L4M5 Notes

(My notes for L4M5 are relatively brief. A lot of the excluded content from these notes is intuitive and a repeat of previous modules.)

Nature of negotiation

Negotiation: reaching an agreement when some interests are shared and others are opposed. Consists of:

·       Purposeful persuasion: persuade the other to accept their viewpoint

·       Constructive compromise: both parties make concessions, identify common ground

Other ways of getting agreement:

·       Persuasion to accept your case

·       Giving in to the other side

·       Coercion

·       Problem solving to remove differences in interests

Strategic negotiation addresses long-term issues in a relationship, and is about what the ‘ends’ are. Negotiation will be collaborative.

Tactical negotiation is carried out more frequently and is more transaction, about ‘means’. It can be more adversarial, each party trying to maximise its own benefit.

Negotiation can happen throughout the CIPS cycle. Procurement staff can play 1 of 2 roles in negotiations:

·       Sole negotiator (for lower value items)

·       Team leader in a cross-functional negotiating team (for more complex items)

Negotiation during the Procurement Cycle

Identifying business need: during this part of the Procurement Cycle, procurement staff may negotiate with internal customers/stakeholders about requirements in a requisition, the need to reduce costs etc. Early Supplier Involvement could mean some negotiation with suppliers over requirements at this stage.

When selecting suppliers: there is a range of possibilities, ranging from no negotiation (if framework agreement in use), to negotiations with a single supplier, to competition.

Post-tender negotiations: after tender submission and before contract award, the buyer may negotiate with suppliers improve or clarify the offer.

Contract and relationship management: post-contract award, negotiations may arise over potential misunderstandings over contractual obligations, risk events or poor performance.

 

Constructive conflict vs destructive conflict: constructive conflict aims to encourage creativity, allow release of emotions etc. Destructive conflict polarises and causes win-lose outcomes (can derail negotiations).

Three main scenarios where formal negotiations are needed:

·       Grievance and conflict handling

·       Group problem-solving

·       Negotiating terms and conditions

 

Orientations to negotiations

Two basic orientations:

·       Task-oriented: wanting a win-lose outcome to settle a task-related objective

·       Relationship-oriented: aiming for win-win to achieve relationship-related objective

Distributive bargaining: distributing limited resources, resulting in a win-lose.

Integrative negotiation: collaborative problem-solving, reaching win-win.

Five types of conflict management styles:

·       Avoiding

·       Forcing/competing: win-lose

·       Accommodating: lose-win

·       Compromising: lose-lose

·       Collaborating: win-win

 

Position-based bargaining: each side taking a position on an issue and trying to get an outcome aligned to that. Bargaining can be hard or soft:

·       Hard: aggressive position and holding onto it

·       Soft: make concessions readily, often reaching a negative result because the initial position was too generous.

Position-based bargaining leads to win-lose or lose-lose outcomes. It’s unsatisfactory.

Principled negotiation: parties working collaboratively on a shared problem. Hard on the problem, soft on the people.

Developing target outcomes

Must-Intend-Like (MIL) target outcomes:  differentiate between objectives that are must achieve, intend to achieve and like to achieve. These set red lines and areas for concessions.

Limits, target points and alternatives: limits are when you walk away, target points are what you realistically expect to achieve, alternatives are other deals that could be achieved that meet needs.

Best alternative to a negotiated agreement (BATNA): this is the back-up plan, what happens when you walk away. There may be a BATNA with another supplier as contingency.

 

Relationship spectrum

Relationships can vary across adversarial, transactional, single-sourced, strategic alliance and partnerships.

Adversarial-competitive relationships: each party trying to maximise benefit for itself. Any gains for buyer are at the expense of the supplier. These are transactional relationships, characterised by lack of trust, use of power etc.

Cooperative-collaborative relationships: relational approach, seeking long-term mutually beneficial deals.

The choice of which relationship to pursue depends on circumstances and needs; collaborative isn’t always better than adversarial.

