Principled Concessions™ – The short version

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In our workshops, we teach the concept of a “Principled Concession™”.  Many people hear this and confuse it with the related but different concept of trading concessions in a negotiation.  They think of common examples like these:

  • “If you buy 2, I can discount the second one by 50%.”
  • “If we reduce the scope by providing service 12×7 instead of 24×7, we can lower the price by 20%.”
  • “We can finance your total $100M payment for this project, at a cost to you of $1M.”

These “offers” follow the least-acceptable form of changing your position.  It is a more acceptable form than this one:

  • “I’ve sharpened my pencil, and I can offer you an additional 12% off the price.”

It is easy to see that the first three are preferable to the last one.  The 12% price reduction in the last example implicitly contains a message that your profit margin is high enough to offer a discount.  The buyer is now challenged to take that information, and try to find out how much margin, through extended negotiating.  Instead of the goal which the offer is usually intended to achieve (faster closing), it actually creates buyer uncertainty, loss of confidence, and delay.

Let’s reframe the first three in the form of Principled Concessions™:

  • “If you buy 2, I can discount the second one by 50% – and you’ll be able to use both at the same time when needed to perform (whatever desired outcome you bought them for).”
  • “If we reduce the scope by providing service 12×7 instead of 24×7, we can lower the price by 20%.  However, your mission-critical revenue-collection application will take longer to restore during the unsupported hours, and your revenue could be impacted by $25,000 for each hour of delay.”
  • “We can finance your total $100M payment for this project, at a cost to you of $1M.  This will allow the project benefit stream (in $) to pay for the continuing costs, and you will avoid significant out-of-pocket costs, thereby freeing up that money for other investments.”

In each of these cases, we are describing the exchange in terms of outcomes to each side.  For the seller, this is money.  The buyer gets simultaneous use (for whatever purpose), risks losing revenue, or will free up funding for other projects.  In each case, the outcome description provides a business basis for the concession, and allows the buyer to make the decision on the basis of business value.  In the real world, the outcome descriptions would be even more robust, but these examples convey the intent.

So here is the formal definition of a Principled Concession™: A concession given with a specific connection to business value.  The alternative form is this: A concession expressed as an exchange of outcomes.   (td)

Forensic Forecasting – More business in 2009

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We have added an article on Forensic Forecasting to the K&R Web Site.  The article begins:

“Forensic” is an adjective meaning “appropriate for use in legal or public discussions”.  In today’s popular culture it often refers to the use of technical analysis for criminal cases.  We’re not taking your sales forecast to court, but we can tell you how to improve its accuracy – and your results.  When year-end measurements are coming, improving your results can have an even bigger impact.

You can read and download the complete article here: Forensic Forecasting

Best Wishes for every success in closing more business in 2009.

Cash for Clunkers: Some Simple Lessons in Timing and Value

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If you live in Spain, Germany, France, Italy or the United States, or are following the automotive or economic news, you are probably aware of the government programs commonly referred to as “Cash for Clunkers”.  If you aren’t aware, here’s a simple view of how they work. Individuals that own older (but not too old) autos which get relatively poor fuel economy are encouraged to trade their car in for a new, more fuel efficient one.  The encouragement is in the form of a (presumably) inflated trade-in value paid directly by the government to the seller.  Buyers immediately get the benefit of the difference between the actual trade-in value of the auto and the government payment.  Over time, buyers and the environment both benefit from the improved economy of operation and reduced emissions of the new auto.  At least that’s the theory.  Public policy is outside our scope in “Negotiation and the News”, but these programs provide some simple lessons in negotiation timing and value.  Let’s use the program in the United States as an example, since it recently ended. I’m calling it “CFC” for short.

In the US, CFC went “live” on July 27th and, to qualify for the “encouraging” payment, the final paperwork was to have been completed by 8PM on August 24th.  Let’s look at some exercises in value and timing.  For simplicity, assume that any ownership transfer costs are always $0, and that we ignore any time value of money.

Lesson one: If we assume that the paperwork took an hour, and that backdating did not happen (bad assumption?), when did the last sale take place under this program?

  • Easy, right? 7PM, August 24th. Everybody gets this one. We can all see that the incentive disappears at that time, so sales under the program stop.

Lesson two: What happened to the value of a qualifying “clunker” auto on July 27th?

