Spend Matters welcomes this guest post from Sachin Yadav, of GEP.
Negotiating the best value out of monopoly suppliers is a tough challenge. Monopoly suppliers will always steer a relationship in a direction that doesn’t benefit the buyer. A lot of suppliers that also act like a monopoly are where the transition cost is exceptionally high. Some of the major issues faced by companies while negotiating with a monopoly are:
- Supply dependency: Only one supplier can provide the product your company needs. This includes utilities and patented products like software. It can create a huge supply side risk to the business.
- Transition cost: When a company builds a long-term partnership with a supplier like Microsoft or Rockwell, transition cost is extremely high, which gives the supplier a lot of leverage.
- Financial risk: When a company uses small-scale suppliers to develop proprietary or patented products for them, they create a monopoly from the supply side since they cannot source this product from other sources. In such cases pushing the incumbent too far on pricing can lead to the supplier going out of business and create huge risks for business.
- Information and intellectual property security: With long term relationships, certain suppliers have access to critical information such as R&D, engineering prints, key processes, etc. This obligates a company to refrain from changing a supplier.
But how can organizations drive even better value out of a monopoly supplier when the opportunity to negotiate arises? Understanding how market conditions and current supplier relationships have evolved over time will help procurement teams to drive a lot of value.
- Business criticality of supplier: Understanding the current commercial position and how it evolved over time is key to understanding the current contract value as well as leverage. A dollar value should be assigned to the relationship in terms of “business impact” before entering any negotiation. This will help procurement to know how far it can go in pushing the supplier.
- Financial risk analysis: The most important factor is to analyze is the financial health of the incumbent supplier and clearly understand their strategic financial goals. Conduct a market share analysis to understand the financial leverage of your business with the supplier. Analyze all financial statements and the existing customer base of the supplier to understand their position.
- Type of the monopoly: When determining the negotiating strategy, it is important to consider whether you can walk away. Is the supplier truly a monopoly supplier? You will rarely find a supplier with a true monopoly, as you can always find substitutes outside of that industry (i.e., replace air travel with video conferencing).
Negotiation with monopoly suppliers is very sensitive as they are business critical, so signaling is important. This means that in most cases you will have to project a win-win outcome but still create a credible threat with your exit options.
Negotiating with monopoly suppliers will always be difficult, but by having a clear objective for the negotiation, clarity on the levers you have available and an understanding of the psychology of the supplier and your relationship with them, you will have a better chance of achieving the most valuable deal possible.
- Choose the right time to make sure market conditions favor your position. If the supplier is going through a rough period financially, it might help your case.
- Look at other streams of business with the same supplier and use them to leverage in your negotiation as a true value of contract.
- Check provisions of utilizing the supplier by your other suppliers and customers under the same contract. This will increase supplier’s dependency on your firm.
- Identify how costly it is for the supplier to lose you as a customer. Estimate supplier consequence of no agreement. Put all of the numbers on the table and provide a savings target to the supplier in first meeting.
- Provide financial data to support your argument and hint at all your exit strategy options.
- Optimize other costs associated with sourcing from monopoly supplier by taking measures such as challenging the demand, optimizing orders or lowering logistics costs.
- Develop a strategic partnership with the monopoly supplier that benefits both parties. For example, Dell purchases processors from monopoly supplier Intel and brands its laptops as “Dell… Powered by Intel.”
- Leverage the experience of the monopoly supplier through its involvement in process improvement, technological advancement or inventory management and deliver value to your company.
For more interesting thinking on procurement, visit the GEP Knowledge Bank.