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The Art and Science of Commercial Negotiations

If you are a buyer, have you ever come across a situation where you enter a commercial negotiation with a supplier, without having any background of the deal, you just hear out the "final best price" from the supplier, ask for a 30% discount and the supplier agrees! Never? Well, unfortunately many users tend to believe that this happens every other day. 

As Purchasing professionals we often come across situations where a user has completed his technical evaluation, has performed product demos, has selected the supplier, has had multiple discussions with him, has "negotiated" delivery timelines and has communicated to him that he stands selected. "However, our Purchase guy will negotiate commercials with you", the user has communicated to the supplier. What are the chances that the supplier would offer fair market price to the Buyer, let alone best commercial terms! None.

Users often misunderstand the concept of commercial negotiation. They believe that it is an act performed in one hour, across the table, where the Purchasing Buyer will use his negotiation "tactics" to reduce the prices. However, this is as far from truth as can be. The negotiation meeting is just a culmination of immense ground work and preparation. Commercial Negotiation is all about analysis and research to arrive at a fair price point and then the "act" of negotiation is just an exercise to make the two minds meet. Preparation for negotiation would involve using one or more levers to make a price assessment. This could involve having a commercial comparative in place, a detailed costing exercise, market index evaluation, historical price movements, previous price references etc. clubbed with market analysis, supplier analysis, geo-political situation assessment and other such tools which enable a scientific approach to the process, based on facts and figures. So, while the final act of negotiation may be regarded as an art by some, but the entire preparation that goes behind that art, is all science.

While many organizations mandate that all buying should happen through Procurement, sometimes it ends up becoming a stamping exercise, where the Buyer spends the final 30 minutes with the pre-selected supplier in negotiations and walks away with some discount. Everybody seems happy. But the fact is that the mandate is followed in just words and not spirit, and the organization loses a lot in the bargain. For the Purchasing Buyer too, there is no learning and no satisfaction of adding much of value to the process. For the negotiation process to be effective, involvement of Purchase should be early on in any sourcing exercise and all communications to suppliers, whether technical or commercial, should ideally be routed only through Purchase. Purchase should consciously distance itself from any deals where it was involved at the last minute, more as a stamping body and just to complete the process of "involving" Purchase. Purchase will never get any credit for all such contracts; whereas if anything goes wrong, it stands to be questioned not only by internal stakeholders but also by auditors.

So, while the art of negotiation may be important across the table, it's the entire strategy and science that makes the art effective; without which, the negotiation is nothing but bargaining aimlessly.

Please share your views on the above. I would be eager to know what you feel and what's the experience / beliefs in general.

Comments

It is really nicely written. You rightly focused on role of purchasing getting limited by either themselves or because of stakeholders involved and need to be cautious of that (Art).
I think “Science” of negotiation could have been a bit more elaborated including “ e-Auctions” as one of the “best practice” that has already made negotiation a tactical exercise in the end but involves "Art and Science" both when RFx process is initiatiated with involvement of customers and suppliers…Good luck Khalid..

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