  • It became the greater of the actual trade-in value or the government payment.  Everybody gets it again. If the clunker’s trade-in value was $1000, but the incentive value was $4500, that $4500 can be “spent” on a new car in the same way the trade-in value could have been.  If the clunker’s trade-in value was already $6000, that value remained unchanged.

Lesson three: On what date did the clunker actually become worth the value of the government payment (assuming that the government payment was higher than the actual trade-in value)?

  • This one is a little harder, and a little less clear. Certainly the value changed on the day the program was approved, in anticipation of the actual start date.  The value probably moved upward as passage of the bill became more certain, and reached the incentive payment point at the moment passage happened.  If the bill had moved toward passage, and then away, the value would have slightly fluctuated in response to the uncertainty of the possible “reward”.

Lesson four: If a clunker-owner was interested in a new car, and was induced by the CFC program to walk into a car dealership at 5PM on August 24th, who was under more pressure to close the deal by 7PM?  The salesperson or the owner?

  • Tough one.  If you said the clunker-owner, we understand why.  The value of the car drops in 2 hours.  And of course, like all negotiation cases, it depends.  It depends on the salesperson’s quota, available new cars, and a bunch of other things.  But my vote is for the pressure to be on the salesperson.  Here’s the logic: the buyer lived with a clunker for a long time without acting.  They also waited until the last minute to look at closing the deal.  A buyer like this can make the transition back to the position they have been in for a long time fairly easily.  The seller recognizes that this is a one-time, short-term opportunity, and stability (which means the buyer is not buying) will set in again in a hurry.  The seller is under more pressure.  Now, whether the parties act like they recognize who is under greater pressure is a different question…

Here are the negotiation conclusions to take into your everyday negotiations:

  1. Value changes over time (or should):  If what you are selling or buying has value, that value is most likely not constant.  You should consider how the passage of time influences value.  Remember that in the CFC example we are dealing with a tangible commodity, and the value is more or less expressed by price.  In complex technology sales, value is often determined by business usage, and the price should be related to, but not equated to value.
  2. Decision-making is linked to time:  Remember the Y2K panic over potential computer program failures?  Relatively speaking, how many Y2K solutions were put in place in 2000 as opposed to the years approaching the end of 1999?  You should consider how time influences the decision-making process.  Regulatory dates, time to deploy (or fill out a form) and other factors will sometimes determine IF an agreement will happen.
  3. Things expire:  Sometimes the decision process can drag on forever.  And sometimes if you miss the expiration date, the opportunity is gone.
  4. Leverage Shifts: Where does the pressure and negotiating power exist – with which party?  It is variable, and influences each side to a different degree.  Think about who is under what pressure as you proceed, and how it might shift over time.

K&R is expert in the issues of why and when transactions close.  We call it “Negotiation Forensics”. Ask us about it.

A “Happy” view of value

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“Admiral produces boringly good numbers” is a headline from the fall Times Online (UK).  At K&R, we often write about the linkage between value and negotiation success (or sales success).  Well-done value arguments are compelling.  They result in shorter selling cycles and in more revenue and profit.  Poorly done ones lead to longer sell cycles and discounted prices.  Perhaps the most common value argument error we see is that people stop short of linking their value argument to a business result that the buyer cares about.  Something like “My product will make you more efficient.”  It isn’t enough.  We know that to be effective, “efficiency” has to be followed to its logical business-outcome endpoint.  In a simple way, Admiral gives us a clue for creating better value chains.

To write about negotiation and the news, you need to read a lot of news.  In our searches lately, we have read a lot of recession articles.  There is a sameness about them: the messaging is gloomy, and the “wisdom” is uncertain and repetitive.  A search for “record profit” found the interesting article about Admiral Group in the Times Online (UK).  In fact, Admiral produced record profits.  How did this happen?

On the About Us page on the Admiral Group website there is a discussion of their company culture.  Their statement is a simple example of how to follow a value chain.  Here it is:

  • “Put simply, Admiral’s philosophy is; People who like what they do, do it better.  Happy staff will create happy customers, happy customers will increase profit and increased profit will make happy stakeholders.  Happy stakeholders will want to grow the business and the circle starts again.”

Suppose that you want to sell something to Admiral.  Do you say, “My product will make you more efficient”?  No, you do not.  What you say is this, “My product is improves efficiency because it addresses the usability complaints that your staff has about existing solutions.  It will make your staff happier. Happy staff…” and so on.  You now have a continuous linkage from your product to their profit.  This is the beginning of a real value argument.

