Negotiation in Procurement -IQPC mining procurement and supply forum

Peter Spence
SPANS www.spans.com.au
03/25/1403/25/14 11
Copyright © Peter Spence, SPANS 2013
Building Procurement Capability
and Success through Effective,
Systemic Approaches to Negotiation

 Negotiation is an essential skill for all Procurement Professionals
who expect to lead negotiations with suppliers required by the
organisation
 Investment in professional development appears low despite the
high risks and costs to an organisation of having untrained
professionals undertake significant and complex negotiations
 If you expect or are expected to lead negotiations and negotiation
teams, particularly across boundaries and functions, knowledge
and experience in more contemporary negotiation theories and
practice will put you at a distinct advantage
 OTJ learning and following the lead of others may not cut it – you
may only become proficient at doing the wrong thing
03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012 22

 So how do or would you know if your
Negotiation capability is fit for purpose?
 Firstly, it may help to challenge the perception
of what negotiation is or should be –
answers to the following questions may help.
How do you measure
negotiating success as an
individual and organisation? Does your procurement or
supply group follow a standard
negotiation theory or
approach? What is it?

If not, how do you validate, support
and evaluate the level of competency
in the approach you are taking?
03/25/1403/25/14Copyright © Peter Spence, SPANS 2012Copyright © Peter Spence, SPANS 2012
44
Has your organisation invested in
developing negotiation as a core
competency within your procurement
and/or supply group?
Do you have incentive systems and support
structures that reward group as well as
individual negotiation performance?

How strong is your internal and
external procurement and supply
relationship networks?
The competency to Negotiate will determine the
successful performance of the procurement and supply
functions

 Price and short term cost reductions/savings
appear to be the current main measure of success
for mining procurement and supply functions –
reflecting downturn demand in the industry and a
glut of supply.
 Money is the only bottom line
 There may be other real issues that you need to
address to ensure high quality, innovation, reliable,
safe and cost effective supply, strong, stable and
secure supply relationships
What happens
when demand
picks up and
supply is
limited?
Or is it?
How well does your
negotiation approach serve
real issues beyond price?

 You may be tasked with getting the best deal for the
organisation while your performance is only measured
on short term cost reductions
 You may be provided with little authority or mandate to
negotiate beyond price yet will need to satisfy various
demands from multiple users in the organisation that you
are accountable to.
 Sound familiar? You can change the situation.
 Our focus and measures of success define our
negotiation styles and approaches
 Successful negotiations deliver agreements that satisfy
the interests of each party involved; preserve
relationships, are efficient and durable

Interest Based Systems
Sound and Strong
Power/Rights based systems
Distressed, fragile/weak

 Despite the high costs, its seems we are locked into a traditional
negotiation approach that is pre-occupied with exerting rights and
power more than satisfying interests
 Positional or Distributional Bargaining still appears to be the
prevalent Negotiation approach within the mining procurement
and supply field where competition and adversarial bargaining
based upon positional claims (rights and power based) is
preferred to collaboration (interest based)
 ‘Soft skills’ associated with collaboration often seen as a sign of
weakness by hard bargainers in the mining industry

 Positional or Distributional bargaining is aligned to
an adversarial or competitive ‘sum/lose’
negotiation approach – the more you win the more
the other side must lose
 Aligned to a scarcity mentality - an assumption
that resources are in short supply and fixed drives
this hard, competitive bargaining style
 More suited to market haggling over single,
simple issues
 Not equipped to handle the complexity of mining
procurement and supply - yet it persists
why?

 Culturally understood
 Requires little preparation and is easy to use
 Outcomes are predictable
 Used to divide scarce resources when
long term or future relationships are not important or unlikely
 Suited to simple, single dimension and party issues
 It is a process we are familiar with as a traditional form of
negotiation.

