Global Leaders in Procurement & Negotiations (PSCMInstitute.com)

Tag: Procurement Negotiation Training

  • The 3 Procurement Contract Deadly Sins – Part 3

    We are now down to the 3rd Procurement Contract Deadly Sin.  And it’s the deadliest of them all.  If you did not read the prior 2 deadly sins, these all feed upon each other. Here are links to the other 2:

    The 3 Procurement Contract Deadly Sins – Part 1 – Global Leaders in Procurement & Negotiations (PSCMInstitute.com)

    The 3 Procurement Contract Deadly Sins – Part 2 – Global Leaders in Procurement & Negotiations (PSCMInstitute.com)

    This 3rd Procurement Contract Deadly Sin is also the most commonplace.  Everyone is committing this sin, and everyone is suffering from it.  Worse yet, nobody is talking about it. 

    This deadly sin makes you spend 70-90% of every day in unproductive fire fighting activities.  In unplanned activities.   In activities that become the highest priority, but don’t contribute anything to your career, income, or job results. 

    The final Procurement Contract Deadly Sin is this: writing of contracts for goods and services, instead of for *PERFORMANCE RESULTS*.  

    Let’s follow this painful flow:

    • The end user asks for goods and services. 
    • You solicit or tender for goods and services.
    • You negotiate for goods and services.
    • You contract for goods and services.
    • You receive goods and services.
    • Your end user complains, not about goods and services, but about PERFORMANCE RESULTS.
    • Since the contract was written for goods and services, you have no recourse and no remedies, because you got exactly what you contracted for. It just wasn’t what the end user actually needed.
    • You now have to spend your time fire fighting solutions because your end user is unhappy, your suppliers are confused, and the contract you wrote is useless to help resolve.  And somehow it’s all procurement’s fault.

    Sound familiar?  What would you say if I told you the Fortune 100 is absolutely struggling with this?  How about if I said the Fortune 500?  The Fortune 1,000?   Keep going. 

    The procurement profession is struggling with this issue, from top to bottom, in every industry, in every country, at every level. 

    Is that bad enough for you?  

    And what is being done about it?  Answer: absolutely nothing.  The contract templates are for goods and services and the lawyers don’t have it as a part of their scope to address this. 

    The net result is frustrated end users, frustrated suppliers, and exasperated procurement professionals that are full time fire fighters, against their will. 

    The answer is to rearchitect the entire procurement process so that end user demand is articulated in the form of performance results, performance results are solicited and negotiated for, and performance results are contracted for.

    And guess what happens next?  You guessed right: Performance Results are received.  

    No more frustrated end users.  No more frustrated suppliers.   No more full time fire fighter roles for procurement.  Much more free time on your schedule. 

    This is not just a theoretical panacea – we’ve taken over a hundred companies down this path and helped them transform.  Not a single one has looked back.   It’s the only way to go. And with all those employees no longer spending 70-90% of every day in wasted activities, productivity levels have gone through the roof. And they actually have time to work on strategy.

    If you aren’t working on this transformation, then you are a slave to this profession. It needs to be your #1 focus as a procurement leader.

    Now go off and do something wonderful.

    Be your best!

    Omid G.

    “THE Godfather of Negotiation Planning” ~ Intel Corp

    P.S.  The CPSCM™ IS THE ONLY certification program on earth that does a deep dive on this contract transformation that we just covered. Omid G is your private instructor for 32 very dense and fast paced hours – see the materials and hear his voice throughout – online and on demand!   Learn these skills to put your career and departmental results on the fast track for success.   Contact my office at support@PurchasingAdvantage.com for a free demo for your department or to discuss in-house Procurement & Negotiation Capability Building efforts for your team. 

  • 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.  

  • 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!

  • 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

  • Supplier Negotiation Strategies, Part 3 – Supplier Time Pressures

    Purchasing Training - Supplier Negotiation
    Negotiation Shenanigans

    We are doing a blog series here focused on supplier negotiation strategies.

    This is an appetizer for the kind of “main courses” I teach in my online and face to face training solutions.

