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Negotiation Strategies for *BREAKTHROUGH* TCO

“THE Godfather of Negotiation Planning” ~ Intel Corp

Omid Ghamami

PURCHASING AND NEGOTIATIONS EXPERT

Omid GhamamiPresident & Chief Purchasing Officer,

Purchasing Advantagewww.PurchasingAdvantage.com

About Your Instructor • MBA, University of California System

• 18 Years at Intel Corp – Ran $2.2B Corporate Purchasing Operations Organization

• President & Chief Purchasing Officer, Purchasing Advantage

• Globally recognized author, speaker, trainer, consultant

• Thousands of hours speaking experience in 15 countries

• 2 purchasing books & multitude of industry purchasing articles

• 50+ hours TV appearances as purchasing industry expert

• Architect, Founder, & Adjunct Professor of Purchasing for the only such curriculum in the State of California

Series Overview, Modules I - IV

• Module I: Negotiation Intelligence Gathering

• Module II: Pre-Negotiation Cost Opportunities

• Module III: Total Cost Analysis for TCO

• Module IV: Planning, Holding & Closing Negotiations

Training Objectives – You Will Learn:• Why negotiations are won and lost before they ever start and what steps to take for next

level TCO outcomes and satisfied suppliers.

• How and when to use benchmarking, should cost, total cost, and must cost models

• How to harness supplier knowledge to streamline and eliminate unnecessary costs

• The secrets to motivating suppliers to be actively involved in driving TCO reduction

• How to make compromises and concessions that suppliers value but don’t impact your cost savings objectives

• How to call a supplier’s bluff when they say they want to walk

• How to select, manage, and carry your negotiating team to the negotiation table

• A “toolbox” of powerful behavioral negotiation strategies that crack cases

• How to establish TRUE win-win, whereby you meet and exceed your TCO objectives while having the supplier feel great about the deal

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Module I

Negotiation Intelligence Gathering

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Pre-Negotiation Phase Importance

Effort spent preparing for negotiations

Expected Results

Negotiations are Won and Lost Before they Ever Start!

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“Give me six hours to chop down a tree and

I will spend the first four sharpening the

axe.”

- Abraham Lincoln

Important Notice!

• Negotiation philosophies that focus on:– Getting the upper hand

– Getting an unfair advantage

– Forcing the other party to agree to your terms based on aggression, deceit, mind games, psychological leverage, coercion, time pressures, etc.

ALL HAVE NO PLACE IN OUR PROFESSION

Influence vs. Position Power• Influence achievement of objectives because the other

party wanted to

• Position Power achievement of objectives because the other party had to

• Influence results in motivated followers

• Position Power results in disgruntled followers

• The ability to influence is THE most important factor in your career success

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Key Message• Properly Evaluating the

Interests of the Other Side is THE Key to Successful Negotiations

• This necessitates a PRE-NEGOTIATION session with suppliers for major negotiations

Counter Intelligence

• Suppliers will know when you haven’t prepared for negotiations, and you will lose bargaining power

• Larger suppliers have a keener sense for this, because they put greater emphasis on information gathering

• Your #1 way of accomplishing this is through developing your listening skills

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Practicing LISTENING in Negotiations

• Before you tell the supplier what you want….

• Ask them what THEY want from this deal to be successful.

• Perception counts! Act interested, take notes, and play back what you heard. – Now is NOT the time to express disagreement

– Your job at this moment is to show you CARE.

• You are gathering counter-intelligence

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The Power of Listening• People are more apt to support a solution when they feel

they had input into it

• Breaks down barriers right away

• Establishes good will

• Increases supplier’s willingness to compromise

• Gives you the data you need to build a Concession Worksheet.

The Win/Win

Myth

– Larry David,

Curb Your

Enthusiasm

“I know, look, listen, you're unhappy. I'm unhappy, too. That's what a good compromise is all about. A good compromise is when both parties are dissatisfied, and I think that's what we have here."