There are components to the argument that are missing.  How much happier?  How much profit?  What is your position versus competitive alternatives?  The professionals at K&R know how to structure value arguments.  We can show you how to uncover the motivations and objectives of your clients and better understand what linkages to make.  For Admiral Group, “happy staff to happy customers to profit to happy stakeholders”.

If you want to make the positive news (“boringly good numbers”), not the negative news (“recession batters another company”), think about the value you deliver – in the client’s context.  (td)

Value, Benefit, and Cost in Negotiations

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In a K&R Negotiation Skills Training Workshop toward the end of last year, one of our clients brought in this formula…

Value = Benefit – Cost

Not perfect, but persuasive in many ways.  Let’s discuss a couple of critical pieces of it.

The first negotiating mistake we see related to this is that “value” is one of the most misused words in technology sales.  A maddeningly high percentage of the time, it is used by Sellers as a substitute for “price”.  An example: “This deal provides you with $250,000 worth of software value for only $167,000.”  This sort of presentation reminds me of the magazine subscription solicitations I get in the mail. “Photographing Travelling Automobiles, a $360 value, for only $14.95 for one year.”  I do not believe there is anyone left in the world who believes the $360 value statement.  It’s really a statement of newsstand price.  It is not in any way credible.  If you are a Seller, don’t ever make this mistake again.  Find out  the real business value that your offering provides to your Buyer, and describe it properly.  Remember that the more specific the description is to the Buyer, the more persuasive it will be.

The second negotiating mistake related to this formula is forgetting to quantify the benefit.  If we plug in $0 for the benefit, what do we get?

Value =  0 – Cost

It’s always a number below $0.  As a Seller, the only way to improve your position is to cut price, and hope that the Buyer has some value figure in their head that can offset the cost remaining.  This is a bad negotiation strategy, and leads to agreements that get closed when the Buyer gets around to it (because their intuition says the time is right).

If you’re happy with that as a seller, you have our permission to ignore the benefit part of the equation.  If you are not happy with this, contact us – we can improve your results.  (td)

A Buyer’s look at 2009 Opportunities

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There are no original-but-excessive descriptions left for the present condition of the world markets and growth projections.  Insert one that resonates with you here…

We agree with it completely.

K&R had an interesting discussion about what the 2009 recession means with a significant buyer of technology hardware, software and services.  The company provides services to their own clients, and in the course of providing those services they deal with over 1000 vendors and spend over $100 million with those vendors each and every year. We wondered what the implications of the year would be to their vendor management.

Many sellers will see extreme versions of historic buyer behavior in the coming year.  Many Buyers will choose based on price, and look for the absolute lowest pricing.  They will play one vendor against another for the short-term benefit they can get that results from Sellers’ fears.  Many will look to set multi-year agreements which “lock-in” favorable terms which can only be obtained in a highly competitive and “nervous” market.

But, not everyone will take this approach.  The Buyer we spoke with has a different vision.  These are his words.

“Our approach to vendors is different than many things — often predatory — that I see going on in the market. Our emphasis includes squaring away financials that don’t make sense based on how the relationship has evolved, but that’s only one component. Equally important is reexamining the vendors we’re doing business with, reducing the number of ‘multiples’, aligning critical ones strategically, and having them adopt [the principles which guide us with our own customers]. I want our critical vendors to become an active component of the overall value proposition.”

In our eyes, this is a highly effective strategy.  The fundamental argument we make to Sellers is that they must link their offerings to the business value of the client to improve the results of their negotiations.  Here, an important Buyer says the same thing.  Why?  Because in the end, Buyers only buy to get a job or task accomplished, not just because the price is low.  The present market provides Buyers with opportunity.  We predict that this Buyer’s organization will use that opportunity for long-term benefit, and exit it stronger than ever. Their focus on business results over negotiating tactics is superb.  (td)

K&R Success Stories Published

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K&R Negotiation Associates has published a few representative success stories on the K&R Web Site.  Here are excerpts and links to more information:

  • K&R’s client turned a $150K annual loss into a $50K annual profit, while at the same time raising their own client’s satisfaction with the service. (more)
  • K&R’s client realized 6.7M€ of revenue in their current fiscal year, and 60.2M€ additional revenue within two years. (more)
  • K&R’s client benefited between $13.5K and $250K. The ultimate buyer saw a clear ROI from the total $837K investment in our Client’s products. Both our client and our client’s client were rewarded through the application of K&R negotiation principles. (more)
  • K&R’s client did not offer expensive guarantees and rebates as part of their services package. This will positively affect profitability as the agreement executes. The result was generated by carefully understanding client needs before offers were made. (more)
  • K&R’s client closed $2M higher than expected, using a few simple K&R principles. (more)
  • K&R’s client benefited by up to $65K, and began the process of breaking a pattern of discounting with their client, which will repeat in every transaction. Our client’s client was satisfied, because they understood the value of what they were buying. (more)
  • K&R’s client closed for $1.6 to 2.1M more than they expected to, using K&R’s value principles. (more)

A Negotiator’s Resolutions for the New Year

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With the pressure of year-end closing behind us, it is time to look forward.  This is no time to rest on our laurels – unless we want to go through another insane end of year, hoping that the customer will have pity on us and sign, even if they are not convinced.  To that end, as good negotiators, repeat after me…

I resolve to do my preparation early in 2009, and as a result, have a terrific year.

To that end, I resolve:

  • To persuade my buyers by describing the value of my solution – in their business terms, not mine, using references and proofs of concept as needed.
  • To articulate that value to each decision maker or key influencer for the agreement. The articulation will be customized and relevant to the role of the customer person I am speaking with, and I will get confirmation from them that it is relevant.
  • To quantify the business benefit that my solution provides, in customer terms. I will use real customer data as much as possible, and develop the model for the business benefit jointly with my customer.
  • To get a confirmation from my customer that the quantified business value is important to them, and if possible, that they will use our jointly-developed models in their decision-making process.
  • To understand and describe accurately how only my solution offers certain key characteristics that solve the customer problem.
  • To be proud that I have brought a solution to my customer which provides them with a real business benefit, at a fair price.
  • To enjoy the journey and have a great year.

Negotiate Wisely!  (td)

Thoughts about selling in the current economy

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Here are a few ideas and thoughts from some of the collective experience of our associates, in addition to some suggestions from articles we have read over the past few months about selling and negotiating in the current difficult economic environment.

In many of the articles, there are three common themes:

  • It is important to maintain a positive attitude – focus on where you can have impact – not on the overall economy. Remember the old expression: Attitude will determine your altitude.
  • Execute the basics – diligently. Vince Lombardy turned the Green Bay Packers into a successful American football club with his relentless focus on the basic skills of the game.
  • Work harder (depending on the article – it will take anywhere from 25% to DOUBLE the effort to accomplish the same results.) Working harder doesn’t necessarily mean spending more hours doing unfruitful things. It is working smarter and doing the right things to produce results. In other words, continue to develop your skills which will enable shorter selling cycles.

That being said – these are three very good themes – they do not necessarily drive you to any specific actions.  Here are a few ideas for you to try:

  • If you are using a web based tool for networking (like LinkedIn®) – expand your network. Think of everyone you have ever done business with or for (superiors, peers, subordinates, clients) and look them up. Reach out and connect with them – expand your network. You will be surprised at how many people you can “rediscover” with the potential side benefit of discovering some new business.
  • Call EVERYONE in your contact list – not to sell them something – but just to reconnect and “catch up”. Some of you are hesitant to call on your contacts because you have let the relationship lapse. This is the PERFECT time of year to reconnect. Call them just to wish them “Happy Holidays”, “Merry Christmas”, “Happy Kwanzaa”, “Happy Hanukkah”, “Joyous Solstice”, etc. Wish them the best for the coming year. Do this just to reestablish the contact. Human contact is very important in a world of high technology virtual reality. You may even get a referral or an introduction, but remember your objective is just to reestablish contact.
  • Contact ALL your prospects – with a change in your tune – you are not calling about business – but just to wish them a Happy Holiday. It is a tough time for everyone – you will be pleasantly surprised at how they react. “Someone actually called me to show a genuine interest instead of asking me for my business”. It definitely changes the playing field, and it helps to build trust and confidence in you as a person.
  • In your conversations with your clients and prospects, be more empathetic and positive. These are difficult economic times for everyone, and you can’t “cost cut” your way out of it. Consider alternative offerings in your product or services portfolio that will address the client’s needs. Additionally, look at ways to pare back your total solution. Think about what you might offer that will deliver the maximum return for your client. This will enhance your credibility and trust with the client and will open the doors to future business when the business climate improves.
  • Remember: clients cannot afford to make a mistake – too many eyes are looking. For you to be successful, you must prove that you can address their needs, and you will need to articulate your offering value in terms that resonate with them:
    • Minimize their risk
    • Reduce their costs (save them money)
    • Increase their revenue
    • Improve their profit / mission attainment
    • Improve their operational efficiency
    • Etc.