    We are learning counter-intelligence about how sales people prepare for negotiations and what tactics they use.

    Guess what happens when you know their tactics? You can anticipate and diffuse them.

    The next one in this series is “Supplier Time Pressures”. Suppliers know that purchasing professionals are overwhelmed. You know it too.

    In speaking to thousands of purchasing professionals in 15 different countries, I’ve yet to meet the purchasing professional who has time to spare.

    So let’s start with that premise, because your suppliers start with that premise too.

    Suppliers will look for opportunities to put you in a time pinch. This happens most famously when negotiations are held at their facility, which we covered last week.

    Suppliers will look for an opportunity to paint you in a corner. It can be something like this:

    “Welcome to Singapore! Now let’s negotiate.” This tactic attempts to force a negotiation when you actually need more time and are in no mood to negotiate.

    Another one is where you schedule several days to negotiate with a supplier, at the supplier’s facility, because you want to see their operations (or because they convinced you).

    The supplier then fills the agenda each day with other activities. These activities can be business or non-business related. They might give you a grand tour of the city and sights, take you to fine restaurants, and treat you like a celebrity.

    It’s a great ride, but it doesn’t come with a happy ending. Suddenly, you find that you have two hours left to agree on a deal. That’s exactly how they want it.

    Are you really going to go back to work and tell your boss you couldn’t get anything done in three days? I think not. And the supplier knows that.

    Something I’ve seen Chinese suppliers do is to make a celebratory public announcement regarding a deal having been culminated between the two of you before you’ve ever started negotiating.

    On top of that, they have a big event prepared to celebrate that they’ve put together just for you. What are you going to do, show up at this celebration event and inform everyone that there actually isn’t a deal done?

    That’s like showing up to a massive birthday bash scheduled just for you and telling everyone your birthday isn’t for another 8 months. Awkward.

    Or suppliers will try to impose their own timelines on getting a deal done, and pretend like they are the ones who have the power of choice.

    Guess what, suppliers don’t have power of choice. It is a privilege to do business with your firm. Don’t ever forget it, and don’t let your suppliers ever forget it either.

    You need to turn the tables. Tell the supplier you are not going to rush to make a deal, that you have timelines, but you are willing to push them if you are not getting the kind of TCO deal you are looking for.

    Then you need to ask the supplier when their fiscal cycle ends and if there are any target dates they want to hit internally for financial or incentive reasons.

    And believe me, those are real, hard dates that every sales professional worth his or her salt has committed to memory. Their financial livelihood depends on it!

    This is when you start to turn the tables.

    Hold firm on your positions and trade TCO concessions on the supplier’s part in return for you allowing them to book revenue by their target dates. It works, and it creates a win/win deal. Both parties get what they wanted.

    Always be in control, always exude confidence, and never let the power of money shift to the supplier’s hands. YOU are the one with the money. THEY are the ones who want it, and YOU have the power of choice.

    Do you want to learn more of these powerful and eye-opening secrets and put them to work for you?

    To Get Started Click Here Now

    Want to know one secret clause that isn’t in your contracts now that will save you 75% time in your negotiations, and how to include it?

    Want to learn how you can virtually eliminate redlining?

    Click Here and get that plus much more

    These are YOUR negotiations, be in charge!

    All the heartache and headache that comes with negotiating contracts is preventable.

    Don’t fall victim to supplier shenanigans! Use these strategies to take complete control of supplier negotiations.

    Next week, we will talk about “Value Based Pricing” as a supplier negotiation strategy.

    There is no better place to be than in this profession. Be your best!

    Omid G

  • Do You Cost Model? Why Not? Part V

    Supply Chain Management Training

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    Thank You!

  • Do You Cost Model? Why Not?

    That’s one of the questions I’m going to ask at a 2 day public seminar I’m leading in Singapore next month. If you look at all the negotiation courses out there, they all focus on ways to influence suppliers to achieve your objectives.

    None of the negotiation courses out there, and I really truly mean none of them, talk about cost modeling.

