase on this one: The problem is not the legal department.  The problem is you and your procurement dept.  Let me explain.

    There’s really a few pieces involved.  We’ll knock one of them out now.  The legal dept is viewed as overhead.  That means they will never be sufficiently funded, and all stakeholders get impacted by that.  But we can easily overcome this by doing some other things right.  Lets keep going.

    Another part to this problem is that procurement throws red-hot contracts over the fence to legal and asks them to swiftly approve.  You might ask “what else are we supposed to do?”. 

    Well, you have to remember that contracts are risk shifting vehicles, and there are two basic types of risk: legal risk and commercial risk.

    Legal risk includes the potential for financial loss, litigation exposure, vulnerability to damages, public relations exposure, etc.  In short, the legal dept is really focused on limitation of liability, damages, indemnification, insurance, dispute resolution, and intellectual property. That’s their basic scope. 

    And with all the endless hours the legal dept spends in negotiating those clauses, how often have they actually gone wrong for you?  The answer is never.  Most procurement professionals go an entire career without needing any of the provisions that legal negotiated for those clauses.

    So why do we negotiate them at all?  Because they’re like seatbelts.  You put them on 500,000 times in case something happens once.  They’re important, and we need them. 

    Now the remaining clauses are all related to supplier performance.  Clauses that define what the supplier is to deliver, tying payment to performance, and ensuring that there are pre-defined remedies for failure to perform to these measures.

    Do you know how often these factors go wrong? How about almost every single contract you sign!  And do you know how much training your legal dept has in negotiating these clauses?  How about almost none at all! 

    And it’s not their fault.  It’s out of their scope.  It’s in your scope exclusively.  Did you know that?

    Read this twice: The #1 mistake procurement professionals make is to assume that when a lawyer approves a contract, that means it’s a good deal for the business. 

    WRONG.  It could be a terrible deal for the business. The lawyers are just focusing on the legal terms.  The commercial terms, which you are supposed to own, the ones that always go wrong, aren’t a part of their focus at all. 

    And so all the supplier performance trainwrecks that you have are because of the above.  Contracts that are highly effective in mitigating the risk of things that NEVER go wrong, and highly ineffective at mitigating the risks that ALWAYS go wrong!

    Now we get to the third part of the problem.  Our profession likes to save the contract language for last.  We tell the supplier “let’s negotiate price/warranty/leadtime/etc first, then we’ll get to the Ts & Cs.”

    Well, I have news for you.  When you tell that to a supplier, you’ve just become red meat in front of a lion. 

    What they hear you saying is “let’s finalize the commercial terms so you have the business in the bag.  Then once you’ve fully secured the business and have nothing left to lose, we’ll review the contract, and you can redline the entire contract because there’s nothing I can do about it.” 

    Read this twice: Contract terms that are “saved for last” in negotiations will always result in endless heartache for both you and the legal dept.  And those contracts take three times as long for the legal dept to process, because so much more is redlined. 

    And why does the supplier redline so much more when you save the contract for last? 

    Answer: Because they can.  Because you encouraged and incentivized it.  Because they’ve already won the business. 

    The final piece that procurement does wrong which results in the legal morass above is to not be legally savvy themselves and to not have a Service Level Agreement (SLA) with the legal dept. 

    The procurement dept needs to know contract law the same way a mechanic knows a wrench.  The relationship must be that intimate.  And once this knowledge level is established, then an SLA can be negotiated with the legal dept whereby many of the clauses can be negotiated by procurement, absent legal dept involvement. 

    And if you do all the above correctly, by the time the contract goes to legal, the contract will have far fewer redlines, many of the issues will have been resolved by procurement already, and the supplier will not yet have the business in the bag, because the contract terms were negotiated first and not last.  Also, the commercial terms, negotiated by procurement, will be rock solid. 

    Lets move this profession forward together. You can do this.

    Now go off and do something wonderful.

    Be your best!

    Omid G.

    “THE Godfather of Negotiation Planning” ~ Intel Corp. 

    P.S.  We are pleased to announce our new brand: Procurement and Supply Chain Management (PSCM) Institute.  Our new website is www.PSCMInstitute.com.  We have a special offer waiting for you: sign up for Free Membership and get exclusive access to our Power Purchasing Pro course, normal price $397.  Many other benefits await.  Register now!

  • Preemptive Concessions in Negotiations

    Preemptive Concessions in Negotiations

    So many procurement professionals, and sales professionals for that matter, make the fatal flaw of making preemptive concessions in negotiations.

    It just happened to me last weekend.   I was at a simple kiosk at a beach boardwalk.  I told the proprietor that I wanted to buy 4 of a particular item.  I knew the price of each and that the total would be $50.  I conveyed intent to purchase. 

    He responded with “well if you want to buy 4, I’ll give them to you for $40.”  I realized right away that he was making a preemptive concession.  Meaning, he gave me a discount when I wasn’t even negotiating.  I was just going to pay the $50, and if he was just paying attention, he would have known that.   