Budgets are being cut – or at least pared back, you must not lose momentum or your contact with your prospects.  When budgets open back up (and we believe they will), you want them to remember you and your organization.  You also want that memory to be positive!

We wish you a “Happy Holiday”, “Merry Christmas”, “Happy Kwanzaa”, “Happy Hanukkah”, “Joyous Solstice”, and all of the very best for a wonderful New Year. (jh)

What The Nova Scotia Business Journal knows that you don’t

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There was a recent article in the Nova Scotia Business Journal that contained a fundamental principle for successful negotiators.  In the article titled “Five Fatal Business Mistakes”, the author included the following: “The psychology of the customer is vital to marketing and sales success.  …The prescription has three parts: do the research, listen very carefully and, most importantly, act decisively for the long term.”

How simple is that?  Yet in consulting session after consulting session, we see failures to perform on these basic tasks. Let’s take a look at how these simple precepts work, and where the failure to perform occurs.

Do the research. Many sellers provide references and high-level benefit statements, such as these:

  • “99 satisfied clients can’t be wrong.”
  • “Our solution is highly reliable.”

These statements focus on the seller’s interests and generic values, but are not compelling.  Contrast those to these:

  • “A client similar to you used our solution, and it improved their inventory turnover by 12%.”
  • “As you told us, when your systems are down, and reservations cannot be taken, your lose $4000 / hour in revenue. Our solution is 20% more reliable than your present system.”

Moving from value statements about generic interests to value statements about the buyer’s interests takes research.  What issues concern them?  What are their goals and objectives?  Research takes time.  Many sellers fear the passage of time.  So they go with what they have, as unfocused and generic as it is, and hope that the buyer makes the connection on their own.

Sometimes the buyer does exactly that… when they get around to it.  This, of course, works against the fear of lost time that sellers have.  If you want the buyer to act promptly, there is no substitute for understanding their business. That takes research.

Listen very carefully. In a recent negotiations consulting session, I heard a list of client demands. “The client wants simpler contract terms and language.”  Later I heard, “The client wants different terms for the production and non-production systems.”  I stopped for a moment, and asked this: “What am I missing?  These two requests are conflicting.”  No one else had considered it.  I don’t deny that the client had a problem.  I just don’t think we knew what the problem was.

If we run around trying to satisfy every demand without listening, we are going to hit a dead end.  One of the things we see in the negotiation role-plays that we run as part of our training is a negotiation flaw related to listening.  Someone will ask a question of the other side.  For whatever reason – discomfort, time needed to make a thoughtful response, etc. – the other side will be slow in answering.  In many cases, someone else from the original team will jump in with another question or will change the subject.  The chance to learn something new and potentially valuable is lost.  The author of the article gets it right again.  Listen very carefully.

Act decisively for the long term. One of our clients was asked to quote a sale price for products including 4 years of maintenance.  She dutifully went off to get approval to do it, and found out that it was so hard internally to figure out how to do it that they were willing to give the fourth year of maintenance away for free.  This salesperson worked where the business model was to do complete replacements every 3 years, including new product and service.

It is not unlike a car lease for cars where maintenance is included (BMW or Audi, for example, in the US).  If she gave away the fourth year of maintenance, then she would lose the replacement sale 3 years out – the customer’s incentive to act would be significantly reduced if the system is still performing well.  We advised her to wait before giving it away – or to at least ask for a corresponding concession from the client.  She waited, and the client never brought it up again.  Business decisions with significant investments are long term decisions for the buyer.  The seller should remember that their own actions also affect the long term.

Now…does the Nova Scotia Business Journal really know something you don’t?  Or are you just forgetting the basics in a rush to close?  Remember: do the research, listen very carefully and act decisively for the long term.  (td)