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Negotiation Best Practices
VAGP Conference Spring 2010
Presented by:
Sonja Headley
VITA Policy & Compliance

Quan B. Myles
VITA Supply Chain Management
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INTRODUCTIONS


Who We are and Why Were Here


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Negotiation Strategy Planning
A Buyers Crucial Need-to-Knows
The Risk Toss of Negotiations
Wrap-up
Questions
WHAT WE WILL COVER TODAY
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NEGOTIATION STRATEGY
PREPARATION & PLANNING
He who fails to plan, plans to fail
~Winston Churchill
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NEGOTIATION STRATEGY BASICS
Prepare! Prepare!! PREPARE!!!
Research your market
Have a Negotiations Tool Kit
Know the most often negotiated terms
Define your Negotiations Team and roles
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VITA Supply Chain Management



Sourcing
Purchasing
Operations
Category
Management
Supplier
Management
Contract
Mgmt.
Focus area
Category contract
& sourcing plan
SLA determination
Strategy &
communication

Sourcing process
Negotiation strategy
Contract negotiations
Market analysis
Pricing analysis
Develop custom
contracts
Mitigate supplier risk
Negotiate contract
modifications
Monitor contract pricing
Contract use review
Cooperative contracts
Supplier relationship
management
Monitor supplier
performance
SLA tracking, reporting
& management
Supplier relationship
methodology
Contract administration
Bids, small
procurements, quick
quotes
Purchasing operations
Order management
P-card
NG Partnership
transactions (P2P)
Policy Planning and Analysis
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MARKET RESEARCH RESOURCES
Free Directories (examples):
Yahoo Finance http://biz.yahoo.com/ic/ind_index.html
Ariba Network Discovery -
https://service.ariba.com/Discovery.aw/691258/aw?awh=r&aws=ZiJVYD7L0Pv4WgpV
&awssk=&dard=1
Thomas Register /Thomasnet - www.thomasnet.com
Global Spec www.globalspec.com; engineering directory
Special Issues - www.specialissues.com ; good for rankings, buyer guides, etc.
Industrial Quick Search - www.industrialquicksearch.com

Online Publications and Resources
CIO e-Magazine www.cio.com
ZD Net www.zdnet.com
Purchasing.com www.purchasing.com
Annual Reports www.annualreports.com