    Is this a problem? Well, of course it is. Imagine going to a car dealership to buy or lease a new car and not having performed any kind of number crunching beforehand. All you have in your bag of tricks is a series of behavioral influencing techniques. Don’t you think that would put you at a gigantic disadvantage?

    Mind you I’m not saying that influencing techniques aren’t important. They’re critical and indispensable. What I’m saying is that if that is all you’ve learned and practiced when it comes to negotiations, then what you have is an incomplete strategy.

    The foundation of all purchasing negotiations is data. Either you’ve done your homework and analysis or you haven’t. No amount of behavioral influencing techniques, as effective as they may be, will make up for this.

    Some of the most tested and true data based negotiation techniques are must cost models, total cost models, should cost models, and benchmarking.

    Should cost models are used when custom product/service or sole sourced providers are being assessed. The reason for these cost models is that there is no other way of assessing whether or not TCO is being optimized, due to the custom or sole source nature of the purchasing scenario.

    Must cost models are used when you KNOW that price exceeds budget under all scenarios. This is the one and only time in negotiations where it is to your advantage to disclose budget. This can result in tremendous innovation and breakthrough, because it forces reassessment of cost drivers to hit new price targets.

    Total cost models are used when there is a material difference between acquisition cost and total cost. This is critical when making a lowest price decision can be counterproductive from a TCO perspective. Post acquisition costs are often ignored or misunderstood in purchasing decision making, and that’s where total cost models ensure that the right TCO decisions are made.

    Benchmarking is best used for undifferentiated products/services where apples to apples comparisons can be performed, usually through an RFX process. Using industry available benchmarking information is often less reliable, unless it is a TRUE commodity item, such as copper, oil, or other traded commodities.

    For any high value negotiation, one of the above cost modeling techniques must be performed, and the right one must be used. There are also lots of rules for doing cost models, from differentiating between facts, assumptions, and estimates to doing sensitivity analysis with key variables to change control techniques. You also have to understand the various types of costs, such as fixed, variable, average fixed cost, opportunity costs, sunk costs, switching costs, etc.

    I’ll never forget my first negotiation ever. I had all my influencing techniques down. I was confident and ready. I told the supplier, who had everything to lose, that I wanted and expected an 18% discount, up from the 15% we were getting previously. I used every negotiation influencing technique I had studied.

    The supplier had one response: “Why 18%? Why not 20% or 25% or 27%?” I sat there like a bag of potatoes. I literally had no response. He caught me. I didn’t do cost modeling. Nobody taught me cost modeling. I had no data based negotiation strategy upon which to rest my case.

    I don’t remember the outcome of that negotiation (it was probably suboptimal), but I will never forget how I felt. Never again would I go into a negotiation without having done cost modeling.

    Are you doing cost modeling for all of your major negotiations? Does your analysis lead you to the lowest TCO answer? Do you know what type of cost models to do and when? Do you follow all the cost model rules above and do sensitivity analysis on your findings?

    If you ever ask yourself “could I have done better in that negotiation?” Cost modeling helps eliminate all doubt, and shows to management and customers that you got the best possible deal for your company.

    Make it a part of your arsenal, be a complete purchasing professional, and put your results and career on the fast track to success. Being good at cost modeling is one of the most confidence building skills you can establish in our profession.

    Contact me if you’d like to get cost model training or have an in-house seminar done for your organization. I’d love to partner with you and help jump your TCO results into high gear.

    SPECIAL ANNOUNCEMENT! 

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    This book is intended to give an overview of the highly critical skill of purchasing contract management (or what sales professionals would call ‘sales contract management’).

    Purchasing professionals are consistently plagued by inadequate knowledge of purchasing contract law, which becomes a capability and therefore a career liability. The goal of this book is to address this problem and turn this liability to an area of strength and competitive advantage for purchasing professionals.

    This book is intended to be a timeless reference guide, and is written for the practitioner – the person who wants concrete and actionable direction to do their job better and get their career on the fast track. The importance and purpose of contracts is covered, followed by how to customize purchasing contracts to fit the purchase, and then a detailed (116 pages) coverage of all major contract clauses, what they mean, and how to negotiate them.

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