“Splitting the pie down the middle” = Lose/Lose

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Defining Win/Win• Win/Win = meeting your high value objectives and having

the vendor feel good about the deal. • Bitter vendors can and will find ways to increase revenue • Allowing the vendor to “win” while still meeting your

objectives is an art form

“A good deal is a state of mind.” — Lee Iacocca, Former CEO of Chrysler

Differentiating win/win from win/loseWin/Win

• Both parties achieve high value objectives

• The supplier is eager to see your continued success

• Supplier will be your trusted partner in resolving future issues and needs

• Build lasting relationships based on trust, ethics, honesty and transparency

Win/Lose

• Only you achieve your high value objectives

• The supplier is resentful and will do the minimum required by contract

• For a fee, supplier will help you resolve future issues and needs

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Bargaining Power Influencers

• Contributions to manufacturing quality• Buyer’s profitability• Motivation of Buyer in purchasing• Buyer’s negotiation philosophy (win-lose

vs win/win)• Switching costs for Buyer to switch to

another supplier• Technological leadership position by

Seller• Product differentiation by Buyer,

resulting in few Sellers that can support

• Seller’s slack in production capacity• Seller’s desire to gain marketplace

traction in marketing & manufacturing

• Existence of substitute suppliers• Purchase volume offered by Buyer• Ability for Buyer to engage in

backward/forward integration• Supplier’s desire for rapid growth

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Pre-negotiation Meeting with the Supplier

• Pay now or pay later process!

• Key objectives:– Get to know players

– Get to know decision makers

– Align on requirements

– Align on negotiation expectations

– Align on timelines

– Give the supplier homework!

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Get to Know Decision Makers• Authorized to say ‘No’ vs ‘Yes’• YOU own:

– Who comes to the negotiation– Where the negotiation is held– How long it is held for– When they start and stop– Why they start and stop– What is discussed– What your team members say at negotiations– How decisions are made– How the output of meetings are captured

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Calling a Supplier’s Bluff – 6 Key Questions*

1. What percentage of your business will be coming from our firm with this proposed contract value?

2. Relative to your other customers, what is our organization's expenditure ranking with this proposed contract value?

3. Are you currently operating at full capacity?4. Are you doing business in any capacity with other divisions of our

organization?5. If an agreement was reached, are there any target dates for placing the

first order?6. Are there any industry segments or new markets for which you would like

us to use this contract as a gateway?

*Source: Ghamami, Omid, “Calling the Supplier’s Bluff - 6 questions to determine how much they need (or don't need) your business”, ISM™eSide Supply Management, Vol. 1, No. 5, Sept/Oct 2008 issue.

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Giving the Supplier Homework!*Other Key Supplier Questions*

• List of Top 5 competitors

• NAICS Code (or regional code if you are

• Spending from last year & forecast for next year

• Proposal developed that addresses the exact areas on your negotiating plan.

• Now is the time to give them your contract!

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Building a Concession Worksheet - Negotiation skills and Value Creation Resources

• Don’t assume you know why the supplier wants your business

• This is the value of

– Asking questions

– Listening

– Having a pre-negotiation session

• You need to ask the supplier what success means for them

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Example Concession MatrixSupplier’s Desire Perceived Value with Supplier

(1 – 5 scale, 5 = high)

Total Cost Impact to

Purchasing/

Customer

(1 – 5 scale, 5 = high)

Concession Value

(in rank order of impact)

Using customer and firm name as a

reference in advertising 5 1 4

Payment terms of Net 10 4.5 1 3.5Initial payment received by end of

quarter, ahead of product delivery 5 1.5 3.5Weekly forecast updates provided to

supplier to optimize inventory

requirements.

4 1.5 2.5

Limitation of liability capped to contract

value for direct damages 5 4 1

Ownership of new IP Developments 4 5 -1Source: Ghamami, Omid “Win/Win Negotiation Strategies”, ISM™eSide Supply Management, January/February 2010, Vol. 3, No. 1

Module I Summary• Negotiations are won and lost before they ever start – preparation is key!• Counter intelligence gathering is your best strategy for exceeding your

TCO goals while ensuring a win-win• If you don’t determine the supplier’s interests, you WILL end up fighting

over one pie only – most likely price.• Understand bargaining power of both sides at ALL times – including

whether the supplier can really walk from the deal or not – is critical!• Use a concession worksheet to have an advance strategy of how you will

achieve your high TCO objectives through the use of low TCO concessions • Have a conscious strategy and desire to make the supplier successful

*without* impacting your TCO objectives