Negotiation Basics for Purchasing Professionals
Dr. Michael A. McGinnis, C.P.M., A.P.P.
Dr. Michael A. McGinnis, C.P.M., A.P.P., Professor of Marketing and Logistics, University of South Alabama, Mobile, Alabama 36688-0002, (334) 460-7907, Fax: (334) 460-7909.
83rd Annual International Conference Proceedings - 1998
ABSTRACT. Whether you are new to purchasing or an experienced negotiator, an overview of negotiation basics can help you sharpen your buying skills. The first section of this paper provides an overview of the negotiation process. The eight steps presented in the second section provide a framework for negotiation preplanning.
INTRODUCTION. While the ideal of most negotiation processes is to reach a win-win agreement, the ultimate objectives always include reaching an accord that meets the needs of the negotiator's organization. The first component of successful negotiations is an understanding of negotiation processes. This includes a working knowledge of the definition and purpose of negotiations, when to negotiate, barriers to effective negotiations, characteristics of effective negotiators, techniques that facilitate the negotiation process, and insights that can strengthen the negotiation process.
The second component of successful negotiations is thorough preparation. This includes understanding the other party's proposal and your own objectives, being able to formulate your own positions and analyze the other party's positions, defining and organizing the issues, developing negotiation strategies and tactics, and organizing for success.
Whether you are negotiating a complex agreement or working out a minor issue with a colleague, an understanding of negotiation processes and techniques can increase the likelihood of reaching a successful accord.
AN OVERVIEW OF NEGOTIATION PROCESSES. While no two negotiation processes are identical, an understanding of the following five points can increase your effectiveness in most situations.
The Definition and Purpose of Negotiations. Many feel that negotiations are "haggling" or "beating down" the other party in order to get your way. This type of win-lose orientation ignores the potential for finding areas of agreement where both parties can benefit. The definition of negotiation that I prefer is, "the process of working out a mutually satisfactory agreement." As a result, the purpose of negotiations is to reach a mutually beneficial deal. Generally, if both parties do not get something that they want from the negotiations an agreement will not be reached.
When to Negotiate. In a business buying situation, negotiations are likely to occur when the five criteria for competitive bidding are missing. They are (1) at least two or, preferably, more qualified vendors, (2) vendors who want the business, (3) clear specifications, (4) an absence of collusion among bidders, and (5) a purchase dollar value large enough to justify the expense of competitive bidding. In most other situations, negotiations will be used before the buyer and seller reach agreement.
When specifications are inadequate, two-step bidding may enable the buyer to combine negotiations with the bidding process. In the first step, technical proposals are requested. After the technical proposals are evaluated, bids are requested from those sellers who provided satisfactory technical proposals. Buyer-seller negotiations may occur in either step. The buyer should indicate from the beginning whether negotiations will play a part in either step of the process.
Barriers to Effective Negotiations. Six barriers can limit the effectiveness of any negotiation process. First, individual styles of managing conflict (competing, compromising, problem solving, and inaction) may clash, resulting in frustration by both parties. Next, the past, present, and expected future relationship between/among the negotiating parties can inhibit (or facilitate) effective negotiations. Third, a win-lose orientation can inhibit the ability of the negotiation process to find mutually beneficial solutions. Next, the "mixed motive" nature of most negotiations, where each party wants to win and maintain a long-term working relationship adds tension to the process. Fifth, negotiations are less effective when the negotiators do not have authority to reach an agreement. Finally, complex issues may be interpreted in simple win-lose terms.
An understanding of the negotiation process can help the purchasing professional minimize the six barriers to effective negotiations.
Characteristics of Effective Negotiators. Effective negotiators (and negotiation teams) must have a wide range of characteristics. They include planning ability, a high tolerance for ambiguity, a desire to achieve, an ability to think clearly and rapidly, patience, and an ability to objectively consider others' ideas. They also include problem solving ability, tact, self-restraint, a good knowledge of human nature, an ability to listen, an ability to gain respect, and competitiveness.
As you can see from this partial list, the development of effective negotiation skills requires much training and practice. Several of these skills, for example self-restraint and competitiveness, conflict. In order to provide the needed array of skills it is often desirable to form negotiation teams where member skills complement each other.