·       In reference to the Kraljic Matrix, non-critical and leverage items are low-complexity with many suppliers, so favour a transactional approach

·       Bottleneck items have fewer suppliers, and the relationship will be tactical (low financial importance). Favours integrative negotiation with backup suppliers identified

·       Strategic items favour strategic relationships, integrative negotiation

Types of power:

·       Overt power: obvious through direct tactics. Doesn’t need to be coercive necessarily

·       Covert power: subtle, indirect tactics like withholding information

·       Structural power: built into the situation e.g. contractual obligations

Pricing

Types of cost-based pricing:

·       Full cost pricing: markup on full cost

·       Cost-plus pricing: markup over direct costs

·       Marginal pricing: fixed price that yields a particular profit margin

·       Target return pricing: profit based on desired return on investment

·       Contribution pricing: price is less than total cost

Market-based pricing:

·       Price volume pricing: cost-volume-profit analysis to determine a volume of production that’ll be most economical

·       Penetration pricing: low introductory pricing to win market share

·       Market skimming: high introductory price to attract buyers who want the product quickly

·       Promotional pricing: discount for specific amount of time

·       Differential pricing: sets different prices for different market segments depending on what market will bear

·       Dynamic pricing: bids competitively to win a contract according to what other suppliers bid

Three main types of cost:

·       Raw materials

·       Labour

·       Overheads

Marginal pricing: fix price based on variable cost of producing each additional good.

Absorption costing: total cost including allocating a share of fixed cost to the item.

Activity based costing: fixed cost allocated to products based on activities used in creating them. Identify the primary activities (value adding) and secondary activities (non-value adding)

·       All primary activities have some output, and this is the activity’s cost driver

·       Cost pools: the overhead costs for each segment e.g. procurement department may be considered individual cost pools

·       Once cost pools are built and cost drivers identified, can calculate cost driver rate: total cost pool divided by number of cost drivers

 

Breakeven point (in units) = fixed costs / (selling price – variable cost per unit)

Margin of safety = planned sales volume – breakeven sales volume

Price elasticity = % change in quantity demanded / % change in price

 

Defining issues for negotiation

Tradeables: these are the concessions that could be traded in bargaining.

Bargaining mix: the total package of issues on the agenda for negotiation.

Objectives for all negotiations should be:

·       Specific

·       Acceptable

·       Realistic

·       Tentative (it will be based on assumptions)

Three-point range of objectives:

·       Best case

·       Worst case

·       Most likely

Zone of Potential Agreement (ZOPA): zone between your best and worst acceptable outcomes.

‘Anchoring effect’: negotiating ploy used at the start of negotiation. Exploits the tendency of people to rely heavily on the first piece of information given.

Post-settlement settlement (PSS) options: parties are enabled to return to issues they’ve agreed on in order to further refine them.

Persuasive techniques: threat, emotion, logic, compromise, bargaining.

Influencing tactics: rational persuasion, inspirational appeal, ingratiation etc.

Influencing tactics in integrative negotiation:

·       Expanding the pie

·       Log-rolling: parties identify issues where they have different priorities, so they can trade easily.

·       Non-specific compensation: one party gaining concessions by offering non-specific benefits

·       Cutting cost of compliance: one party minimising costs of compliance to the other, making it easier to say yes

·       Bridging: parties re-frame issues so they are now win-win

Negotiating ploys

·       Good cop bad cop

·       Salami tactics: slice a large issue into smaller issues to force movement on each

·       Add-on: the agreed price excludes certain things that then need to be paid for separately

·       Mother Hubbard / empty larder: supplier loves doing business with you, but they have no leeway on the issues under debate

·       Russian front: supplier presents two alternatives but one of them are awful

 

Influencing techniques: Neuro-linguistic programming (NLP)

NLP helps people understand how language and sensory perception influence behaviour, and use techniques to influence behaviour. Examples:

·       Mirroring other’s body language

·       Mental rehearsal

·       Framing and re-framing

·       Intentional use of language

Ethical influencing: differentiate between manipulative and positive (ethical) influencing:

·       Manipulative influencing: uses tactics based on dishonest logic or negative emotions

·       Positive influencing: uses non-manipulative behaviours that show that you’re treating people honestly and respectfully

 

Communication skills

Interpersonal skills: used in interactions between people. These exist on two levels:

·       First order skills: observing, listening, empathy etc

·       Second order skills: applying first-order skills in specific contexts

Intrapersonal skills: processes within an individual that support in dealing with others.

Non-verbal signals:

·       Kinesic behaviour: body language like gestures, facial expressions

·       Proxemics: how near you stand or sit to others

·       Paralanguage: tone of voice, speed, emphasis etc

·       Object language: personal grooming, dress, furniture

Reflecting on negotiations:

·       Formative evaluation can be carried out before or during negotiation

·       Summative evaluation can be carried out after negotiation