L4M5- Chapter 1- Approaches in negotiation Flashcards
Why is negotiation in the public sector more limited?
Limited by regulations and legislation
Have to used rule based tendering which usually has restrictions
May be some room to negotiate within the contract management stage but not the pre contract award stages
Unlike the private sector where they are free to negotiate anything (provided it is legal)
What are the stages of the CIPS procurement cycle?
Business need
Analysis of market/ make or buy decision
Strategy and plan
Pre procurement market testing
Develop documentation
Supplier selection
Issue tender documents
Evaluate bids
Contract Award
Warehousing, logistics and receipt
Performance management
SRM
Asset management
How would negotiations arise within stage 1 of the CIPS procurement cycle: Define business need and develop spec?
Internal negotiation with stakeholders
Challenge whether the product is actually needed
What elements are needed (large opportunity to reduce costs at the design stage)
Negotiation with budget holders over price to pay
How would negotiations arise within stage 2 of the CIPS procurement cycle: Market Analysis and make or buy decision?
Informs the negotiation process
Evaluate the bargaining power of the buyer and the supplier
Market analysis (Porters 5 forces)
Local vs national competition
How would negotiations arise within stage 3 of the CIPS procurement cycle: Develop the strategy and plan?
Whether to negotiate and what to negotiate
If you have established there is competition in the marketplace and you would benefit from negotiation
Negotiation is not free and the amount of effort and time put in needs to be worth it
How would negotiations arise within stage 4 of the CIPS procurement cycle: Pre procurement market testing?
This step is where supplier conditioning can begin
Engage with market before tendering to gain insight into supplier pricing, cost structures, strategies and trends
Engage suppliers to attract more interest
Conditioning suppliers on which elements to focus on e.g. cost, quality, ESG etc
What is supplier conditioning?
The process of influencing a supplier or suppliers to behave in a certain way or to accept certain circumstances
How would negotiations arise within stage 5 of the CIPS procurement cycle: Develop documentation and detailed spec?
Limited negotiation, especially in public sector
Focussed on ITT or RFQ documentation
How would negotiations arise within stage 6 of the CIPS procurement cycle: Supplier selection to participate?
Limited commercial negotiation
Normally (via PQQ) this stage is about shortlisting suppliers
How would negotiations arise within stage 7 of the CIPS procurement cycle: Issue tender documents?
Limited commercial negotiation
Follows automatically from stage 6
Sent in the form of an RFQ or ITT
What is the difference between RFI, RFQ and RFP
Information vs quotation vs proposal
Proposal is a document used to canvass potential solutions from suppliers when the spec is still unclear
RFI is to gather information about supplier capabilities
RFQ- invitation to bid on specific products or services
How would negotiations arise within stage 8 of the CIPS procurement cycle: Bid and tender evaluation?
In public sector they need to follow appropriate regulation
This is the first stage where commercial negotiation may start
You have received an ‘opening bid’ from the supplier
Could be initial price or final price (if final then suppliers should know in advance as its effectively their best price)
Suppliers may be invited in to present and answer questions on their bid
What is BAFO?
Best and final offer
How would negotiations arise within stage 9 of the CIPS procurement cycle: Contract award and implementation?
Commercial negotiation may happen in private sector or under regulation in public
Decisions have been made on the suppliers you want and its about negotiating any final concessions
How would negotiations arise within stage 10 of the CIPS procurement cycle: Warehouse, logistics, receipt?
Negotiation with delivery is often overlooked but is critical
Can be internal and external and look at delivery times, unloading facilities, manpower, return of pallets, access, security
How would negotiations arise within stage 11 of the CIPS procurement cycle: Contract performance and improvement?
Commercial negotiation can take place here
Getting agreement on what the data shows (could be disagreements)
may be driven by factors like lack of cooperation/ stakeholder issues
How would negotiations arise within stage 12 of the CIPS procurement cycle: SRM?
Commercial negotiation can take place here
Sometimes suppliers will bid low- knowing that during the contract they will be able to do changes, variations and add ons
Even in a less complex contract there is likely to be changes/ negotiations after the contract is awarded
How would negotiations arise within stage 13 of the CIPS procurement cycle: Asset management?
Commercial negotiation can take place here
Need to manage any transfers from existing suppliers to new ones
Leverage over the outgoing supplier will be weak
Need to ensure the orderly transition of data, staff, assets
There are restrictions on when buyers can negotiate in the public sector, which types of tender can no negotiation be done?
Open
Restricted
Others are:
Competitive dialogue
Competitive with negotiation
Innovative partnerships
What is contract management?
A continuous procurement process that ensures suppliers and buyers adhere to their agreed contractual obligations, along with negotiating any future changes that need to take place
What are the 12 stages of the CIPS contract management cycle?