    Making preemptive concessions is a rookie tactic in negotiations.  It stems from one of three things; consider these the 3 legs of the stool: 

    1. bad negotiation form (i.e., not knowing better)
    2. Lack of information about the other party’s willingness to agree to your terms
    3. Lack of confidence in negotiation positions, which is usually tied to #2.

    How does it happen in negotiations?  Consider the following hypothetical scenario:

    Seller: “What are you looking to get in terms of pricing on our product?”

    Buyer: “Our target here is 15% discount, but we are willing to sit down and discuss.”

    Did you see it?  It just happened.  By saying “but we are willing to sit down and discuss”, a preemptive concession was made.  It’s unmistakable. 

    Why did it happen?  Maybe because the Buyer was trained that way (#1).  Maybe because the Buyer didn’t do their advance homework on the supplier’s pricing schedule (#2).  Or maybe lack of confidence  (#3) because either the price thrown out was way too high, or because the price thrown out was arbitrary, or most likely of all, it stems from #2 – not having done the homework necessary to build such confidence. 

    A lawyer in court never asks a question of a key witness to which they don’t already know the answer inside and out.  The reason is because they do depositions in advance.  And subpoenas.  And evidence analysis.  When it’s game time, they’ve got good form, good information, and good confidence. 

    And if one leg of the 3 legged stool is missing, the stool falls.  If you’re sitting on it, so do you. 

    The very first corporate negotiation I ever did was for logic analyzers and oscilloscopes.  30 years ago.  I thought because I was working for a Fortune 50 company and spending a lot of money, that this was enough.  I had enough confidence to run for President of the United States. 

    We were getting 12% and I confidently asked for 15%. But nobody had trained me, and I hadn’t done my homework.  The Seller said “Why 15%?  Why not 18%?  Why not 25%?!”  I had absolutely no answers and I learned a huge lesson:  No leg of the stool can overcompensate for the others. 

    Your homework is done in advance by benchmarking, finding out if the supplier has a published discount schedule, doing should/must/total cost analysis (whichever is applicable), doing bargaining power analysis, looking at alternatives and substitutes, seeing if the product design spec can be simplified or standardized for lower cost & TCO, looking at dual & multi-sourcing models, and so forth. 

    Once you’ve done all those things, then you can take your positions with confidence (externalized behavioral) and with rationale (internal research).   You can make concessions, but they should never be preemptive, and they should always be data driven.  

    Now go off and do something wonderful.  Be your best!

    Omid G.  “THE Godfather of Negotiation Planning” ~ Intel Corp  

    P.S. It’s just a couple weeks away now.  Purchasing Advantage and The Center for PSCM Excellence are rebranding, and the CPSCM™ is going to be offered at aggressive price points that will be irresistible to all of you.   We are also going to offer a free membership model that will bring procurement professionals around the world together and also offer very valuable free benefits, including $397 of training the day you sign up.  Are you ready? Get ready to join the best in the world today.

  • Sunk Costs in Negotiations

    Sunk Costs in Negotiations

    You’ve all heard of the Sunk Cost Fallacy.  It’s a killer in negotiations.  But usually in INTERNAL negotiations – with management, end users, and other stakeholders. 

    Before we talk about the procurement implications, let me share a story.  There was a cult years ago that said the world would end on a particular day.   They wrapped their mini-religion around that concept. 

    Most people knew that the world would continue past that magic date, and they figured the cult would completely fall apart once they saw that nothing happened, since that was the central premise for the cult’s existence. 

    There was a prominent psychologist however that prognosticated that the cult members would not abandon ship, and further, that their commitment and conviction to the cult and it’s leader would INCREASE, not decrease. 

    It turns out that everyone was wrong and the psychologist was right.  After the magic date came and went, the cult members doubled down and grew even stronger in their convictions about the cult, evidently ignoring the original central premise. 

    This perplexed all but the psychologist, who went on to explain the Sunk Cost Fallacy: past time or money spent on a particular endeavor then biases our interpretation of what should be done next, in favor of that endeavor. 

    And we do it in our personal lives too – for instance, you’ve surely had a friend date someone who was not good for them by any measurement.  Yet they continue to justify, doubling down on intangibles that nobody else sees.

    Why?  Because they’ve spent so much time, even if it was down the wrong road.  It’s the Sunk Cost Fallacy at work.

    Why do you think a full 67% of gym members never go to the gym?  It’s because they charge a registration fee of usually a few hundred dollars, and if they quit, then that money spent becomes a bad decision, and they’ll have to pay it again if they want to rejoin. 

    But the money is ALREADY GONE.  It’s irretrievable.   That’s a terrible reason to keep paying a monthly membership fee, which once paid, is also a sunk cost. 

    Now onto procurement.  Good money gets spent after bad so many times, because of the Sunk Cost Fallacy.  And it’s usually not coming from procurement.  It’s usually coming from end users.

    The exception is when procurement is the end user.  Such as with software systems.  I can’t begin to tell you how many companies and government agencies I’ve met who are completely unhappy with their procurement software and regret ever buying it, but continue to double down and invest more. 

