NEGOTIATION

Global Procurement Perspective

From: Presented by:

Chapter 13 Chapter 20
Akshay Sharma
13PGP008
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Chapter Overview
• What is negotiation?
• Negotiation framework
• Negotiation planning
• Power in negotiation
• Concessions
• Negotiation tactics: trying to reach agreement
• Win-Win negotiation
• International negotiation
• Comprehensive global negotiation skills and enhanced
cultural understanding
• The impact of the Internet on negotiations
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What Is Negotiation?
Direct:
• A process of formal communication, either face-to-face or via
electronic means, where two or more people come together
to seek mutual agreement about an issue or issues

• Involves the management of time, information, and power

between individuals and organizations who are interdependent

Indirect:
• Relationships between people, not just organizations
• Persuasion
• Negotiation skills can be honed and practiced
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Terms Used in Negotiation

• Positions

• Interests

• Needs

• Wants

• BATNA (Best Alternative To a Negotiated Agreement)

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Positions
• A negotiator’s opening offer
• Represents the optimistic or target value of the issues
being negotiated
• The stated demand at the negotiation table
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Needs vs. Wants

• Needs – those negotiated outcomes that the negotiator
must have in order to reach a successful conclusion
• Wants – those negotiated outcomes that a negotiator
would like to have
• May often be exchanged as concessions
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Interests
• The unspoken motivation or reason that underlies any
given position
• Unlikely to be expressly stated or acknowledged
during the negotiation
• May not be directly germane to the position
• May be personal in nature

Key Points on Interests

• Play detective and try to discern the other party’s interests
through a series of open-ended, probing questions
• Always focus on the other party’s underlying interests, not
his/her stated positions
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BATNA (Best Alternative To a Negotiated Agreement)

• What is BATNA:
• Negotiating Without Giving In.
• A party should generally not accept a worse resolution than its BATNA.
• Bottom line or reservation point
• Walk away if outcome is better than BATNA
• Need to ensure that a negotiator’s BATNA is never revealed
to the other party
• All settlements must be judged in light of all other viable
alternatives
• Accounts considered: relationship value, time value of
money and the likelihood that the other party will live up
to their side of the bargain
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Triangle Talk
Step 3:
Propose Action in a Way that They Can Accept

The
Step 1: Negotiation Step 2:
Know Know
Process
Exactly Exactly
What You What They
Want Want
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Know Exactly What You Want

• Determine and write down specific goals and objectives
• Can be referred during the negotiation
• The more clearly defined, the more likely that can be
achieved
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Know Exactly What They Want

• Attempt to discern the other party’s likely needs and
wants
• Estimate underlying interests to the other party’s stated
positions
• Beware of expecting the other party to think in the same
way
• Ask open-ended questions to confirm or counter
preconceived notions
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Propose Action They Can Accept

• Frame your own needs in terms of the other party’s needs
• Make it easy for the other party to say, “Yes”
• Remain fair, flexible, and reasonable
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Negotiation Framework
Identify or anticipate a purchase requirement

Determine if negotiation is required

Plan for the negotiation

Conduct the negotiation

Execute the agreement

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Identify or Anticipate a Need

• Purchase requisitions
• Inventory counts
• Reorder point systems
• New product development
• New facilities
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Is Negotiation Required?
• Is bid process inadequate?
• Are many non-price issues involved?
• Is contract large?
• Are technical requirements complex?
• Does contract involve plant and equipment?
• Does contract involve a partnership?
• Will supplier perform value-adding activities?
• Will there be high risk or uncertainty?
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When to Negotiate
• Identification of allowable costs
• Delivery schedules and lead times
• Expected product and service quality levels
• Performance metrics
• Technological support needed
• Contract volumes
• Special packaging
• Loss and damage liability
• Payment terms and currency issues
• Progress payment schedules
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When to Negotiate
• Transportation mode selection
• Carrier selection
• Filing freight claims
• Warranties and replacements
• Capacity issues
• Material lead times
• Penalty clauses
• Performance incentives
• Contract length
• Contract renewal mechanism
• Proprietary information
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When to Negotiate
• Intellectual property
• Resources related to closer buyer-supplier relationships
• Contract resolution mechanisms
• Spare parts
• After-sale service
• Operator and maintenance training
• Improvement requirements
• Quality
• Delivery performance
• Lead time
• Cost
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Reasons for Negotiation