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Script Team
Members
Participation
Plan Sequence
And Timing Of
Supplier Contacts
Develop Negotiation
Messages For
Suppliers
Establish Common
Vision and Objectives
Identify/Evaluate
Options
Select Negotiating
Team
Coordinate
Negotiations with Other
Negotiations In
Progress
Negotiation
Execution
Negotiation Preparation
Negotiation preparation builds on a solid fact base and
ensures effective negotiation execution
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Example
Product
Support
Availability
Price
Guarantee of consistent quality at all facilities
statewide
Commitment to the continuous design
improvement of new parts
Relief for warranty costs
Web-based access to product information
Dedicated sales and technical staff
24 hour response to disasters/emergencies
Guaranteed availability within 20% of forecast
Minimal transportation and inventory cost
Secure lowest market pricing (target 15%
reduction)
Pricing protection formula to protects against
market swings
Warranty recourse
Regular component audits
OEM testing lab costs and resources
Web capabilities current and planned
Number of support personnel
Emergency response systems
Availability guarantees
Delivery and carrying costs
Delivery frequency
Pricing model and indexing
Competitive Pricing clause
Payment terms; Early Payment
discounts
Sourcing Objective Category Potential Negotiation Levers
The first task is to refine and record teams objectives
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You need to understand key negotiation concepts to
leverage information and our analysis frameworks
Key Negotiation Concepts
MDO Most Desirable
Outcome
LAA Least
Acceptable
Agreement
BATNA Best Alternative to a
Negotiated Agreement
MDO is independent of what
the other party will accept
MDO is an opening, not a
closing proposal
MDO is the opposite of LAA
We will never get more than we
ask for (i.e., ASK!)
Aspiration level is one of the
most important factors in
determining success
Be ambitious but have a
defensible rationale
The minimum we can
agree to without
sacrificing our
imperative interests
Barring the emergence
of a better option,
settling for anything less
is not a viable business
option
What we will do if we cannot get a mutually
acceptable agreement
Its a unilateral action on our part
BATNA strengthens our position in the
negotiation
BATNA helps protect against making an
agreement that should be rejected
Knowing opponents BATNA will give us the
upper hand in the negotiation
A BATNA helps us:
Assess more realistically our relative
position
Ensure that we do not settle at any cost
Be more flexible
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Determine negotiation team roles prior to a negotiation, the
negotiations team requires a mix of skills
Team Negotiations: Potential Roles
Assigning team member roles should be based on skill set, NOT on title or position
Role Negotiating Role Points to Communicate
Lead Negotiator
Driver of Change
Seeks alternative/options
Teams MDOs
Need for change
No sacred issues
Procurement
Representative
Neutral
Seeks common ground
Value of suppliers
Value of good relationship in the long term
Functional
Representative
Good Cop
Provides avenue for communication
Seeks common ground
Maintenance of day-to-day relationship
Focus on specific details
Implementation of changes
Expert
Process Decelerator
Asks tough questions
Challenges assumptions
Leaves doubt in suppliers mind
Need for change
Investigation of options
Need to improve costs and service
Observer / Note
Taker
Facilitate Process
Ensure discussions are positive/focused
Manage pace of discussions
Document agreements/messages
N/A
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Think carefully about which questions are appropriate to answer and to
maintain a level playing field of information
Suppliers Question Your Answer
How many suppliers are invited to
negotiations?
The number of suppliers is not fixed at
this stage
Will decisions be made on price
considerations alone?
The award decision is based on data
measured by the Value to Cost ratio.
Who will be making the final decision? The final decision will be made by the
Evaluation Team based on the data.
How many rounds of negotiation will
there be?
There is no fixed number of negotiation
rounds
How did we rank in the last round of
quoting?
Your supplier scorecard shows overall
competitiveness
When will you award the contract? Contracts will be awarded early in the
new year
Etc.
Prepare carefully scripted and agreed responses to anticipated supplier
questions so that the entire team is on message and consistent
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Anticipate potential supplier retaliation and have appropriate
responses ready

Potential Supplier Reactions Potential Responses
Refuse to extend existing contracts/agreements Prepare to pay list prices in interim
Increase negotiations with other suppliers who could
handle business
Propose to increase all prices/fees/charges Initiate immediate diversion of discretionary business
Initiate supplier options
Initiate alternative product/services
Make competitive options even more attractive
Retaliate by increasing prices on sole source
business
Remove all discretionary business from supplier
Divert sole source business to others who can be moved
immediately
Begin actions necessary to divert all other sale service
business to other suppliers
Reduce service levels
Reduce product/service supply or availability
Bring to senior supplier management attention
Publicize supplier quality problems
Initiate immediate business diversion options
Reduce prices to your competitors Let supplier do it reduces their revenues
Initiate business diversion to alternate suppliers
Example
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DOCUMENT YOUR NEGOTIATION STRATEGY
Prepare your Negotiation Strategy Playbook
Resource: IT Procurement Manual: BUY IT
Know the most often negotiated terms
Develop negotiation messages for the Team and Suppliers
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A BUYERS CRUCIAL NEED-TO-KNOWS

The more you read and learn, the less your
adversary will know.
~Sun Tzu, The Art of War
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A BUYERS CRUCIAL NEED-TO-KNOWS

Understand your procurements business needs/budget
Understand the suppliers market, challenges and concerns
Your non-negotiable points (statutory, technical/functional,
other)
Your targets and walk-away issues
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Your Non-Negotiable Points (statutory, technical/functional, other)

