The following article was prepared by Mike Taylor, C.P.M.


Creative Negotiation (part 2)
December 2003

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.

  1. Start by learning everything you can about what you are buying and what it's for. Also learn how it's received, handled, stored, dispensed and used. I once discovered by accident that special seals we received in packages of 3 were being used in lots of 10 with the extra two being discarded. Not so funny was the fact that the supplier was packaging them specially for us in lots of 3. That's the way we used to need them and no one had ever updated the traveling requisition. By switching to the standard package of 5…. you know the rest… the company saved millions and I was promoted to president. [Well almost, but you get the point].
  2. Keep a checklist handy of contracting issues to consider negotiating. Review the list before each purchase to find applicable subjects to include in the solicitation and/or discuss with the contractor. Reviewing the list before each contract will help you remember everything and might spark some thoughts about items to include that have never been included before.
  3. IMPORTANT NOTE to new buyers. Assume everything is negotiable until the contractor convinces you otherwise.
  4. Don't negotiate with yourself! If you don't ask because you think you know the answer, then you loose automatically. Without asking you will never know.
  5. Spend some time brainstorming optional ways to handle major contracting elements with friends. Ask some pointed questions and explore options.
    a. Is this process necessary?
    b. What purpose does it accomplish?
    c. What alternatives do we have to accomplish the same purpose?

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:

  1. Just send the contractor a check with the purchase order. The contractor ships and cashes the check. No invoice process at all. [Don't laugh, companies have been doing this for small value items for many years]
  2. Set up a blanket contract and pay for each release using a Purchasing Card
  3. Set up a blanket contract with one invoice a month for all of the various releases or shipments during the month.
  4. Make automatic payments of a fixed amount for six months, and then adjust the payment amount for the next six months based on actual usage. Electrical companies do this for consumers. Consider it for your maintenance or office supply contractor where usage is continuous and relatively stable.
  5. Pay the purchase order amount on receipt without any invoice at all.
  6. Require contractors to submit invoices electronically (no mail or paper to handle)
  7. Pay by using Electronic Funds Transfer (no check to write)
  8. Barter. Trade for items or products that you can supply. It might even be surplus to you. An example might be machine tools that are obsolete in our environment but that the contractor can sell in foreign markets.
  9. Read a previous article on this topic; It Ain't Over Until its Paid

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:

  1. Place one contracting issue on a flip chart.
  2. Ask each table to discuss ways to be creative, eliminate or improve the value of the process
  3. List ways that including this item can reduce risk or improve the value of the contract to your company
  4. Share the ideas on the flip chart for everyone to see and take back to work.

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