• Total contract value or volume is large
• Purchase involves complex technical requirements,
perhaps even product and process requirements and
specification still evolving
• Purchase involves capital-intensive plant and equipment
• Agreement involves a special or collaborative buyer-
supplier relationship
• Supplier will perform important value-adding activities
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Plan for the Negotiation

• Identify participants
• Develop objectives
• Analyze strengths and weaknesses
• Gather information
• Recognize other party’s needs
• Identify facts and issues
• Establish positions
• Develop strategies and tactics
• Brief personnel
• Practice the negotiation
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Establish Positions
Example is a buyer-seller price negotiation
Aspiration Buyer

Aspiration
B.A.T.N.A.
B.A.T.N.A.
Point

Point
Zone of Likely
Agreement

Seller

Zone of Likely Agreement = Zone of Possible Agreement (ZOPA)

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Conduct the Negotiation

• Perform fact finding
• Recess or caucus as necessary
• Work to narrow differences
• Manage time pressures
• Maintain informal atmosphere
• Summarize progress periodically
• Employ tactics
• Keep relationships positive
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Points to Focus On
• Defining the issues
• Defining interests
• Defining objectives and openings
• Assessing constituents and social context
• Analyzing the other party
• Planning issue presentation and defense
• Defining protocols
• Where to negotiate
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Face-to-Face Negotiation Phases

• Fact finding and information sharing
• Recess to:
• Reassess relative strengths and weaknesses
• Review and revise objectives and positions
• Reorganize the negotiation agenda
• Narrow differences
• Seek agreement and conclusion
• May involve several iterations
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Being an Effective Negotiator

• Willing to compromise or revise goals
• View issues independently
• Establish upper and lower ranges for each major issue
• Explore additional options
• Build on common ground between parties
• Avoid making irritating comments
• Avoid argumentation by presenting too many reasons
• Make fewer counterproposals
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Execute the Agreement

• Provide performance feedback
• Build on the success of the negotiation
• Monitor contract provisions
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Power in Negotiation
• Power is the ability to influence another person or
organization
• Power by itself is neither good or bad; it is the application
or use of power that makes it good or bad
• Sources of negotiating power
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Sources of Negotiating Power

• Informational power
• Reward power
• Coercive power
• Legitimate power
• Expert power
• Referent power
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Informational Power
• Ready access to relevant and useful information
• Presentation of facts, data, and persuasive arguments
• Can be manipulated by withholding information or by
providing false information
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Reward Power
• One party is able to offer something of perceived value to
the other
• Direct attempt to exert control
• Individuals respond and behave accordingly when valued
rewards are available
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Coercive Power
• Taking away or withholding something of value to the
other party
• Ability to punish – financially, physically, or mentally
• Can have damaging effects on long-term relationships
• Promotes escalation of conflict or retaliation
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Legitimate Power
• Special form of informational power
• Often represented by verifiable credentials
• Reduces the likelihood of refuting a position
• Other party must value the expertise in order to be
effective
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Referent Power
• Comes from attraction based on socially acceptable
personal qualities and attributes
• Physical
• Honesty
• Charisma
• Friendliness
• Sensitivity
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Use of Power
• Used to support one’s advantage
• Need to be careful not to abuse power
• Damaged relationships
• Invited retaliation
• Diminished value of that power
• Some types of power interact synergistically with others
• Example - expert and referent power
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Concessions
• Movement away from a negotiating position that has value
to the other party
• Give-and-take process is normal in most negotiations
• Need to avoid giving away concessions without receiving
something of equal or greater value in return
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Guidelines for Making Concessions