PRAR
PIR
CDS
EA
Strategy Structure Resources
1. Planning and scoping- responsibilities and obligations
- Stakeholder readiness- expectation management with stakeholders and clear understanding of the agreed contract
- Contract administration- Minor schedule or spec changes required
- Relationship management- Is there a benefit in a closer working relationship. What is attractive to the supplier other than payment e.g. speed of payment, technology
Implementation
5. performance management- Unless managed performance can decline over time and there may be disagreements with the supplier which are subject to negotiation
- Payments and incentives- Negotiation of improvements in performance or additional services or goods in return for additional payments
- Risk and resilience- External environment or other changes may mean risk share needs to be revisited
Development
8. Contract changes and development- core area for negotiations within contracts
- Supplier development- Improvements in the supplier capability, capacity and range
- SRM- e.g. long term strategic critical relationships should have a partnership style and a win win mentality
Life cycle management
11. Exit and termination- what risks exist, ownership of assets etc
- Asset management- Post contract ends, e.g. management of assets outside of warranties, advice on disposal, upgrades, compatability
What are the key considerations in contract management?
Developing and management of contracts
Risk assessments/ mitigation
Sustainability/ ESG/ Ethics
Procurement cycle
Category management
Procurement systems and technology
Strategy and policy
The 12 stages of the CIPS contract management cycle can be broken down into 4 sections, what are they?
Strategy, Structure, resources
1-4
Planning and scoping
Stakeholder readiness
Contract administration
Relationship management
Implementation
5-7
performance management
Payments and incentives
Risk and resilience
Development
8-10
Contract changes and development
Supplier development
SRM
Life cycle management
11-12
Exit and termination
Asset management
Give examples of things that might be sources of divergent positions between buyer and supplier in the content of negotiations?
Price
Quality
Payment terms
Risk share
Volumes and commitments
Contract T&Cs
Dispute resolution
Delivery characteristics
Give examples of things that might be sources of divergent positions between buyer and supplier in the process of negotiation?
Agenda and governance- who decides whats discussed, is there confidentiality
Conflicting negotiation styles- win win vs win lose
Cultural differences- misunderstandings based on customs, unintended insults, punctuality, dress codes
Timescales/location- how many meetings required, how long, on whos premises
Negotiation medium- what interface to use
Team size and make up- who should be present
How negotiations will be closed out- how to identify when it is over, is there a time limit, what happens if the negotiation fails
Why do negotiation situations arise?
Buyer/ supplier seeks an opportunity to improve their position relative to their competitors or suppliers
Buyers/suppliers have different assumptions or attitudes regarding what should happen at each stage
Mutual benefits could be unlocked through negotiation
Buyer/supplier objectives are in conflict
What is the thomas kilmann model?
A model used to determine the style of approach to avoid conflict
Assertiveness vs cooperativeness
Avoid
Accommodate
Compromise
Compete
Collaborate
What is game theory?
A technique of creating your negotiation position by second guessing the strategy or direction of the other party
Each are pursuing their own interests
Give examples of each element of the thomas kilmann model
Compete- objective to win e.g. when you can easily change supplier and not critical so you can push suppliers for a better deal
Accommodate- objective to yield- you have a weak negotiation position so do not want to waste time (could often be for internal negotiations)
Avoid- Objective to delay- maybe when you have favourable (low costs) and want to delay any new commercial terms
Compromise- Find a middle ground- e.g. after a period of avoiding (because of great terms) you may move to make some concessions in price
Collaborating- win win solutions- example is expanding the pie. It is generally seen as the most effective starting position assuming the relationship is important
What is a stakeholder and why should they be consulted on negotiations?
A stakeholder will have a vested interested in the outcome of a negotiation
Also need to be sure it is the best business outcome, not just the procurement person negotiating thoughts on what the best outcome is
What are the 3 types of stakeholders in a negotiation?
Internal
External- can influence the organisation but not connected to it
Connected- other than suppliers themselves, these tend to have low influence on procurement
What are the steps in stakeholder management and engagement?
Identify key stakeholders- everyone who will be affected or have influence or interest
Identify needs and expectations
Identify level of influence and interest (mendelow)
Identify current level of commitment for project success (mainly keep satisfied box who need to become interested)
Identify a relationship owner for each stakeholder (who engages who)
Decide how to engage and communicate
Record actions and provide status updates
What is the mendelow matrix?
Interest vs power
Minimum effort
Keep satisfied (high power)
Keep informed (high interest)
Manage closely
What is the stakeholder support level scale?
Can be used by a procurement individual internally to estimate the gap and progress towards level of stakeholder support
- Resistant/ unaware
- Neutral
- Positive aware
- Collaborative
- Positive advocate
Move up the scale to a more desired state via effective engagement plans
What are the advantages of working as a team in a negotiation?