 Not suited to complex or multiparty negotiations
 Tendency to focus upon positions rather than underlying
interests of each party
 Rights and power based adversarial approach that
promotes conflict and undermines long term relationships
 Resulting agreements may not be durable
 Leaves significant money or value behind at the
negotiators table (claiming but not create value)
 Tendency to negotiate around a single issue (price) only
may compromise other important interests – i.e. quality,
safety and relationships

Some procurement professionals find it difficult to break
from the status quo and continue to pick and squeeze the life out
of low lying fruit while leaving considerable value behind to waste
on the tree.
It is not difficult to identify hard bargaining styles:
◦ Traditionally competitive and opting for rights/power solutions
before interests
◦ Presents arguments emotionally and not on merits
◦ Seek multiple concessions before reducing demands
◦ Use intimidation to make unreasonable demands
◦ Use what you say against you
◦ Reluctant to disclose/share information on real interests

◦ Competitive, hard bargaining tactics are not the answer
◦ Hard bargaining strategies undermine trust and relationships
needed for joint problem solving and value creation
◦ A narrow focus on value (success measures) and
competition over fixed or limited resources results in missed
opportunities for mutual gains and expanding the value
proposition
◦ Hard bargaining processes limit communication, disclosure
and sharing of important information that is essential for
innovation, value maximisation, early risk identification and
management

 A process dominated by auctions and competitive tender bids
that determine the value of goods and services
 Little room allotted to negotiations that create the value of goods
or services supplied
 Competitive tender processes that lock out opportunities and
benefits derived from negotiations
 Use of the higher cost rights and power solutions (default to
contract compliance and performance remedies) that are
indicative of stress in the supply relationship management
system
 Increased conflict over rights and power positions leading to high
costs in disruptions, delays, withdrawal of supply and litigation

 Auction bidding (competitive tenders) more suitable for simple
procurement projects - more complex projects require a higher
level of negotiation involvement
 One way transactional processes such as competitive tenders or
auctions do not support the two sided, two way processes of
negotiation
 Pure auction or tender bidding processes can stifle
communication between buyer and seller resulting in poor trust,
mutual understanding, reliability and commitment
 Buyers risk missing out on accessing the sellers/suppliers
expertise on improvements to the supply chain function, process
and/or shared complementary resources that may deliver further
savings or cost benefits

 Mining Procurement and supply functions seem to struggle to
extend their focus beyond cost containment and onto other
value creation opportunities
 The majority of Negotiation efforts may be attributed to price,
yet other areas of value creation are ignored – surety over
supply, quality, timing, safety, innovation etc.
 Serious money and value may be left at the table
 To create value beyond cost savings, procurement and supply
leaders need to change their approach toward more
contemporary theories and practice of negotiating supply
agreements

 Balancing traditional power and rights approaches with more
cooperative negotiation strategies will enhance supply
relationships to deliver more strategic value to the organisation.
 Shifting our thinking from purely transactional, distributional
negotiations to more contemporary mutual gains and
collaborative negotiation approaches
 Developing Soft skill development in areas such as negotiation
and collaboration competencies to deliver stronger value
propositions for procurement and supply functions

 Ensure the procurement and contracting function is flexible
enough to enable pricing and conditions to be negotiated if
required to manage emerging supply risks – also allows you to
search for and negotiate post settlement settlements
 There may be strength in leaving contracts incomplete in
terms, so that they may be reviewed and renegotiated during
the contract lifecycle for mutual benefit
 Consider the option of introducing an invitation to negotiate
process as a pilot – inviting supplier participation in outlining
the procurement scope and framework for negotiations

 An invitation to negotiate process provides an opportunity to
access information that may improve supply chain
processes
 Consider conducting negotiations with buyers or suppliers
around areas for cooperation beyond traditional contract
terms and conditions – cooperation may lead to each party
revaluing the criteria and opportunities for negotiation
success

Part of changing the game is shifting the mindset from thinking
of suppliers/buyers as adversaries to approaching them as
partners in the supply chain. Supply or procurement relationships
that are well developed and strong are more likely to:
 Increase access to expert and leading edge knowledge to improve
innovation, efficiency and cost benefits
 Improve Innovation - sharing and co-creating knowledge
 Improve trust, commitment and reliability
 Strengthen performance management through collaborative
development, alignment and commitment to KPIs
 Produce reliable quality suppliers

 Deliver soft skills that complement and leverage technical skills
 Prevent and resolve conflicts more efficiently and cost effectively
 Increase the company's Relationship Capital – brand, reputation,
scalability of networks etc.
 Early identification and coordinated response to potential supply
chain failures or threats – risk management
 Increase efficiency and safety for not only the supply chain but
wider business operations
 Promote joint problem solving and more innovative value add
solutions
 Strengthen the durability of agreements and performance

 Now that we understand the high cost of positional or distributional
bargaining what do you intend to do: Surrender, play their game,
quite the game or change the game.
 Changing the game is the most effective response.
 Adopt a more collaborative, mutual gains approach to negotiation
How do we change the game to drive
joint supplier/customer innovation and
create value while still achieving
substantial cost savings?