• Give yourself enough room to make concessions
• Try to get the other party to start revealing its needs and
objectives first
• Be the first to concede on a minor issue but not the first
on a major one
• Make unimportant concessions and portray them as
valuable
• Make the other party work hard for every concession you
make
• Use tradeoffs to obtain something for every concession
you make
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Guidelines for Making Concessions

• Generally, concede slowly and give a little with each
concession
• Do not reveal your deadline to the other party – ever
• Occasionally, say “No” to the other party
• Be careful trying to take back concessions, even tentative
ones
• Keep a record of concessions made to try and identify a
pattern
• Do not concede too often, too soon, or too much
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Negotiation Tactics
• Low ball • High ball
• Honesty and • Best and final offer
openness • Silence
• Questions • Planned
• Caucus concessions
• Trial balloon • Venue
• Price increase
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Power of Influence
• Reciprocation
• Consistency
• Social proof
• Liking
• Authority
• Scarcity
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Reciprocation
• An obligation to give something back of equal or greater
value to someone after having received something from
them
• Creates a powerful obligation response
• Can be used effectively when giving concessions
• Patterns of concession (quid pro quo)
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Consistency
• People tend to want to be perceived as being consistent
in their beliefs and actions
• It is difficult to back away from something already agreed
to
• Beware the consistency trap
• Small commitments often lead to larger ones
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Social Proof
• Looking to the behavior of others to determine what is
desirable, appropriate, or correct
• Power of the endorsement
• Everyone is doing it
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Liking
• People work well and are more agreeable with others that
we like or who are like us
• Get to know the other party better to build on the
relationship when concessions are being offered
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Authority
• People are more likely to accept the positions, arguments,
and directions from recognized authority figures
• Power of titles and perceived importance
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Scarcity
• Can also be the perception of scarcity
• Act now
• For a limited time only
• Offer expires tomorrow
• Suppliers often use potential price increases as a scarcity
technique
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Overcoming Tactics
• Modify tactics when they don’t work
• Prepare for likely tactics to be used against you
• Tactics are more effective on you if you are unprepared,
stressed, under severe deadlines, inexperienced,
fatigued, or disinterested
• Try not to react without thinking
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Win-Win Negotiation
• Win-lose – competitive or distributive bargaining
• Win-win – collaboration or integrative bargaining
• Expand the value or resources available to all participants
• Equitable sharing of a larger and expanded pie
Win-Win Negotiation
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Win-Win Methods
• Expand the pie
• Logroll
• Use nonspecific compensation
• Cut the costs for compliance
• Find a bridge solution
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International Negotiation
• Added complexity and challenge
• Substantial extra time and effort required
• Culture shock
• Barriers and obstacles
• Need for translators
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Barriers and Obstacles

• Miscommunication due to language
• Time limitations
• Cultural differences
• Limited authority of international negotiators

Characteristics to Overcome Barriers

• Patience
• Knowledge of the contract agreement
• Honest and polite attitude
• Familiarity with foreign cultures and customs
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Caveats when Negotiating Overseas

• Don’t think that everyone else negotiates like the
Americans
• There is a danger in stereotyping or oversimplifying
characteristics of other cultures
• There is always substantial interpersonal variation within any
culture
• However, there are often common tendencies
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Impact of the Internet on Negotiations

• Electronically-based negotiations tend to equalize the
differences between the parties
• Normal visual and auditory clues are diminished or not readily
apparent
• Status differences and social differences are less discernible
• Problem of being anonymous
• Negotiators tend to be more risk taking
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Impact of the Internet on Negotiations

• Real time vs. asynchronous
• Loss of information richness
• More difficult to provide feedback and conduct active
listening
• E-negotiators ask fewer questions and tend to make more
assumptions