Less likely to be intimidated
Unlikely to make unplanned concessions
Individual team members can focus on specific areas
Can stage your team for tactical ploys
More witnesses ensuring ethical behaviours are upheld
Junior staff can learn from observations
What is an integrative approach?
Approach to negotiation used when the interested parties are attempting to create more of something of value to share, known as collaborative or win win
What is a distributive approach?
Approach to negotiation used when the interested parties are attempting to divide something up or distribute something of value, also known as zero sum or win lose
Assumes a fixed size ‘cake’ or ‘pie’ that must be distributed amongst the parties so if one loses the other gains
What is zero sum?
Zero-sum is a situation, often cited in game theory, in which one person’s gain is equivalent to another’s loss, so the net change in wealth or benefit is zero
What is the principled style of negotiation?
It is effectively the codification and application of an integrative approach to negotiation (win win)
Agreement can be reached without damaging relationships
It does assume all parties are reasonable, open to logical approaches, want to reach an agreement and are focussed on the best outcome in the long term
What are the 4 fundamentals of principled negotiation? PIOC
PEOPLE
Separate people from problems
INTERESTS
Focus on interests, not positions
OPTIONS
Generate options for mutual benefit
CRITERIA
Use objective criteria
Explain the first fundamental of principled negotiation: separating people from problems:
Shouldn’t necessarily start with both sides starting position and try and find a place in the middle- this is called positional bargaining
Best to find ways of ‘helping you to help me’
Don’t take things personally, both sides are negotiating for the employer not themselves
What are the problems that can occur with separating people from problems in principled negotiation?
- Trying to impress your own team instead of clearly stating the position to the other party and working towards an agreement
- Not actively listening in order to understand the other party, and only picking up contentious points
- Misunderstanding, rephrasing or summarising inaccurately
Explain the second fundamental of principled negotiation: focus on interests, not positions:
Distinguishing between positions the position the party holds in the negotiation and their underlying interests
e.g. The position may be they need a 10% CPI to be profitable but the underlying interest tends to be more flexible, like they just want a CPI
Framing a negotiation on the interests and ultimately why they are taking a position (e.g. on price, quality etc) helps have productive conversations
Explain the third fundamental of principled negotiation: invent options for mutual gain::
Thinking creatively about the benefits both parties get from doing business and aims to find a solution that will benefit both parties
Creating multiple variables/tradeables can create an easier negotiation as there is less of a focus on individual points
e..g can reduce cost of the product (favours buyer) but payment terms need to change (favours supplier)
What is a tradeable?
A negotiation variable (e.g. price, contract length etc) that can be traded during a negotiation
Explain the fourth fundamental of principled negotiation: Insist on using objective criteria:
The central characteristic of an objective criterion is that it can be independently verified
What success looks like needs to be defined (more the objectives not necessarily the specific performance numbers
What would be some examples of competitive, win lose, zero sum, distributive negotiations?
One off deals e.g property or land deals
Purchasing where price is the only variable e.g. commodities
Trade unions pay negotiations
Government budget distribution (distributing a fixed amount of funds from the budget to different departments)
What is a price taker?
Someone who has little to no purchasing power
E.g. Consumers cannot influence prices that suppliers offer
What are French and Ravens 6 personal bases of power? (CHERRIL)
Legitimate- belief you have rights e.g. authority, rank, grade in the military. In commercial it may be the job title
Reward- compensation that can be provided to change the others behaviour e.g. larger organisations have power to reward larger more profitable long term contract
Coercive- can punish the other for non compliance (the flip to reward)
Expert- high level of skill and knowledge
Informational- control of the information required for the other to complete something
Referent- perceived attractiveness, worthiness and right to the others respect (sometimes referred to as charisma in leaders)
Hereditary- power passed down through generations
What is organisational power?
In commercial negotiations it can be described as the capability of those representing the organisation to influence behaviours and decisions of others outside the organisation, by virtue of their association with their employing organisations
What is a BATNA?
Best alternative to a negotiation agreement
Often called a plan B, and it is your back up position if no deal can be agreed
What are the 3 levels that can be used to understand the market dynamics relating to organisational power?
Macro environment- global/national (STEEPLED)
Micro environment- industry forces (Porters 5 forces)
One-one supplier/buyer dynamics
Why is understanding the macro environment important in a negotiation?
Example is even if you are the largest supermarket chain negotiating a price for avocados just after a crop failure, your position is weakened by this external force
What is STEEPLED and how can it be used for understanding the negotiation?
Social
Technological
Economic
Environmental
Political
Legislative
Ethical
Demographic
Questions to ask for the negotiation:
Has anything changed that will affect my power in the negotiation?
Has anything changed to affect the other party’s power?
What is porters 5 forces?
