Negotiation Trade-Offs and Supplier References

Please note this is not an article aimed purely at public sector readers, even if it starts off sounding that way!  But we have been writing in some detail over on Public Spend Forum about the National Audit Office’s document titled “Commercial and contract management: insights and emerging best practice”.

It is very useful and proposes 20 key factors to define good contract management performance. We have been going through these and commenting, and this week, we covered number 16; “understand suppliers’ motivation”.

The main point within that NAO discussion is about how a supplier’s reputation is very important to them in terms of winning work and ultimately can even affect shareholder value. So a contract manager can use this to their advantage to encourage the right behaviour and performance from the supplier.

That led us on into thinking about how many firms and buyers are prepared to give a supplier a “reference” of some sort in terms of recommending them to others. Now there may be good reasons on some occasions not to do that; if you are getting real competitive advantage from the supplier, you may not want to give away information about that to other firms! But on many occasions, it does not cost the buyer anything to offer that recommendation, and of course it has real value to the supplier.

And that takes us into the real point for today, which relates to the “invent options for mutual gain” principle from the bible of negotiation, Fisher and Ury’s “Getting to Yes”.

In negotiations, we should be constantly looking for options within the deal that have a higher value for the supplier than they do for us. We can then trade that value for something that does have a high value to us – and if that in turn has less value for the supplier, then there is scope for a genuine win:win result from that aspect of the negotiation.

So giving a reference or other recommendation usually costs very little for us as buyers. But it can have huge value to the supplier. So that might be a very good point to use in the negotiation, and could get us something significant in our eyes back in return.

That is not the only  point to consider of course in terms of these negotiation trade-offs. Another aspect of how we value aspects of the deal is around risk aversion. Daniel Kahneman in Thinking Fast and Slow (and other psychologists) have pointed out that we have an “emotional feeling of loss” that leads us to value what we already have more highly than we rationally should.

So we hate to give up things we already have, valuing them at well above their “real “ value. That applies in negotiation trade-offs too. So say a supplier offers us a 2% price reduction in return for us relaxing their contractual service levels. Our immediate psychological response to this is “I don’t want to lose my service levels, or anything else I already have”.

But that service relaxation might not really cost us much, and 2% is a tangible benefit. We should try and look at that dispassionately.

One final point. We don’t generally want the supplier to know that we don’t value what we are trading. So, for example, I would always hesitate before agreeing to give the reference in that case.  I would stress how difficult and rare it is for us to do that, and obviously push for more concessions in return before I “reluctantly” agree to provide it! The supplier should perceive that it is at least as valuable for us as it is to them.

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