When Incumbent Negotiations Make the Most Sense

OK, I admit it. As a marketing geek at heart -- and by trade -- I'm a sucker for good vendor propaganda (especially when it's under the guise of thought leadership). And one thing I'm struck by is how poorly most services and consulting do at marketing their intellectual property, especially in the sourcing and supply chain worlds. So when I come across whitepapers and vendor newsletters from consultants who are clearly experts in their domain, my ears perk up. One such newsletter I enjoyed reading recently came from CGI (the firm that acquired Silver Oak). Even though they spammed me with -- I do not recall signing up for it -- I'm not upset.

In their most recent edition, the firm highlights their perspective on when and how to best negotiate with incumbent suppliers (versus scanning the supply market and looking to competitively bid a category with multiple suppliers). The article cites seven different times where an incumbent negotiation strategy can make the most sense. For example, if there's an urgent need for quick results or there's small spend, but high potential ROI, an incumbent negotiation strategy can be ideal. In other situations, when it's clear that there's a strong end-user preference in the organization -- marketing and legal spend are good examples here – it's also smart to move down the incumbent negotiation path.

While CGI does not go into great depth on specific tactics for incumbent negotiation strategy in the piece, I'll suggest a few here based on my experiences in the past. Perhaps the first piece of advice that I can give from an incumbent negotiation perspective is to follow the lead of Honda and Toyota and know more about the category you're sourcing than the supplier who is providing it. By overwhelming an incumbent supplier with your knowledge of competitive price benchmarks, cost breakdowns and general market conditions, you'll greatly increase your leverage.

Next, I'd suggest offering to work with your incumbent to take cost out of the equation rather than engineering it into the agreement in the first place. In the case of services spend, this might take the form of striking or including a lesser indemnification clause -- which, incidentally, IACCM found can be worth dozens or even hundreds of basis points in a negotiation -- or specifying only the service levels required (e.g., is 99.5% availability sufficient enough?) In the case of direct materials or industrial MRO, joint cost take out initiatives might take the form of reducing inventory levels while keeping expediting to a minimum. Or it might take the form of lean supplier development initiatives.

Regardless of the actual form such negotiation and supplier development strategies ultimately take, one thing's for sure when it comes to incumbent negotiations. And that's the more prepared you are -- and the more thought and effort you're willing to devote to the relationship -- the more you'll save and come out on top in the end.

Jason Busch

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