Mutual Gains Negotiation is based upon the
Principled Negotiation Theories of Fisher, Ury
and Patton.
1. Separate people from the problem
2. Focus upon interests, not positions
3. Invent Options for Mutual Gain
4. Use Objective Criteria to set legitimate
principles for decision making
5. Improve your BATNA
2424

 Emotions become tied to positions
 Positions often mask our underlying interests –
fighting over positions causes us to lose sight of
what we really want (core strategic intent)
 Don’t waste time and money trying to get even or
over the other party – instead, focus on getting what
you really want
 By analysing, identifying and focusing to resolve
underlying interests, any resulting agreement will be
based more upon merit
 Positional bargaining undermines relationships
2525

 Avoid searching for a single answer and bargaining over
a fixed pie - enlarge the pie and increase value
 Work with supply partners to generate options without
judging them – brainstorm ideas and possible solutions
without deciding or committing = innovation and value
creation
 Search collaboratively for mutual gains – this results in
Win/Win outcomes, increases value to the agreed
outcome – avoids the win/lose outcomes associated
with unilateral gains
2626

 Search for shared interests
 Search for different but complementary interests that build
value – concept of integrated diversity
 Don’t avoid or compete over differences – ask questions and
seek out differences that you can trade across to ‘package
agreements’ that meets the interests of and increases value
for all parties involved
 Identify and offer something that may be of little value to you
but of considerable value to the other party – seek the same
from your supply partner (i.e. spare warehousing capacity;
transport; billing preferences, technology; branding as
preferred supplier etc).
2727Copyright © Peter Spence, SPANS 2013

 Without rational, objective standards on which to base your
negotiation, the process degenerates into bargaining over
positions and not upon the underlying principles or interest of
either party
 Insist that the outcome reflects some reasonable or fair
standard that is independent of the will of either party – i.e. cost
modeling based on industry standards to determine fair supply
margins; mining industry logistic, safety or quality standards.
 Outcomes based upon fair principles tend to be more durable,
enforceable and preserve relationships
2828

 A BATNA provides you with a guide to what is minimally
acceptable as an agreed outcome
 Provides a ‘walk away’ surety that you can do better
elsewhere without having to accept a poor outcome or
concede to pressure from a more powerful negotiator.
 The BATNA should set your (value) zone of possible
agreement (ZOPA)
 A BATNA should improve upon your acceptable ‘bottom line’
to strengthen your negotiation position and improve
your negotiation power

1. Prepare for Negotiation – Most of the success
of negotiation is attributed to preparation
2. Create Value
3. Distribute Value
4. Follow through – use nearly self enforcing
agreements, monitoring arrangements; agree
on mechanisms to deal with surprises;
continue to build relationships
(Adapted from source: Lawrence Susskind: Consensus Building
Institute)

 In the end the value that has been created must be distributed
 Can lead to an impasse to reaching an agreement
 Mutual Gains or ‘win/win’ negotiations do not necessarily
translate to equal outcomes, rather the objective is for all
parties to gain (win) more
 Create value first and then approach value distribution using
the mutual gains approach to preserve long term relationships
and trust in shaping the final agreement
 Use objective criteria that each side supports to divide value
 The mutual gains approach balances the tension between
creating and claiming value

 Avoid intervention by or changes to ‘new’ third parties at the 3rd
stage of claiming value – introducing complex process issues
not previously discussed or agreed risks undermining the
strategic intent of the agreement (i.e. Legal Department
developing and formalising contract terms and conditions after
scoping and pricing has been negotiated)
 This is where agreements can become unstuck, incurring the
significant delays and high costs of conflict
 Consider a one text arrangement to record consensus over
terms and conditions (including risk management ‘contingency
bets;) as negotiated from start to finish
 Involve all relevant parties in preparing for and conducting
negotiation from the outset

Individual Barriers to Mutual Gains Negotiation –
why
the legacy and cost of distributional bargaining
prevails:
 Uncertainty of the problem
 Own fears or assumptions (expectancy theory) that you
are going to be ‘taken’ causing defensiveness, hard
bargaining and attracting similar competitive approach
from other party (self fulfilling prophecy)
 Their hard bargaining style
 Being under prepared for Negotiation or preparing in the
wrong ways
 Lack of confidence in your ability to negotiate
3333

