What Is Negotiation in Procurement?
Negotiation is communication between two or more parties with the desired outcome of reaching a mutually satisfactory agreement.
There are a number of reasons for negotiations:
- Costs - To reduce the cost of acquisition by achieving a lower price.
- Value – To achieve added value such as reduced lead or cycle times.
- Performance – To improve performance through KPIs’ and SLA’s
- Conflict – To resolve conflict through reaching understanding.
- Problem – To solve a problem by open discussion.
- Quality – To achieve optimum quality through reducing defects.
- Agreement – To reach mutual agreement in a collaborative style where all parties are satisfied.
(Source: Jarvis-Grove, 2020)
Why Is Negotiation Important in Procurement?
Negotiation can take place between a procurement professional and parties within the supply chain for a variety of reasons. Negotiation is used with the intension of all parties reaching an agreement. The ideal outcome is win-win but this is not always achievable. Negotiation can involve a number of ploys and tactics but regardless of the approach taken, preparation is key. For further information see negotiation preparation and checklist tools.
What Are the 7 Stages of Negotiation?
The negotiation process comprises seven main stages.
- Preparation - Arguably the most important step is preparation. Without thorough preparation including research, knowing the objectives, understanding the concessions and having a BATNA, the negotiation is unlikely to reach the optimum outcome. See Negotiation Preparation and checklist.
- Opening - This is where both parties explain what they want as a result from the negotiation.
- Testing - This stage is where parties try and understand what is really important to each other and where concessions could be made. Effective communication is very important at this stage, ensuring that good listening skills are put into play to gather as much information as possible as well as reading body language from the other parties.
- Proposing - This is where each party puts forward their proposals of what they would like to achieve having heard the opening stage and been involved in the testing.
- Bargaining – This takes place where each party offers to give up something in return for something back i.e. tradeables. If one party has to give something up but receives nothing back in trade, this in known as a concession.
- Agreement - Once bargaining has been completed it is expected that an agreement can be made. Agreement has to have acceptance from both parties to be legally binding.
- Closure - The final stage is closure. This stage includes the documentation of what has been agreed, whether that is a contract or minutes from a meeting. Closure is an important stage – without the documentation the agreement is open to interpretation.
What are the 7 Rules of Negotiation?
- Clear realistic objectives – Know what success looks like. What are the minimum outcomes you must achieve? Think about if you cannot achieve them, what is your walk away point?
- Develop your game plan – Understand your position and who is in the weaker position. Most negotiations require trade-offs and compromise so it is important to know what are the deal-breakers and where you may be willing to trade.
- Research you opposition – Take time to study and understand your counterpart. What is their style? Can they be trusted? What are their objectives and identify any common goals? Communication and active listening skills will play a part here.
- Win-Win – Aiming for a win-win is ideal where you have an ongoing relationship, as if that party felt that they were treated unfairly in the negotiation they this may cause issues and damage the relationship further down the line. You should still focus on your objectives but consider the relationship more important than win-lose.
- Active Listening – Listen to the other party and pay attention to their interests and what matters to them and ask questions to help you understand where there are tradeables.
- Build Trust – Building trust is key to a negotiation. Knowing both parties are ethical and will follow through and are trustworthy is key in the negotiation process and continuing a relationship.
- Focus on Value – For both parties to come to an agreement there must be value.
CIPS Negotiation Tools
- Reasons for Negotiation - The need for negotiation within procurement can present itself in a number of ways. This model explores the reasons for which negotiation may become necessary.
- Stages Of Negotiation - The negotiation process comprises seven stages shown in the model.
- Negotiation Preparation - This model shows how much resource should be used with negotiation preparation.
- Negotiation Check List - This template should be used as part of the negotiation preparation. This check list will enable a buyer to be certain that all generic aspects that could present themselves in a negotiation have been thought about as well as research prior to the negotiation itself.
- Negotiation Styles - Negotiation styles vary depending on the relationship that a procurement professional has with their supplier.
- Win-Win - This model outlines the four potential outcomes of any negotiation.
- Negotiation Ploys - Negotiation ploys/tactics are often used but can be subject to risks. Ploys/tactics have to be carefully researched prior to introducing them into a negotiation.
- MIL - This model outlines the goals that the parties within a negotiation can achieve.
- MIL Template - This template is designed to be used prior to a negotiation as part of the preparation. By recording what has to be achieved, what would be beneficial and what would be an added bonus, a procurement professional can have a full overview of the areas that they are able to trade or concede on
- BATNA - This model shows the importance of having a BATNA – a Best Alternative To A Negotiated Agreement.
- If Negotiation Fails - Whilst in industry parties enter into negotiation with a view of generating a satisfactory outcome, it is not always possible to reach an agreement. If the negotiation cannot conclude in an acceptable manner there are options for escalation.
CIPS members can download the CIPS Negotiation Tools to use in your organisation along with the guidance notes will full explanations of all of the tools listed and how to use each tool effectively.
Negotiation Resources for Members
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