A simple framework for assessing and evaluating the competitive strength and positions of a business organisation in its own industry
Competition/rivalry- number of suppliers, quality differences, loyalty
Power of customers- number of players, number of customers, price sensitivity, ability to substitute
Power of suppliers- size of suppliers, uniqueness of service, cost of change
Threat of substitutes- cost of change, substitute performance
Threat of new entrants- economies of scale, barriers, time and cost of entry
What is supplier positioning?
Process of classifying spend with a supplier in terms of the profit potential and supply risk and assists in prioritising categories of spend and developing the right strategy
Supplier positioning is similar to the Kraljic matrix but what makes up the buyers perspective of this matrix?
Ranks Expenditure on the X axis against Risk on the Y
Tactical acquisition/ avoid (low risk, low expenditure)
Strategic security/ Protect (high risk, low expenditure)
Tactical profit/ compete (low risk, high expenditure)
Strategic critical/ Collaborate (high risk, high expenditure)
Buyer positioning is similar to the supplier preferencing matric, but what makes up the sellers perspective of the buyer?
Attractiveness vs volume
Nuisance
Development
Exploitable
Core
How can you increase leverage through spend concentration?
First step to increase purchase leverage is to review your own organisations spend and if it is split across multiple suppliers
Can be done through:
Vendor base reduction- reduction in number of suppliers
Volume pooling- grouping cross organisational requirements until your order volume is high enough
Volume redistribution- move spend from one supplier to another
Standardisation/harmonisation of spec- could create greater leverage across an organisation
Purchase consortia- may decide to come together and combine their purchase volumes to attract better deals
Stronger relationships- forming fewer, longer term relationships
What is a spend cube?
A way of presenting data in a 3 dimensional way, used to identify the opportunities where you can increase leverage through analysis
Normally split into:
How much you spend on categories/commodities
Who in your organisation is spending the money
Who are you spending the money with
Which factors can make a buyer seem attractive outside just the size of spend?
Low risk
Reputation
No capacity for further investment
Simple processes
No strict T&Cs
On time payments
Transparent and collaborative
Ethical behaviours
Exclusivity
Learning opportunities
Useful business contact
What is the relationship spectrum?
Level of commitment of the buyer vs level of commitment from the supplier
Starts at adversarial, arms length, transactional
Bespoke, single source, outsource in the middle
COllaborative, partnership, codestiny at the top
What sort of negotiation approach should be taken for transactional suppliers?
No business critical products and alternatives exist
Automated purchasing
Short term, high level relationships
Limited negotiation (may not be worth the effot)
Focus on price and delivery
May be over the phone, email and unlikely to be face to face
Win lose scenarios common (can be win win)
What sort of negotiation approach should be taken for Operational suppliers?
Tailored products that may be critical
Alternatives exist but switching may be more difficult
Medium term, and more senior stakeholders
Will be a communication line on things like performance
Targeted negotiations
Focussed on cost and other risk elements
Meetings could also be in person
Can be win lose but more likely win win
What sort of negotiation approach should be taken for strategic suppliers?
Highly significant products that may be unique
Minimal alternatives
High switching costs
Long term strategic relationships
Regular comms, open and full sharing
Regular negotiations
Focussed on total cost for both parties
In person meetings
Win win
What are some examples of having a good organisational reputation?
Reputation= beliefs or opinions generally held about someone/something
Good quality
Enhanced levels of communication
Brand alignment
Low cost/value for money
Ethics
Reliability
Technology
Customer focus
Engineering excellence
Cultural alignment
How do big organisations enhance their reputation?
Sponsorship of prestigious events
Recruitment of salespeople with qualifications (e.g. drug companies hiring qualified pharmacists- even though its not a requirement to do the job it instils trust)
Employ high profile sports people, celebrities or leaders
Buying brands or smaller companies to acquire their goodwill (e.g. Mondelez buying green and blacks, but green and blacks make no reference on pack to being mondelez owned)
What are the 3 types of trust in a commercial relationship? (developed by Mari Sako)
Contractual trust- essentially, you can claim damages if the trust is broken (not the strongest type of trust)
Competence trust- based on the other party’s qualifications or proven capability
Goodwill trust- Knowing the other party has your interest at heart and will not behave opportunistically
If you have a relationship underpinned by all 3 then it is likely to be most durable
Give examples of trust building behaviours and signs of strong trust
Joint issue resolution
Quick info sharing
Open discussions
Joint planning
Celebrate successes
Strong trust:
Mutual agreements and managed objectives
Both sides renegotiating terms
Real time info sharing
Acceptance there may be some conflict but will be managed
etc (p64)
Give examples of trust destroying behaviours
Gossip
Emotion led actions
Blame
Shadowing/ oversight/ focus on controls
Avoiding stakeholders in decision making
Avoiding accountability
