Over-Negotiating with Suppliers

Everybody likes to strike a good deal.  But when can pushing too hard do more harm than good?  We are often called in to help clients with important and/or complex negotiations.  While we are motivated to get the client the best possible deal, we tend to look at the deal more holistically and know there is value beyond just the price tag the client pays for a product or service.  In some cases, we have to work with the client team to make the appropriate trade-offs and balance the desire for a great price with some longer-term interests.  Here are some of the ways we have seen a push for too many concessions can cause unexpected problems.

 

Competitive vs Collaborative

Many people have heard of the difference between competitive negotiations (fixed pie – negotiations is about dividing the pie) and collaborative negotiations (expand the pie – win/win).  What is less clear to people is how you end up on one of those two paths.  Sometimes, the situation encourages a competitive approach – for example, when it is a one-time purchase of a commodity type item.  Other times, companies push themselves into a competitive negotiation for no good reason and as a result, they miss the opportunity to secure significant alternative value.  It all starts with how the negotiations are formed and the initial interactions.  A person that is bent on “winning” the negotiation often starts the discussion by positioning and demanding.  It is natural for the other party to respond in kind, and it quickly devolves into a game of posturing and looking for some way to take advantage.  Once you are locked into that type of tit-for-tat exchange, it is hard to find the trust to explore other areas.  That is the real loss in pushing too hard in this way: you close the door to other paths of value because people are too focused on getting their share of the pie.

 

Lingering Effects

Even with the same outcome, people can feel differently about a negotiation depending on the process and how people use the leverage that they have.  Often times, there are frequent touch points between a buyer and seller over the life of an asset or the duration of a service.  When devising your negotiations strategy, you should consider the interdependencies and the ways that goodwill might serve you, or that a lack of goodwill might hurt you.  It is not unusual for the party on the losing side of a negotiation to find ways to claw back value over time when a relationship has been damaged.  This can happen in subtle ways, for example: assigning the “B” team for support, taking a hard stand on grey areas in the contract, or charging for each every additional request.  If you are in a strong position in a negotiation, you have to determine how far you want to push your leverage.  Going too far in the initial negotiations may have negative ramification in the long-run.

 

Tables Turn

Relationships have a way of flip-flopping over time.  The party that has the power at one point often finds that they are on the weaker side of the relationship at some other point.  This was the case when we were called in to help negotiate a termination agreement for a client.  The original terms were decent but the main focus in the initial contract was on price.  When business conditions changed, the company found that they were paying a lot of money for a portion of a service that they were no longer using.  Unfortunately, the termination clause was not favorable to our client and the company that had been on the losing side of the price negotiations saw this as a way to extract extra income from the relationship.  The issue was eventually resolved because we were able to find some common business interests in the future that made it beneficial for both parties to cooperate and end the current service on fair terms.  This situation could have easily gone the other way and the client learned about viewing a deal from the other party’s side and paying attention to terms other than price.

 

Market Conditions

The dynamics of negotiation may be strongly influenced by market conditions.  In the recessions of 2001 and 2008, suppliers often made deep concessions to acquire or retain a customer in which they would otherwise have no interest.  During this time, some service providers (e.g. contract manufacturers, IT service providers) that previously had revenue minimums for a customer suddenly were competing for any amount of business.  Many smaller customers jumped at the attention that they were getting from these more sophisticated suppliers.  As the market has improved over the last five years, those same customers are often finding that they are no longer welcome or they are no longer getting the attention that originally made the supplier attractive.    We recently met with an IT service provider that was revisiting its business with all customers below a minimum revenue level – customers they fought hard to acquire only a few years ago – if the gross margins were not in line with their corporate goals and objectives.  This can be a costly transition for customers.

 

Summary

Negotiations are a process of movement.  Sometimes you will have more power and can move the negotiations your way.  That is acceptable and we had written a previous newsletter on finding ways to use leverage.   When negotiating, however, you also need to think about the on-going interdependencies in the relationship and consider how far you want to push your advantage.  Often times you will be more successful in the long-run if you structure a deal in a way that allows both parties to have a win even if you have the power to make it lopsided in your favor.  If you are planning a significant negotiation and would like help with strategy, analysis, execution, etc., Symphony can help.  Please contact us if interested.