What’s the best way to negotiate during the RFP process?
We have come to the last chapter in The Buyer’s Guide to RFP Best Practices. This chapter is dedicated to procurement negotiation. It tends to be the final step before the contract is signed, but an experienced buyer knows that the RFP process doesn’t always work in such a linear fashion. We’ll explain why negotiations should take place throughout multiple stages of the RFP process, not just after awarding, and also give you some negotiation strategies to help you seal the deal.
Preparing to negotiate
An experienced lumberjack knows that if he wants to cut down a tree in five minutes, he’d better spend the first three minutes sharpening his axe. The same goes for an experienced procurement negotiator — more time is spent on preparation than is actually spent at the negotiating table.
Preparing for negotiations begins as soon as you decide to run an RFP since the best way to prepare is to understand what your stakeholders need and want from suppliers. Keep in mind, too, that these objectives will not be universal among all groups of stakeholders. For example, the engineers will want to a supplier that meets their technical needs, while your CFO will prioritize getting the best value for money.
By starting out your RFP process with a clear understanding of your stakeholders’ wants and needs, you’ll be better equipped to negotiate with suppliers. You’ll be able to open up conversations with confidence that you’re moving forward towards a satisfactory resolution.
When to begin negotiations
The typical RFP process looks something like this:
This linear RFP process has one main drawback: if you want to negotiate after awarding, you’ve already given the supplier the upper hand. At this stage, they will probably assume that if they’ve been notified of their winning position, then the other suppliers have already been notified that they’ve not been selected. The other suppliers are essentially out of the picture, then.
It’s more beneficial if your RFP process looks something more like this:
As you can see, the process remains much of the same, except negotiations begin once you receive the first round of responses. After shortlisting suppliers, you can run a second round. By entering into final negotiations with a small group of suppliers, you’ll maintain the upper hand because all of the suppliers are still in the running and may be willing to make concessions in order to pull ahead of the others. If you choose to run your RFP process this way, it helps to include a draft contract in the initial RFP, if possible, so that suppliers can bring out any areas of disagreement right away, rather than at the end.
Understand your supplier’s pain
A common sales strategy is to “sell aspirin, not vitamins.” In other words, you need to know and be able to alleviate your prospects’ immediate pain points—like aspirin—rather than offering unobservable benefits in the future—like vitamins.
Even though as a buyer you’re on the other side of that relationship (purchasing not selling) this perspective can still help you maintain a strong position during negotiations. Put yourself in your supplier’s shoes: why do they need you as a customer? Is your company a gateway to a new industry? Are you able to partner with them on innovative solutions? Do you have connections to a parent company that could mean a significant increase in volume?
As a participant in procurement negotiations then, you’ll be able to leverage your position by reminding suppliers why they will benefit from doing business with you.
The “steak dinner clause”
Ryan Holmes, the CEO of social media management platform Hootsuite, wrote an article for Forbes not too long ago about something he calls “the steak dinner clause.” He and his team arrived at an impasse during a negotiation with a supplier, and neither side was willing to budge. Rather than going back to hammering on the same sticking points, the Hootsuite team conceded, but on one condition — that the supplier would take the team out to a steak dinner, for no more than $450, for each $100,000 in revenue generated.
According to Holmes, their willingness to give in on costs led them to a solution that would reap much greater benefits in the long run: facetime with a strategic supplier and a chance to strengthen and improve the relationship over time.
In your particular case, a steak dinner might not be the ultimate solution, but this type of creative problem solving can help you get what you need from a negotiation. Outside-the-box thinking with a long-term view of relationship building has the potential to increase savings and encourage innovation in the future.
Procurement negotiation strategies
So you’re prepared, you’ve got the right mindset and you’re ready to negotiate. If you need some ideas for strategies to employ at the table, check out this slideshow:
Regardless of which strategies you decide to use, always keep in mind your BATNA (best alternative to a negotiated agreement) and your stakeholders’ objectives.
As the purchasing organization, it’s in your best interest to wrap up the awarding and negotiating process as quickly as possible; it benefits suppliers to draw it out because they realize that the more time you’ve invested, the less likely it is that you’ll walk away. But at the end of the day, the purpose of negotiating is to come to mutual agreement. This agreement isn’t always a “win-win” because usually somebody has to give in at some point; it’s more about making the pie bigger, so everyone is satisfied with the slice they have to take back to their stakeholders.
Don’t forget to share this guide with your colleagues!