Techniques that Facilitate the Negotiation Process. Developing your negotiation skills is a continuing process. There are two developmental techniques that are useful for this process. The first, "lessons learned," provides insights from previous negotiation sessions. It is a critique of a recently concluded negotiations. Examples of questions that might be included in a lessons learned include: What did we learn? What went well? What could have been done better? What did not go well that should have gone well? What did the other party do well? What did the other party not do so well? If the other party learns from its mistakes what should we be prepared for next time? The answers to these and other questions can help any negotiator improve his/her future performance.
The second developmental technique, the "caucus," provides insights into ongoing negotiation sessions. The caucus is a planned or unplanned break in negotiations that gives the negotiator (or negotiation team) an opportunity to review its strategy, tactics, or progress before proceeding. The caucus should immediately be used when disagreement, confusion, and/or misunderstanding occurs within a negotiation team. The caucus may be used to critique ongoing negotiations, resolve misunderstandings within a negotiation team, revise strategies or tactics, slow down momentum if negotiations are not going well, or create a pause that causes the other team to caucus.
The caucus should be used as a routine part of negotiations. You should avoid using the caucus only when a crisis arises because this sends unnecessary signals to the other party. If you are negotiating individually, a caucus is achieved by excusing yourself, arranging to have yourself called away from the meeting, or telling the other party that you will get back to them.
Insights That Strengthen the Negotiation Process. Two common challenges in creating positive negotiation environments are the creation of a climate conducive to problem-solving and negotiating effectively in cross-cultural situations.
The following is a list of conditions that can enhance negotiations and improve the environment for problem solving behavior:
- Some common goal or objective
- Faith in one's own problem solving ability
- The motivation and commitment to work together
- Clear and accurate communication
- A belief in the validity of the other's position
These conditions can reduce or eliminate the barriers to effective negotiations discussed earlier. Please keep in mind that these conditions are not quick fixes, but ongoing commitments that must be developed and nurtured over time.
When conducting cross cultural negotiations the ability to understand the culture of the other party can reduce the number of misunderstandings that inhibit negotiations. Adequate preparation can improve cross cultural understanding. The lessons from cross cultural negotiations can also be applied when negotiating with those from unfamiliar industries or unfamiliar markets.
Negotiation Processes: Concluding Comments. First, most negotiations occur in the context of the past, present, and expected future relationship between the parties involved. For this reason past experience with the other party and expectations of future dealings with him/her/them should be considered when preparing for and conducting negotiations.
Second, preparation and planning are the most important parts of negotiating. Being glib and eloquent in presenting your position is of little help when the underlying preparation and planning are third-rate. The balance of this paper presents an eight step process for negotiation preparation.
NEGOTIATION PREPLANNING BASICS(1). A critical step in any negotiation process is planning. Without proper planning you are unlikely to know what your negotiation position should be, be able to anticipate what the other party is likely to do, be unable to realistically respond to the other party's proposals, and know if the agreement that you negotiated is reasonable. The following summarizes an eight step process that can be a useful guide for negotiation preparation.
1. Analyze the Other Party's Proposal. If you have received a proposal take the time to analyze it in depth. Evaluate price, delivery, specifications, terms, and any deviation from your requirements. A thorough knowledge of the other party's proposal can be a source of advantage at the bargaining table, especially if you know their proposal better than they do. Keep in mind that the other party's proposal is usually their beginning point (optimistic position) for negotiations.
2. Establish Your Objectives. State your objectives in terms of price, delivery, specifications, terms, and any other requirements clearly and in writing. Set specific objectives in terms of dollars, quality, service, dates, features, capabilities, and warrantee. You will now have objectives that are measurable rather than a vague desire to "Do the best you can."
3. Formulate Your Positions. Consider your objectives and set your Optimistic (what is the best you hope to get), Target (what is likely), and Worst Case (what is the minimum you can live with) positions for each issue that is likely to be negotiated. Graphing your Optimistic, Target, and Worst Case positions for each issue can provide an overall perspective that helps you develop your negotiation strategy.
4. Analyze the Other Party's Positions. You can also estimate and graph the other party's likely positions on each issue. This helps you develop a feel for their negotiation strategy. This puts you in the other party's shoes and helps you estimate what is likely to be important to them. The other party is probably doing a similar preplanning exercise, so don't underestimate them. You may now want to graph both positions to develop a feel for the range of likely negotiations. Such a graph might look like Figure 1. You might prepare several "Range of Negotiations" graphs to represent the various issues that are subject to negotiation.
