What Is Procurement Negotiation?

Procurement negotiation is one of the most important processes a negotiator might face. Not only does it represent the chance to forge relationships and deliver value to a company, but it can also give both parties the chance to put procurement negotiation strategies into good practice.

Everyone who takes a seat at the bargaining table will always have a few negotiation tactics that they want to try out, yet this isn't always the case. Data from a Hackett survey, reported in Procurement Magazine, showed that buyers are only fully prepared for negotiations 70% of the time.

Procurement negotiations are just like any other that a negotiation specialist might undertake. Understanding how to negotiate supplier contracts is key to bringing value to any business.

What is procurement negotiation?

Procurement negotiation is when two or more parties come together to negotiate and create a contract agreeable to all.

This negotiation process forms a vital part of business, as it connects suppliers and buyers whilst giving them terms that they both can agree on. Terms usually discussed in the course of procurement negotiations can include:

• Pricing

• Timeline

• Delivery

• Payment

When conducted correctly, this negotiation process should lay the groundwork for a lasting partnership between companies.

7 stages of procurement negotiation

The Chartered Institute of Procurement & Supply (CIPS) has laid out seven clear stages negotiators should follow during procurement negotiations. This provides a clear structure for procurement professionals to follow for effective negotiations and should help both parties reach a satisfactory conclusion. Different types of negotiation that might affect a party's overall strategy, these seven steps should still be kept at the forefront.

1. Preparation

We shouldn't have to tell you that preparation is a vital part of any negotiation, whether the outcome is procurement or not. A negotiation team should research the other party to help inform their approach to discussions. In doing so, it might be possible to uncover the styles of negotiation that they typically embody, allowing a counter-strategy to be developed.

2. Opening

When parties first sit down at the negotiation table, it is time for the opening stage. Both will get the chance to state their own goals and expectations for the negotiations. In doing so, negotiators will find out if the expected outcomes match and this can set the tone for the rest of the discussions.

3. Testing

The testing stage requires good communication and listening skills on both sides. As can be implied from the name, negotiators will test one another to better understand each other's values and positions. This can help to bridge the gap between the two parties and begin to build real understanding that can lead to a breakthrough in agreements.

4. Proposing

Each party in the negotiation will have the opportunity to propose a new desired outcome, shaped in part by what they have heard across the previous stages and with new insights gleaned from what they have learned thus far.

5. Bargaining

With proposals now having been heard, it is time for a compromise to potentially arise. Is there something that the other party is willing to give up if it means that an agreement can be reached? Perhaps there is something your group is willing to lose. If only one party chooses to give something up without receiving something back, this is classed as a concession. Though 60% of salespeople can enter negotiations with no intention of making any form of concession, this is one scenario where concessions are actually likely to be of benefit.

6. Agreement

When bargaining is over, we can hope that an agreement has been reached. In the case of procurement contracts and other business matters, an agreement has to be from both parties for the contract to be considered legally binding.

7. Closure

Final details will now be worked out as the meeting draws to a close. This will often include the initial documentation of the agreement, possibly in the form of minutes if the actual contract is due to be drawn up at a later date. This is an important step that should never be skipped or rushed; you don't want other parties arguing that the deal is open to interpretation thanks to inadequate closure.

Advantages of negotiation in procurement

Procurement negotiations are advantageous to both the buyer and supplier as it is a deal that benefits them both. Even if one side has to take a few concessions to get a deal across the line, there will still be plenty to gain from a successful proposal.

Win-win scenarios

Procurement negotiations are often considered favourable as they are true win-win scenarios. Both parties will benefit from a finalised deal. This means that everyone will come to the table with the mindset that they will hopefully leave with some sort of contract. Though there is some negotiating to be done to work out details, both parties will start by working towards the same goal.

Reduce costs

The buyer might choose to negotiate for a lower price during discussions. A company's chief procurement officer will always want to ensure that they get the best price for their suppliers and services. Though the suppliers will obviously want to get a good price for their products, they might be willing to offer a reduced cost rather than lose the business.

Increase value

When discussing clauses, it might be possible for a buyer to negotiate additional services from the supplier at a reduced cost, or even bundled with the main product being purchased. The increase in value might not even be directly related to the products; it might be the opportunity to attend a new conference or even just a chance for the supplier to gain valuable feedback about their product.

Improve performance

Delivery is often negotiated as part of a procurement negotiation. Each party will have a clear idea of what a reasonable delivery time might be. By accurately defining the expectations of both during discussions, conflicts will hopefully be avoided.

Gain other contracts

Many great partnerships have started with a single contract. Though you might have initially sat down at the table to discuss just one deal, you could go on to set up multiple contracts between your companies. If expectations are met and deliveries are timely and to a good standard, it only makes sense to return to a company that you know to offer good service rather than start all over with a stranger.

How to create long-lasting relationships during procurement negotiations

The procurement negotiation process can take some time, especially when speaking with a new supplier, but a successful negotiation should lead to the creation of a positive long-term relationship. Demonstrating good negotiation skills can be critical when pursuing the right outcome, but negotiators also need to make sure they have the right mindset in place if they wish to achieve a deal that best benefits them.

Drop the egos

Heading to procurement negotiations with guards up and defence already in place is not the way to begin things. Remember, a procurement negotiation should hopefully end in a win-win scenario. This will be difficult to get to if one side refuses to get on the same page and avoids making compromises.

Negotiate binding clauses

We've said to not leave any part of the contract open to interpretation. To successfully set up a long partnership, steps need to be taken to avoid conflict that might arise. By focusing on the binding clauses that cement the contract and expectations for both parties, a strong deal will be created that does not allow for any ambiguity.

Remain open-minded

Even if you have a clear idea about how you would like the negotiations to go, you can never account for how others might act. Actively listen, be prepared to change up your approach, and be open to collaboration if it means that you create a contract that will suit all.

Stay observant

Don't become lost in the discussions. Choosing to listen carefully and observe everything in the meeting can provide some key insights that could turn negotiations in your favour. Whether the meeting is in person or conducted virtually, staying observant carries many advantages that could lead to more successful negotiations for those willing to learn from what they see and hear.

Practice makes perfect

There is no "right" way to go about procurement negotiation. Even with strategies, soft skills, and the inside track over the other party's goals and mindsets, there is no guarantee that you will sit down to a textbook negotiation process.

Give your team the skills to thrive during procurement negotiation

No negotiation is straightforward, but doing adequate preparation and following a set strategy can take you far. Remember, this is one negotiation scenario where both sides should come out richer if an agreement can be made. You are both working towards the same goals, and that should be reflected in the tone and nature of your discussions.

Does your procurement team need a refresher on their skills, or would you like to learn some real and actionable negotiation strategies your team can apply next time they sit down at the bargaining table?

Our team has over 45 years of experience and provides specialist negotiation training and consultancy to individuals and businesses in the UK and worldwide. Get in touch with Scotwork today to find out more about the training and guidance we can offer your organisation.