Procurement gets a Ferrari

Posted on October 31, 2008 | Filed Under Negotiation Success Range™ (NSR™) | Leave a Comment

K&R does a lot of work near year-end.  In addition to delivering Negotiation Skills Workshops, we directly consult on sales that are projected (or sometimes just hoped) to close before December 31st.

Having had many of these discussions lately, one thing struck me as a pervasive problem.  Many sellers who consulted with us said something like this: “Procurement told me that they need to reduce costs with us to 10% below last year’s spend.  I have a plan to do it, and with that plan I think I can close this deal by year end.”  To me, this is Procurement asking for a Ferrari (or for any other very hard to obtain item).  Let’s talk about why.

Let’s recall the K&R Negotiation Success RangeTM.  The NSRTM is a tool for analyzing the range in which both parties can succeed in a negotiation.  It is often used with price, but can apply to service level agreements, completion dates or other factors which have ranges.  In working toward the NSRTM, each side will make an initial offer.  In almost all cases, the parties believe that there will end up being some movement in the offer – initial offers are not usually final.  Because of this, a plan that says, “Let’s meet Procurement’s 10% goal” will usually end up leaving money on the table that the seller could get.

In one of our sessions, I asked the seller if he considered that if he met the 10%, that Procurement might decide that 10% was not really the number, and ask for 12%.  He replied, “They have done that before.”  Apparently it wasn’t a sufficient learning experience.  Most of the time, if the stated goal is 10%, the real goal is somewhat less, and it worth your while to work on finding out how much less.  That return will not only count this time, but it will affect your starting negotiation next time.  The payback for sellers can be large.

Also, the business value that your solution generates should be related to the cost. In addition to the NSR considerations above, a number of the people we worked with had clients that were growing at 30% a year.  Procurement still asked for a 10% year-over-year savings. If your products or services are useful in either supporting or generating that client growth, you should consider if it is reasonable to support all rates of business growth with the same cost reduction target. Many times it isn’t.  Perhaps cost as a percent of revenue could decline by 10%, but on an absolute basis, it may be completely unreasonable to ask for and get a flat 10% reduction.  Procurement (again) asks for and gets a Ferrari.

I told my wife I wanted a Ferrari. I’m driving a Honda Civic Si.  I really like it. A real-life example of the difference between an initial offer and an acceptable alternative which is some (considerable) distance from that initial offer.  I don’t even think about the Ferrari anymore. Much.  (td)

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