Do You Have the Right Contracting and Negotiation Skills to Get the Job Done?

There are a couple of classic mantras and slogans for contracting and deal making that really should be banned, or at least not be in the vocabulary of anyone who’s serious about doing business. The first is the old saying that you can have quality, speed and cost savings, but not at the same time. This is a clever saying that isn’t true, and worse, it really misses the point. Another one is "faster, better, cheaper". This is silly and fraught with peril. Faster, better and cheaper THAN WHAT? Let’s take a brief look how these sayings really miss the point. There are several buy scenarios ranging from simple commodity transactions, to highly complex, highly transformational strategic initiatives. Although infinitely variable, these deals share a common economic goal: Optimization. Regardless of the type of transaction, the goal should be to drive behaviors that provide the most value per cost. Depending on the type of initiative, cost can take many forms, such as money, time, opportunity or disruption. Unfortunately, too often, business people use the same arms-length buying mechanisms, transactional negotiation tactics, and commodity contracts for all sorts of transactions types, sacrificing optimization. We know that relationships based on contracts tend to fail, but contracts based on relationships tend to succeed. Yet, how often do sourcing and contracting professionals get the training to build successful relationships as part of the purchasing process? And when is relationship-based negotiating the most efficient method of striking a bargain? "Unfortunately, too often, business people use the same arms-length buying mechanisms, transactional negotiation tactics, and commodity contracts for all sorts of transactions types, sacrificing optimization." Sourcing professionals would greatly benefit from using different skills for different types of transactions. Negotiation and contracting skills follow the sourcing continuum (see diagram). As the transaction type increases in complexity and buyer/supplier interdependence, the contracting professional’s technique should move from transactional to relationship based, and competency in several key contracting skills becomes critical to the success of the transaction. On one end of the scale, commodity transactions can be served well by an efficient arms-length buying process, conventional negotiation tactics and standardized contracts. The role of buyer is to adequately describe the good that his company is buying, to get the best value for that good, and to protect his company in the event of a breach of contract, usually non-performance. Preferred vendor transactions are slightly more complex and the buyers and suppliers more interdependent. The goals remain largely the same as in commodity transactions even though buyers and suppliers typically have a closer relationship than a commodity supplier. On the other end of the spectrum, strategic and outsourcing relationships are some of the most complex and interdependent business relationships procurement and contracting professionals will face. The role of a good negotiation is to establish the foundation for the relationship. The role of the contract is to give the parties a thoughtful roadmap to keep them on track (the parties obligations to one another), and a highly effective safety net should the relationship fail in some way. In all forms of strategic relationships, the buyer will most likely be unable to adequately describe their requirements, but when successful, should be able to adequately describe its desired outcomes. From these desired outcomes, buyers seek to select the vendor that will help them achieve their outcomes. In outcome based contracting, buyers will get increased value with increased costs. The trick is to find the point of diminishing returns. Therefore, arms-length buying processes, conventional negotiation tactics and standardized contracts are not at all useful. Many sourcing professionals have a portfolio covering a variety of transactions. It is unusual to have one person handle all commodity buys while another handles all sole sourcing agreements. Therefore, sourcing professionals should focus their efforts on mastering the negotiation and contracting skills necessary for the most complex types of arrangements, namely strategic, outsourcing, and alliances. If the contracting professional can successfully structure and negotiate a relationship and resulting contract, he can successfully negotiate and structure a range of relationships on the sourcing continuum, and find that optimization point where quality, value and efficiency meet. Note: Ed and Jeanette are offering a 2 part webinar series, which will cover the negotiation and contracting skills needed to structure a variety of relationships on the sourcing continuum. The first runs next week and the second in February. [eventpdf] Ed Hansen is a partner at Baker & McKenzie LLP and co-chair the North American Sourcing Practice. Ed has more than two decades of experience representing clients in deals involving technology enabled business transformation. He was recognized as one of the world's leading outsourcing lawyers by Chambers Global, Chambers USA and Legal 500 USA, and was named one of the key "innovators and influencers" who will drive change in the business technology sector by InformationWeek. Jeanette Nyden is a recognized thought leader and negotiation expert. She is the author of three books including Getting to We: Negotiating Agreements for Highly Collaborative Relationships and The Vested Outsourcing Manual: A Guide to Creating Successful Business and Outsourcing Agreements. Jeanette is program faculty at the University of Tennessee’s Center for Executive Education.

Do You Have the Right Contracting and Negotiation Skills to Get the Job Done?

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