“Every dollar saved in negotiation is valuable, but every risk prevented and every opportunity secured through commercial contracting is priceless.”
In the previous article, I focused on the implementation of the sourcing strategy, which essentially is about putting the strategy into action through engaging with the supply market with a view to tapping into the strategic value outcomes that underpin the business’s long-term success. In this current series, I transition to the next equally critical stage – negotiating and consummating a “value-packed” deal.
At this stage, I assume that the Strategic Sourcing Team has received bids, proposals, or quotations submitted by suppliers during the implementation stage. I also assume that a proper evaluation of bids has been conducted using appropriate tools and that the team has identified the most suitable supplier or suppliers to best meet the business’s needs. Just to refresh our minds, strategic sourcing is not just about acquiring goods and services. Rather, it is about identifying and acquiring supply market opportunities and capabilities that align with and help to consolidate our own competitive capabilities.
I assume at this stage that the team has identified the supplier whose capabilities closely align with what the business intends to achieve in the long term. All that is left is to tie up some loose ends and formalise the deal into a mutually beneficial and enforceable contract. If crafted properly, the RFQ or RFP would ordinarily guide suppliers to submit their Best and Final Offer (BAFO) to the sourcing team. That BAFO quite frequently misses the team’s expectations for the business. Since those offers are not cast in concrete and the team is not obliged to adopt them as they are, this is where post-tender negotiation comes in handy.
It is critical at this stage to bear in mind that the key to successful negotiation is thorough planning and extensive information gathering, as far as is feasible, on the supply market and the party with whom the team intends to negotiate. Arming yourself with relevant factual information ahead of the negotiation strengthens your leverage during the actual negotiation process.
For stellar results, the team must also go an extra mile to determine and define the business’s positions and interests, as well as those of the supply market or the suppliers targeted for a long-term business relationship. Positions are desired outcomes or “must-haves” that the sourcing team must achieve through the negotiation process because they underpin the business’s competitive capabilities. On the other hand, interests are the underlying reasons why the sourcing team or the other party wants to achieve the defined positions.
To further strengthen its planning, the sourcing team must also determine and anticipate two critical points, namely the ZOMA (Zone of Mutual Agreement) and BATNA (Best Alternative to a Negotiated Agreement) – the point at which they must walk away from the negotiating table, as well as that of their targeted supplier.
When negotiations are centred around positions and interests, even the tone of the engagement changes from a meaningless power tussle and unnecessary muscle-flexing, where the winner takes all. Rather, it elevates the negotiation to a much more strategic level that is predicated on mutual trust, open sharing of factual information, and driving the discussion towards achieving outcomes of direct mutual and fundamental business interest to both parties.
Negotiation at this stage serves the purpose of seeking a deeper understanding of the proposals submitted, tying up any loose ends left hanging in the bids or proposals, and redefining parts or even the entirety of the proposal. When conducted in an atmosphere of mutual respect, it helps both parties not only understand what each seeks to achieve but also unravel the underlying reasons why achieving those outcomes makes business sense. This, in turn, helps both parties find ways to steer the discussion towards the ZOMA. Both parties begin to focus actively on cooperating to find and consolidate areas where mutual interests align, as opposed to widening areas of misalignment.
Once alignment on positions and interests is secured, the parties are ready to concretise their deal into a formal contract. It is absolutely crucial to underscore the fact that a contract is not just a verbose document that serves to loosely remind parties that there is an agreement between them. It is, in a way, a “spring” from which strategic value outcomes beneficial to both parties will continue to flow for the entire duration of the contract.
It is a sacrosanct document that safeguards the ZOMA, as well as the strategic positions and interests of both parties, throughout the entire lifespan of the contract. It empowers both parties with the leverage to demand fulfilment of those positions later when the contract is under implementation. It fossilises those positions and interests in a manner that ensures the business achieves its cost-optimisation targets, ensures continuity of supply even in times of supply market disruption, keeps mission-critical relationships in good standing, and ensures risks that pose an existential threat to the business are kept under surveillance.
By so doing, it enables strategic sourcing to truly live up to its promise – that of aligning sourcing activities with the broader strategic goals of the business.
Written by Emmanuel Nzombe (MCIPS | CIPP)