Figure 1 - RANGE OF NEGOTIATIONS (not available in text-only version of this paper)
5. Define and Organize the Issues. Having completed steps 4 and 5, you can now organize the various issues and identify the points of similarity and difference between you and the other party. Make a list of issues, with yours one side and the other party's on the other. Be sure that you can support your point of view in any dispute with solid data or information.
6. Develop Your Strategies and Tactics. Now it is time to plan your strategies and tactics. Strategy is the planning and direction of your negotiations. Tactics are the processes and maneuvers that you will use to put your plan into action. There are three practical strategies that you can use.
- Reveal No Position. Here you avoid discussing your position, attempting to maneuver the other party toward the position you want by probing his/her proposal point by point. This strategy may work if the other party is eager to reach agreement, when you lack information, or when the other party's proposal is long and complicated.
- Reveal Your Optimistic Position. This most common approach establishes a range for negotiation if you have the other party's proposal. Remember, their proposal revealed their optimistic position. You can now discuss and resolve each issue.
- Reveal Your Optimistic Position and Immediately Offer Your Target Position. This strategy will work if you can sell the other party on the merits of your approach. This strategy can backfire if the other party refuses your offer. You may then have to back down and settle for something closer to your Worst Case Position. This strategy requires that you have the ability to sell your position because you have little room for negotiating.
Skillful use of tactics enables you to put your plan into action. The following summarize some basic negotiation tactics:
- Sequencing, or prioritizing, the issues for discussion can be approached one of four ways. First, you may choose to cover the major issues first on the assumption that the minor issues will then fall into place. Second, you may choose to cover the most troublesome issues first on the assumption that the other issues will then fall into place. Third, you may choose to cover the least troublesome issues first in order to get a feel for the other side's positions and to evaluate their negotiators. Fourth, you may be able to arrange the issues so that if one issue is settled the rest will fall into place. Selecting the sequencing of issues will vary from situation to situation.
- Use questions wisely. Questions should draw out information, rather than yes or no answers and should be phrased so they attack the other party's position without attacking them.
- Listen Effectively. Pay attention to what is being said rather than thinking what your response will be.
- Maintain Initiative. Be prepared. Probe for justification in areas that are unclear.
- Use Solid Data. Be able to back up your position. Positions that cannot be justified ruin your credibility.
- Use Silence. Silence often makes the other party nervous and may result in further discussion and concessions by them.
- Avoid Emotional Reactions. Emotional reactions move negotiations from issues to personalities.
- Make Use of Recesses. Recesses, or caucuses, are an excellent way to rethink your position, interrupt the other party's momentum, or evaluate a counter-proposal. Try to avoid the tendency to backtrack when the session resumes.
- Don't be Afraid to Say No. Do not agree unless you mean to agree.
- Beware of Deadlines. Before agreeing to a deadline make sure you can live with it. It is often better to let a deadline pass than to settle for less than you can live with.
- Be Aware of Body Language. When there is a conflict between what someone is saying and their body language, the body language is usually telling the truth.
- Keep an Open Mind. Preconceived ideas block the creativity that is often needed for a positive outcome.
- Get it in Writing. Before adjourning get all agreements in writing and have the appropriate party's sign the agreement.
7. Select Your Negotiation Team. Decide who will be on the team and who will not. Decide who will be the team leader. Once you have selected your team, make sure each member understands his/her role. Make sure the team can work well together and that the team can support the team leader, even if it means sacrificing their own opinions.
8. Develop an Agenda. The agenda should cover the issues to be discussed, meeting logistics, and who should participate. Prior agreement on an agenda gives both parties to a negotiation time to prepare and think through their positions. When working out the logistics, consider hosting the negotiation meeting in order to take advantage of "the home field" advantage. When deciding who is to participate, make sure both sides are represented by decision makers. Do not hesitate to question whether the team's members have the authority to make commitments for their organization.
CONCLUSION. The issues discussed in this paper provide a refresher for the experienced negotiator and a point of departure for those new to purchasing. A key to successful negotiations is being able to adapt the techniques presented in this paper to your own style and to the specific situation. At one extreme, the negotiations will occur spontaneously and be conducted informally within the context of other discussions. At the other extreme, negotiations will be formal and require substantial amounts of preplanning time and effort. In either situation, the insights provided in this paper should help you increase your effectiveness as a negotiator.
(1) Based on Negotiations - Part I Preplanning (Tempe, Arizona: National Association of Purchasing Management, 1990)