Effective business negotiation is a core leadership and management skill. This is the ability to negotiate effectively in a wide range of business contexts, including deal making, employment discussions, corporate team building, labor/management talks, contracts, handling disputes, employee compensation, business acquisitions, vendor pricing and sales, real estate leases, and the fulfillment of contract obligations.
Business negotiation can make or break a crucial contract deal. It is thus important for procurement or purchasing professionals to be creative when negotiating in a business setting. Business negotiation strategies require breaking the problem into smaller parts, considering unusual deal terms, and having your team to brainstorm new ideas.
Procurement or Purchasing Negotiation
The terminology of procurement versus purchasing can perhaps be best explained using the PP Organogram, as shown in the diagram below. The diagram depicts the focus of purchasing on system and process, whereas procurement is focused on the active interaction with suppliers, as well as with internal customers. Thus, this article will only mention procurement negotiation as the activity of interaction with suppliers.
The Distributive Type of Negotiation
The term distributive means giving out or the scattering of things. By its mere nature, there is a limit or finite amount in the things being distributed or divided amongst the people involved. Hence, this type of negotiation is often referred to as “The Fixed Pie”.
There is only so much to go around, but the proportion to be distributed is limited but also variable. In the real world of negotiations, two parties face off with the goal of getting as much as possible.
The seller wants to go after the best price they can obtain, whilst the buyer wants to pay the lowest price to achieve the best bargain. This is really just good old plain haggling, which is just like from playing a tug of war.
The Integrative Type of Negotiation
The word integrative means joining several parts into a whole. This concept implies some form of cooperation, or a joining of forces to achieve something bigger together. Usually this involves a high degree of trust and forming of a relationship.
Both parties want to walk away feeling that they have achieved something which has value by getting what each wants. Ideally, this is a twofold process. In the real world of business, the results often tilt in favour of one party over the other because it is unlikely that both parties will come to the table at even strength, when they begin the talks.
Nonetheless, there are many advantages to be gained by both parties, when they take a cooperative approach to mutual problem solving.
The process generally involves some form or combination of making value for value concessions, in conjunction with creative problem solving. Generally, this form of negotiation is looking down the road, for both parties to form a long-term relationship that will create mutual gain. It is often described as the “win-win” scenario.
Negotiation Strategy of Making Multiple Offers Simultaneously
When a supplier puts only one offer on the table at a time, the supplier will learn very little if the buyer turns it down. If the supplier refuses all offers, then perhaps the buyer could ask which is the supplier’s preferred choice.
The preference for a specific offer should give the buyer a strong clue about where to find value-creating, win-win trades and generate mutual gain. In addition to identifying potential win-win moves, when the supplier makes multiple offers simultaneously, this shows that the suppliers can be accommodating and flexible, as well as a desire to understand the buyer’s preferences and needs.
Negotiation Strategy of Including a Matching Right
When negotiation, including a matching right in the contract is a guarantee that one side can match any offer that the other side later receives, and this can be a classic win-win move. For example, you want to keep the ability to sell the apartment to someone else in the future, whilst a prospective tenant wants a commitment to rent the apartment for as long as she wants.
By offering the tenant a matching right, this gives the power to match any legitimate third-party offer, and allow the landlord to preserve the flexibility while giving the tenant the opportunity to avoid the disruption of a move. In this manner, matching rights can improve the odds of a win-win agreement.
Negotiation Strategy of Preparing a Contingent Agreement
In negotiation, parties often reach impasse because they have different beliefs about the likelihood of future events. Contingent commitments often create incentives for compliance or penalties for noncompliance. To add a contingent agreement to the contract, begin by having both sides write out their own scenarios of how they expect the future to unfold. Based on such expectations, both parties can attempt to negotiate the requirements that seem appropriate to each scenario.
Poh, Philip (1988), “Defining and Clarifying the use of Terminologies”, International Federation of Purchasing and Materials Management conference, Brisbane.