The following article was prepared by Mike Taylor, C.P.M.
Great buyers negotiate more than just the price; They consider each contracting action an opportunity to be creative. They understand that reducing contracting cost is only one way to be successful. By negotiating an increase in contract value or reduction of risk, effective negotiators can save even more bottom line cost.
Even if price is not on the table, there are dozens of other issues that can affect the success of a contract and can be of direct value to the buyer. In Creative Negotiating part 1 we talked about reducing risk by addressing performance concerns in the negotiation. There are many more ways to improve the value of the contract.
Consider packaging for example. Most of us have negotiated special packaging for one reason or another. It might be smaller lots so the unused portion isn't wasted, environmentally friendly packing or unique labeling to simplify handling. In comparison to a potential 5% reduction in price the net reduction in cost to handle, dispose waste or store the product may be much greater value to the buyer. A buyer who only focused on getting the 5% reduction, might be loosing money on the purchase.
Just in time delivery is another great example of how buyers can apply this principle to just one aspect of a contract and achieve significant savings. Even if it ads a little more to the price, the cost avoidance for storage and handling makes it worthwhile.
So what's the point?
When it is time to negotiate a new contract, be it office supplies or technical services, increase your effectiveness by including more than just the price. Consider the full impact of the contract on your company when planning the negotiation. Here are some suggestions.
Example: The invoicing and payment process certainly is a necessary, time consuming and costly part of each contract, right? Not necessarily so….Here are a few alternatives that might be applicable of useful depending on what you are purchasing:
Once you have the list of options developed, talk with the contractor about payment terms. Several of these methods significantly reduce invoicing cost for the contractor, which should be worth a lot of concession or extra value in the contract.
Note to new buyers: A concession isn't always price. A contractor's cost to produce an item isn't the retail price charged. So a contractor can often afford to give an extra item much more easily than giving you a discount or refund. [remind me and I'll talk about this principle in a future newsletter…]
Here is another example:
When an office supply contractor receives a purchase order for office supplies, the first thing they usually have to do is keypunch it into their computer system. This adds time, cost and potential errors. If, on the other hand, we place an ordering using a contractor's online ordering system, the information is already entered in the contractor's computer and doesn't have to be entered again. The contractor saves significant cost, which can be leveraged in the contracting process. The contractor could use that savings to program a custom web site just for the buyer.
Invoicing and payment is only one element in a contract. Review the negotiation checklist and I'm sure you will find many more to consider. Check off the items that could apply, then see how creative you can be at reducing the cost. Don't forget that including a new item to reduce risk or increase the value of the contract to your company is also an important option. This would be a great exercise at an ISM program:
I'm not talking about a huge negotiation stage production with 6 lawyers and two accountants; I'm talking about the day-to-day discussions that happen between buyers and sellers, where most contracts are created. It's not rocket science, it's making constructive use of the every-day skepticism that buyers develop when contracts go wrong because they forgot to ask, "what if….?"
Just consider the options, ask the questions and make each contract the best it can be. Next thing you know, you'll have a reputation as a great negotiator.
Here is a link to download a previous PowerPoint workshop on Creative Contracting. It's a big file... right click and select SAVE AS to save to your hard drive.
Read more articles about negotiation and creative contract solutions in the Purchasing Toolbox at http://www.mltweb.com/prof/tools.htm and in the BuyTrain news article archive at http://www.mltweb.com/tools/buytrain/index.htm
|MLTWEB is assembled and maintained by Michael L. Taylor, C.P.M.|
|Materials and articles prepared by Mike may be shared for purchasing education provided that this source is cited and no fee is charged. The rights for any other use are withheld.|
|Copyright; Michael L. Taylor, C.P.M.|
|Last Updated: 11/26/2016|