 Disproportionate amount of preparation time on planning
for what we want to get out of negotiation
 Not enough time spent on what we may end up with if
there is no agreement (need to spend more time on
analysing and developing your BATNA)

Organisational Barriers to Mutual Gains Negotiation:
Negotiators often do not prepare as organisations do not allow them to
(insufficient resources, time etc)
The organisation is not familiar with analysing its own BATNA
Lack of internal communication and understanding within the
organisation on what the negotiators objectives are
The organisation only rewards hard bargainers
Lack of internal cooperation in advance of the negotiation task
The organisation does not provide negotiators with a clear mandate to
negotiate
3535

 Adopt a collaborative, mutual gains approach and build your
competencies and confidence in this approach
 Prepare, prepare, prepare – over 80% of successful
negotiations are attributed to preparation
 Invest in developing Negotiation as an organisational rather
than individual capability alone
 Conduct a negotiation audit to compare current capability,
challenges and opportunities]
 Develop Negotiation and Collaboration as core organisational
competencies – the following steps drawn from the work of
Hallam Movius and Lawrence Susskind in their book ‘Built to
Win: Creating a World Class Negotiating Organisation’ provide
a useful guide

Before negotiating with external parties you may
need to get your own house in order first by:
 Negotiating with internal business partners on how you
will negotiate – engage internal partners to work as a
team toward an agreed strategic intent to create value
for the organisation –
 Negotiating Negotiation back tables – negotiating with
internal people in the organisation to who we may be
accountable away from the negotiation table (those not
directly involved in negotiations but influential

 Clarifying roles, responsibilities, authority, mandate (often
these may be vague, processes are unclear and decision
making rules not agreed to)
 If you are directed to seek unreasonable concessions or
adopt hard bargaining there is a need for you to renegotiate
your negotiation mandate and criteria for success
 Engaging key internal partners in the Negotiation process
from preparation to completion to ensure cooperation and
alignment of decision making
3939

The following example of a ‘mapping negotiations’ kindly provided by Ray Fells,
Professor at the Western Australia University illustrates the complexity of negotiations
within the company

 Consider a simple network analysis exercise to visualise and
evaluate both internal and external partner relationships – your
‘negotiation affiliation network’
 Network Analysis mapping will also enable you to see who is
influencing who in the network
 Identify partners you will need in the network and of those, who
you have got
 Identify network structural holes that you may need to bridge
(whether across Departments, Organisations or functions) to
secure partner engagement
 Identify key influencers or brokers that can connect you to needed
partners, resources etc., provide an alternative bridge to bypass
network blockages that impede negotiations, or act as
allies/intermediaries

Internal and external
networks link to
form the complete
procurement and
supply negotiation
network
Red labels denote
internal; Blue labels
external
Connection strength
between partners
(nodes) denoted by
width of links
(vertices)

 Supply networks are a negotiated order – we have to
negotiate connections, roles, responsibilities, resources
 Identify and engage connections that may provide
alternative solutions to manage potential supply chain
disruptions and minimise dependencies
 Negotiation networks allow you to build winning
coalitions
 The strength of your supply network relies upon the
negotiation strength within it

 While you are busy negotiating the deal you should be aware
that there may be negotiations going on elsewhere within the
network that will impact upon the outcome of your negotiations
 It is important to map and get all parties involved in the
negotiation process from beginning to end
 The deal is not done until performance is delivered
 Securing the agreement and contract is just the beginning –
performance will still require ongoing negotiations and
performance management
 Link individual performance criteria to the network negotiation
process – giving partners a stake in the process ensures their
interests align with the strategic intent of your negotiation

 Business partners who only become involved in the
implementation of the agreement during the later stages
can still derail a contract and incur significant costs
 The power of preparation – time spent preparing for
negotiations at the front end adds value and saves
considerable costs of renegotiating or seeking remedies
for breach of performance during implementation
 Investing in Negotiation as a core organisation or group
(network) competency will assist to identify and engage
all parties in the preparation/planning and
implementation process

Peter Spence is the Principal of Strategic Planning and
Negotiation Services – a consultancy that provides
negotiation competency training and development,
coaching and advisory services.
Peter welcomes your inquiries to discuss negotiation
training or advisory needs and can be contacted on
MOB 0457 941188
email: pmspence@bigpond.com
website www.spans.com.au

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