It's no longer enough for industry leaders to follow the footsteps that the traditional procurement process takes. When negotiations get tough, procurement masters must take the road less traveled and learn to Power Bargain.
Every year, billions of dollars are left untouched in business transactions due to negotiators competing for success in the zero-sum game -- a transactional model in which there can be only one winner and one loser. Conversely, many negotiators miss out on potential value by fearing the bargaining process. They over-cooperate and seek an easy 50/50 split of the pie or they fail to push the other party's limits and roll over at the first sign of confrontation.
Both of these styles lead to agreements in which the overall deal potential is never fully realized. In fact, recent studies by MarketWatch Centre of Negotiation of over 25,000 negotiations found that over one-third of the negotiations failed to reach an agreement and, of the deals that did "succeed," an average of 42% of the potential value was collectively forfeited due to failure to bargain for hidden variables.
Today's high-risk negotiation climate calls for a new style of negotiation -- one in which cooperation builds powerful partnerships that allow hidden value to be found. Once uncovered, the extra value is skillfully debated and divided. This negotiation style, which I call Power Bargaining, requires going far beyond the examination of variables of typical contractual agreements; it involves creating trust and sharing information to build a pie far bigger than either party initially thought was possible.
The Essence of Power Bargaining
While there are many steps for a procurement professional to successfully Power Bargain, it all really comes down to two areas of work:
- Cooperating to find ways to generate added value.
- Then, using a zero-sum strategy to divide the added value.
When two parties agree to cooperate and focus on a common goal they realize that they need more information; otherwise, it will be extremely difficult to find a solution. When they choose to incorporate trust in the negotiation relationship and be open, honest, and transparent with information, they have a better basis for decision-making. They perceive the negotiation as a joint project where the goal is to find the most cost-efficient solution, minimize the risks, and to create improved earning possibilities. In the end, the quality of the solution is directly proportional to the amount of available and correct information.
Some examples of ways to create high-value solutions include when parties:
- Leverage different costs and physical conditions
- Benefit from comparative advantage.
- Have different expectations and attitudes towards risk.
- Take advantage of synergies.
- Utilize economies of scale.
- Avoid or clear up misunderstandings.
After the added value is created, negotiators must shift their mindset to the zero-sum strategy and work to get their piece of the optimized solution they helped create. With near endless possibilities on how to divide the added value, this stage can be tricky and requires the expertise and experience of the negotiator to address each bargaining process on a situational basis.
Power Bargaining in Action: The Case of the Molten Metals
For years, a company we'll call Benton Manufacturing has purchased metal parts from Molten Metals under an annually negotiated contract. The contract review traditionally revolved around price, discounts, and payment conditions and did not consider too many other variables. The normal price for their order typically ranged from $640,000 to $750,000.
This year the Benton Manufacturing negotiator tried to squeeze a few extra dollars out of the transaction using traditional zero-sum game tactics. He argued: "If you cannot accept $600,000 dollars for the order, we will be forced to go to an overseas supplier. As one of the larger manufacturing companies in the country, if we start to import, other companies will soon follow. Importers will then be able to sell large enough quantities that they will build up their own distribution facilities and kill you on price. Accept our demand for a price of $600,000."
In the face of potential deadlock, the Benton Manufacturing negotiator decided to elaborate on why he was making this demand. Instead of focusing on the price of the metal parts, he opened up about their costs and profit margins and realized that the cost of the metal parts was just a small piece of the issue. They decided to re-examine the contract and see what methods could reduce overall costs.
The assembly of the metal parts at the factory was examined step-by-step from the time it was unloaded off the truck until it was a finished product. In a candid conversation, it was discovered that one cost for Benton Manufacturing was to repair parts that they stored for long periods of time. Due to corrosion, small dents and cracks, it was estimated that 15% of the parts had to undergo time-consuming repairs before it could be used and an additional 5% were found to be unusable. Additionally, Molten Metals opened up about their costs and stated that they typically incurred $180,000 charges due to the waste created from cutting and shaping the parts. In total, these issues were costing over $250,000 between both companies.
When brainstorming possible solutions, the Molten Metals negotiator revealed that they had developed a thin, composite-like material that they used to safely store their parts. While expensive to make in small quantities, they had reduced costs by mass producing it. For an extra $50,000, Benton Manufacturing could have their order shipped in a box of the composite material and double the shelf life of the parts. It was also found that by slightly changing the specs of two of the parts that Benton orders, Molten Metals could lower their labor, maintenance and shipping costs dramatically. This created combined savings value of over $200,000 per parts order!
How is the Added Value Going to be Divided?
The new method of shipping and storing sheet metal gave the parties a new negotiation problem. Who is entitled to the gain of $200,000 that the parties have achieved together?
A spontaneous, yet ill-considered suggestion might be to share the gain equally. Delegates suggesting a 50/50 split see this as a fair solution. Nevertheless, splitting the gain evenly is often a sign of fear of negotiating and bargaining. Many negotiators see an unfavorable contrast between having created added value through cooperation and then shifting to a zero-sum mentality to divide it. However, this is actually the most powerful and effective way to negotiate.
While every negotiation must be examined under its unique circumstance, four possible ways to go about doing this include:
- Agree on the division in advance and establish how possible savings are to be distributed among the parties.
- Gain insight into the opponent's calculation. Compensate for all the increased costs, provide a modest profit, and retain the majority of the pie.
- Work towards a prearranged goal: "If we can present a solution where we have squeezed the costs down from X to Y, then we will pay you Z."
- Divide the savings so that the gain is distributed in relation to the parties' work effort, costs, or risk. This can be tricky because both parties typically over-emphasize their own efforts.
Manufacturing Added Value
Not every negotiation will yield a perfect compromise. But without being open and honest about costs and underlying motivations, many negotiators become stuck in gridlock. By identifying the source of disagreements, two parties can leverage their differences in costs, expectations, physical conditions and tolerance for risk to devise a creative solution. In the manufacturing example, the negotiators could have argued over their initial $40,000 difference - instead they can figure out how to split $200,000 in savings.
Traditional negotiations often take the form of two parties fighting over a bigger slice of the pie, but their failure to leverage their differences means that there is additional value in the transaction that will be lost. By taking the road less traveled and learning to Power Bargain, both sides can come away from the table with more than they originally expected.
Keld Jensen has more than 20 years experience in international management, negotiation, and communication from his post as managing director of a listed Scandinavian company. He is chairman of the Centre for Negotiation at Copenhagen Business School, and has authored 16 books on such topics as management, business ethics, and negotiation.