Statutory

Code of Virginia
VPPA

Executive Orders in Effect
for Executive Branch Agencies

ARRA
Reporting requirements, unique Federal grant requirements

Confidentiality
Examples: HIPAA, personal data, construction design (security), IP, trade secrets

Federal Flow-Down Terms
If Federal funds are paying for the acquisition
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Your Non-Negotiable Points (statutory, technical/functional, other)

Technical/functional (examples)
Product specifications, engineering standards, building codes
Service levels, performance requirements
Security requirements
Hosting requirements
Integration with certain legacy systems
Installation times
Days required for testing
VITA Technology Standards (COVA standards for technology projects)
Other (examples)
Schedule (based on federal grants, fiscal year restrictions or other dependencies)
Budget (contingency, outyear)
Indemnification/liability (uncapped or limited)
Special insurance requirements, bonds or certification/licensure requirements
Escrow agreement (for technology)
Reporting requirements (subcontractor, DMBE, performance, project status)
No Evergreen clauses

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Your Targets and Walk-Away Issues


Before you release the solicitation, begin with the end in mind
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Know the negotiation targets for your procurement
Business, management, technical, functional, performance, price, etc.
Study industry, market, references to know many of the suppliers target
issues
White papers, industry publications
Other agencies and states procurement experience
Your previous experience with same or similar vendor or procurement
Burn up a white board with pros and cons, risks and mitigations, this for that
thinking
Be creative, flexible, balanced and in the end, certain

IT Procurement Manual: BUY IT

1
Steven R. Covey, The 7 Habits of Highly Effective People



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Your Targets and Walk-Away Issues




Know your walk-away issues
Non-negotiable terms and conditions, mandatory requirements

Know as much as you can about the suppliers walk-away issues
They will vary based on the procurement category (construction vs. IT, product vs. service,
COTS vs. developed)
They will vary based on the size the supplier (IBM or Oracle vs. small business)
They may vary depending on client (check in with other clients)

Negotiating with 2 suppliers will increase your success


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THE RISK TOSS OF NEGOTIATIONS


Imaginative, sanguine men will never recognize that in
negotiations the most dangerous moment of all is when
everything is moving according to their wishes.
~Honore de Balzac


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THE RISK TOSS OF NEGOTIATIONS



Negotiations Should Maintain a Balanced Project
(or Risk Re-assignment)

Warranties Supplier Promises

Negotiating Performance Criteria Service Level
Agreements

Its Give and Take, Nothing is for Free

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Negotiations Should Maintain a Balanced Project (or Risk Re-assignment)

Your solicitation and negotiation strategy compose the baseline from
which to negotiate, so ensure these documents are balanced in the
beginning.
Ensure balanced risks for both parties are maintained throughout
negotiations.
Ensure no compromises are made to impact mandatory compliance
and procurement requirements, the projects business, technical and
functional requirements, or the suppliers financial viability or
performance ability.
Ensure the scope of the original solicitation does not change during
negotiations (can you change that without protest liability or do you
have to resolicit?)
What new or hidden risks will emerge if supplier doesnt accept
certain terms, conditions, or non-mandatory/desired scope
requirements?
The more complex the procurement, the harder you must scrutinize
interrelationships between negotiation points and outcomes.






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Negotiations Should Maintain a Balanced Project (or Risk Re-assignment)
What risks will buyer assume and what risks does
supplier assume for each negotiation point? These are
only a few areas where risks may shift.

Suppliers financial viability Warranties
Buyers needs Security and confidentiality
Project schedule Indemnification or liability
Project budget Performance expectations

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Warranties Supplier Promises
Warranties/warranty services should always be free, but are normally built
into supplier pricing.
Maintenance support starts when the warranty period is over.
Suppliers generally prefer to disclaim all implied warranties of
merchantability and fitness for purpose in favor of specific repair or replace
warranties that give little or no recourse to the buyer. To protect the buyer:
reinstate implied warranties or avoid suppliers implied warranty disclaimers by including
language that exchanges supplier disclaimers for specific express warranties; such as:
Should such product/solution not perform as warranted, the supplier will be responsible for
fixing and repairing the product and if the supplier fails to do so, the agency has the right to
(get credit/remedy from the supplier, etc.)
All express and implied warranties should be clearly stated in the contract.

