PREPARATION: FUNDAMENTAL TO NEGOTIATIONS?
Most negotiators greatly underestimate the amount of time required to effectively prepare for and research the background to any business negotiation. The old clich� says 'failing to prepare means preparing to fail'. We should spend at least twice as much time preparing for business negotiations as we expect to be engaging in actual negotiations skills.
E.g. if we estimate that we are going to spend 1 hour negotiating with our counterparty, we should then consider spending approximately 2 hours preparing for the engagement. The better our preparation, the greater the chances of achieving superior outcomes in our business negotiations skills.
Negotiation preparation is the most important part of business negotiation best practice and is specifically critical for complex, multi issue, multi party negotiations. Let's then analyze what is important to be considered in support of our efforts and decision making processes in business negotiations skills.
1. Understanding the context.
The context of negotiations skills can be understood by an analysis of the environment in which businesses operate. Some of the key elements to consider in understanding the context of a business negotiation include:
What is the nature of the sale/purchase you are making in terms of risks involved, the level of expenditure and the complexity of the deal?
Competitive analysis - what is the nature of the market and what alternatives do our counterparties have available. E.g. in a purchasing role it is critical to understand the supply market in order to prepare our negotiation strategy effectively. We will approach negotiations skills with a sole supplier differently than with a potential vendor in a fully competitive market. Identifying market characteristics for specific services and goods will allow us to understand how the market works, its competitiveness and key suppliers.
Is it a one-off deal or should we consider maintaining a long-term positive relationship that creates opportunities for future business. For example, in a situation where we sell a car or a house we are normally only interested in the best price and not really interested in an ongoing relationship. A competitive approach with no consideration for the relationship will most likely assist us to achieve our goals and objectives if no ongoing relationship is concerned. On the contrary, most business negotiations are more complex and although price is usually an important factor, there are many other criteria that have to be satisfied on both sides as a foundation for mutually rewarding negotiations skills and relationships.
Have we had any dealings with the other side in the past and what is their most likely approach to doing business?
What does the power balance look like? (Legitimate power, Reward power, Coercive power, Expert power, Referent power)
How skilled are the negotiators on both sides of the table?
What cultures will be represented at this negotiation? (Ethnic, Corporate & Professional Cultures should be considered). Do you need to do any homework regarding the local customs?
Who are all the parties & individuals involved in the negotiations skills and the decision making process? When selling it is critical to identify not only final decision makers, but also final users of our product or service in order to develop internal groups of support within our counterparty's organization. A diversified approach is required as different buying roles look for different benefits and advantages when purchasing a product or service.
Final decision makers (read people who release the money e.g. CEO, FD etc.) will most likely be interested in Return on Investment and increased revenues & margins as the ultimate result of purchasing your product, service or solution. The final user who looks for improved productivity and efficiency will find the financial elements almost completely irrelevant.
2. Understanding the deal objectives.
In any negotiation it is critical to understand the tangibles that all parties are trying to gain or achieve. If we fail to prepare and prioritize our deal objectives we put ourselves at risk of being exploited and/or ending with a sub-optimal agreement. Whether you are engaged in negotiations skills on the sales or purchasing side consider the following elements when preparing for negotiation
- Price and payment - Key Obligations - Delivery - Warranties - Intellectual property - Risks etc.
Price and Payments: the notion that price is the only issue in negotiation is not entirely logical. The competition and the complexity of most business deals require finding negotiations skills to create additional value and to move negotiation from positional bargaining to synergistic and creative joint problem solving. Professional buyers are not charged with buying the cheapest solution available but rather with providing their organizations with the cheapest total cost of ownership. It means that besides our company, product and salespeople attributes we can differentiate ourselves from our competition by using the TCO - Total Cost of Ownership approach that is composed of amongst others:
Acquisition costs: includes price, freight, legal fees, warehousing costs, initial training costs etc.
Maintenance costs - repair labor, loss of productivity or revenue during maintenance - The cost of use - fuel or energy costs, safety costs, performance monitoring costs.
Support costs - insurance, taxes, management fees etc.
Supplier performance metrics - financial stability, cost improvement ideas -
Delivery costs can be imposed either on the buyer or the supplier and may include: custom taxes, fuel, loading goods etc.
Quality - testing, defect management, cost of and losses associated with potential external failure.
Customer Support - how many people involved, for what period of time etc. Bear in mind that happy customers will tell others of their positive experience.
It costs much more to attract a new customer than to keep an existing one.
If we are able to minimize the other side's costs involved in the whole life cycle of our product, solution or service and at the same time offer value for money we are in a better position to find common ground with our counterparties and ultimately increase our market share. Additionally it is necessary to clearly define the payment terms and conditions. If you buy make sure you know what is included in the price, when you have to pay, and what happens if you don't pay on time.
Key Obligations: what work the supplier will do and what the buyer will do in return. Make sure your product and services are clearly defined and reflect your negotiations skills. Include all the relevant quantities and specifications. As a supplier make sure you can live with all the specifications stated by the buyer.
Delivery: when and where are the goods or services to be supplied? Is there any extra charge for delivery? How important are the delivery timelines and what happens if the delivery doesn't take place on time.
Warranties: a promise that the products or services will meet a required standard. As a supplier don't expect signing a deal with no warranties at all and make sure you know the limits on what you are offering. In order to maintain trust and credibility make sure that you can live with any promises you are making.
Intellectual property: difficulties in negotiating IP ownership can lead to delays in implementing an agreement.
Carefully negotiate IP ownership rights and consider the following factors:
What party is paying for the R&D?
Could the development be used by the competitors to your loss if you don't own the IP? - How can you prevent competitors to use the same IP?
Intellectual Property can become a key differentiator in a highly competitive market place.
Risks: the best way to manage risks in negotiation is to include the elements that carry any risk in a written contract. Cultural consideration is critical. In Asian countries like China the goal of negotiation is not a signed contract. In China - unexpected circumstances, whenever they arise, are resolved through the relationship and therefore all the risk involved needs to be managed through the relationship as well. Explore the risk aversion of the other side as the value in negotiation can be created by shifting risk to the party that is more able to bear it, in exchange for greater potential returns.
Analyzing the above elements are crucial in planning Concession Strategies that will assist you to leverage maximum value from trades and in planning meetings optimally. Always map out all your negotiation goals as fully as you can and for each Goal, capture your own and your counterparty's view of the Goal with the best information you have.