    The California Bullet Train project was supposed to run from LA to San Francisco for $34B construction cost.  That ballooned to over $105B, while the length of the run got reduced to only go to San Jose.  Now they are looking at having it just run a short course in the middle of desolate central California. 

    Fast forward 14 years:  USD $10.3B has been spent and not a single mile of track has been laid.  The project was on ice but just recently got revived again with a new cash infusion.   The government is doubling down on a sunk cost investment – on a bad decision.  This happens all the time in business. 

    Any time you do a financial analysis, you need to separate out the costs: fixed, variable, controllable, uncontrollable, opportunity, switching, cost drivers, and SUNK costs.  It needs to be clearly understood that from that list, only the sunk costs are irretrievable.

    Similarly, all procurement cost analysis should ignore sunk costs already spent.  The view has to be exclusively looking forward – the rear view mirror needs to be thrown away.  Focus on the facts and data and keep emotions and legacy decisions out of it.

    Now go off and do something wonderful. 


    Be your best! 

    Omid G. “THE Godfather of Negotiation Planning” ~ Intel Corp

    P.S. it’s just weeks away now!  Purchasing Advantage is rebranding, relaunching, and an absolutely irresistible CPSCM™ value proposition is coming your way.  Look for the announcement soon. 

  • The Fallacy of At The Table Negotiations

    The Fallacy of At The Table Negotiations

    I saw an article just this last week in LinkedIn describing different scenarios for buyer and seller to go back and forth on negotiation terms for best outcomes – offer, response, counter offer, counter response, etc. 

    It was touted as a game changing system, and was even given a name and trademarked, indicating it was something new and innovative. 

    It’s something I’ve been familiar with since the early 90’s, and I regret that it’s still being taught.

    If you go back to the invention of currency, and probably much earlier, this is how we always negotiated.  Each party trying to get more of the pie in return for less of what they have to offer in return. 

    This was the earliest form of what I call “At the Table Negotiations”.

    Meaning, this trademarked system is hardly new.  Yet it’s highly glorified.  It’s what we picture when there are the greatest stakes of all – with parties intensely negotiating at the table. 

    But all of that is for people who learned how to negotiate by watching TV shows and movies.  Or perhaps as a child, watching your parents barter at the local market. You’re not going to win any negotiations this way.

    Read this twice: Negotiations are won and lost before they ever start.  They are won FAR before you ever engage in At the Table Negotiations.  Anyone who tries to teach you how to win negotiations at the table is at best still stuck in the 1950’s.

    There really needs to be a well rounded approach for achieving success in negotiations.  In fact, the very definition of negotiation success needs to be redefined.

    The 1950’s and prior definition of negotiation success is how much of the pie you can get.  It’s parasitic negotiations.   You gain at the other party’s expense.  Value is being transferred instead of created.

    Negotiation strategies need to involve value creation before going to the table.  This involves researching what keeps the other party awake at night, and creating strategies to help make them more successful out of the deal, while costing your side very little. 

    This is why you are paid the big bucks, and it’s not optional in high stakes negotiations. 

    The other piece that has to be done is bargaining power analysis.  If you find yourself in a negotiation where you lack bargaining power, then you’ve driven yourself to the middle of the desert knowing you have no gas or drinking water.  You can’t let it get to that stage.

    You need to do an in depth analysis of what the source of their bargaining power is.  What exactly and specifically is it that gives them their bargaining power?  You need to understand this FAR in advance of negotiations very, very well.

    What might it be?  Almost anything.  Here are just a few:

    • Perception of highest quality
    • Monopolistic supplier
    • Switching or startup costs associated with adding or switching to new supplier
    • End user or business unit allegiance
    • Production capability
    • Access to critical material(s)
    • Etc.

    Then you need to architect a strategy to change that bargaining power to your favor.  The shift may not happen right away – it may even take years – but you can conspicuously lay the seeds right under the supplier’s nose.  They’ll get the picture. 

    Then there’s internal negotiations.  Most external negotiations fail because of failed internal negotiations.  Being fully aligned on the SOW/Spec hardly qualifies as internal negotiations alignment. 

    There’s alignment regarding procurement and negotiation strategy, sourcing approach, business shifting, standardization, alternative materials, timing, external communications, internal communications, management influencing, deal positioning, cost modeling, vendor evaluation criteria, and so much more.

    This is just skimming the top of things that need to be done in advance of At the Table Negotiations.  If all you are doing is getting trained in and executing to At the Table Strategies, you are stuck in some very old quicksand. 

    The CPSCM™ Certification Program – already invested in by half of the Fortune 100 – will position you to fast track your career and be a Negotiation Godfather.  In exactly 32 days, a huge announcement is coming and all of you need to be paying attention.   CPSCM™ Certification is going to be attainable by everyone.  Don’t miss it.

    Now go off and do something wonderful.

    Be your best! 

    Omid G.

    “THE Godfather of Negotiation Planning” ~ Intel Corp

    www.CenterforPSCMexcellence.org