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Warranties Supplier Promises
A few express warranties:
Supplier has the right to enter into the contract and to perform its obligations (or provide the
products and/or services or software) under the contract.
The product and all enhancements (and new versions for software) will contain no known
defects.
Suppliers software, services or products shall not infringe on any third partys intellectual
property rights, including, but not limited to patent, trademark, copyright or trade secret.
The supplier is not currently the subject of any litigation or pending claim that would materially
affect the suppliers ability to perform.
Unless approved in advance by agency, no information supplier discloses to agency in providing
the services that are the subject matter of the agreement will be confidential to supplier or any
third party.
The contract is its legal, valid and binding obligation.
For software: The supplier, if a licensor, has the right to grant a license to the software free and
clear of any liens and encumbrances.
And many more . . .

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Warranties Supplier Promises

IT Procurement Manual: BUY IT
Chapter 25, IT Contract Formation, includes
more critical express warranties for software procurements,
as well as warranty discussion/tips usable for all procurement categories.

Chapter 26, Negotiating IT Contracts, provides additional best practices that
can be adopted for most procurement categories.

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Negotiating Performance Criteria Service Level Agreements


How are buyers baseline performance goals and metrics in the RFP affected by other or
ancillary negotiations? For instance, the RFPs performance criteria or SLAs may have
included:

Desired technical, functional and business outcomes
Defined performance objectives and timeframes
Performance incentives, retainage
Percent of time services should be available
Number of users to be supported
Performance benchmarks, usage statistics
Schedule for advanced notification of system changes, upgrades, downtime
Help desk response time
Is what was important to your original performance needs affected by other negotiation
points?
Is it necessary to change who will capture data, who will analyze/report data or, how
frequently? How does this affect pricing, staff availability, etc.?
Do the incentives or corrective actions need to change?

IT Procurement Manual: BUY IT
Chapter 21 includes more PBC/SLA discussion/tips usable for all procurement categories

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Its Give and Take, Nothing is for Free
In the end strive for:
A balanced contract where neither party must assume unhealthy risks
A clear agreement that documents the business relationship (a 4-corners
contract)
Meaningful service levels or performance criteria tied to business
performance
Strong warranties with business remedies
Significant attention to Intellectual Property rights, if any
Contract commitments tied to the procurement category:
Solution: the overall solution not the products, services or components that make it up
Services: deliverables that meet the requirements, not how the services are accomplished
Products: supportability, upgrade and maintenance
Maintenance: the annual cost increase; service levels that support business continuity
Satisfaction with the Total Cost of Ownership at the end of negotiations
What is .com
http://searchdatacenter.techtarget.com/sDefinition/0,,sid80_gci342316,00.html
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WRAP-UP

Strategy Planning & Preparation
Before your team walks into negotiations, you should have:
Completed your market research
Established the vision & objectives
Developed MDOs, LAAs, BATNAs and assess other partys MDOs, LAAs, BATNAs
Identified and evaluated options/alternatives
Developed scripted messages for negotiation & develop roles of team members
Planned the sequence and timing of negotiations

Assessment & Allocation of Risk
Maintain a balanced project
Reallocate risks fairly
Develop meaningful service levels or performance criteria that tie to business performance
Negotiate strong warranties with strong business remedies
Ensure the final contract is a Win-Win for both parties
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QUESTIONS?

THANK YOU

Send other questions to:
SCMPolicy&Compliance@vita.virginia.gov

VITA Supply Chain Management website:
http://www.vita.virginia.gov/scm/