A Systemic Approach to Purchasing Negotiations
Part One
There are many differing methods for measuring and evaluating business performance. Perhaps the most basic is with a simple calculation: Income – Expense = Profit (Loss). As any business owner can attest, it doesn’t get much more fundamental – or relevant – than that, and the economic success or failure of any business entity can be summed up using that formula. We spend much time looking at the income portion of that equation - let’s spend a moment looking at the expense component.
Profit / Leverage Effect
The term “profit/leverage effect” is used to describe an accounting concept that has a significant effect on a business entity’s financial performance. To demonstrate the importance of this concept, assume that an organization realizes a 5% net profit on its sales. Considering income alone, the company would need to increase sales by $10,000 in order to increase net profitability by $500. But if we set income aside and consider the expense component of the equation in the same context, we find that in order to add $500 to net profitability the organization needs only to cut costs by $500. Every dollar of expense saved goes directly to the bottom line without being diluted by issues of margin. And this is why you’ll usually see that the hard core accountant types, those with advanced degrees in finance and the letters CPA after their name, will usually attack the expense side with every thing they have, and will often treat revenues as almost an afterthought. If they’re being judged – or perhaps even compensated – based upon the bottom line economic performance of the organization, this is where they’re going to earn their keep. And that is why negotiating prices for the products and services we need is critical to our success.
Concepts
Mutual gain. Perhaps the most frequently referred to concept in negotiations is that both sides are expected to win. After all, the end result of the negotiating process should be some type of contractual agreement, and who is going to agree to something that is not beneficial? So that’s where we start – with an understanding that the other side has to win as well.
The role of preparation and practice. Prior to testimony, a good attorney will prep her client by going through all of the questions that she is going to ask, and all of them that she feels her opponent is likely to ask. If a poor answer is offered, she will provide a better one so that when the real testimony begins the client is as prepared as possible. This tactic works quite well in negotiations as well. Where are your weak areas, and what are you going to say when they come up?
Understand the relationship in order to understand the deal. Negotiations contain a significant element of science – but they are also an art form. Specifically, they involve the art of influencing and persuading people. At the heart of these endeavors, are relationships. The more you know about those on the other side of the table the better.
The role of trust and past performance. It is inherently difficult to negotiate with an entity that you don’t trust. And because of that, past performance – including your own – becomes an important aspect of the negotiating process.