Documents for Great Negotiating

Sept. 28, 2010
Types of Negotiations

During any buyer-seller negotiation, each party stands directly in opposition to the other.

Types of Negotiations

During any buyer-seller negotiation, each party stands directly in opposition to the other. By its very nature, negotiations create an opportunity to "lock horns" as each person at the table wrangles for advantages.

Such talks have been called "block-and-tackle" negotiations, but if you cut through the rhetoric, you'll find that there are only three basic types of negotiations: win-lose, lose-lose and win-win.

A win-lose example is when a buyer insists on (and receives) additional price discount concessions. In this situation, the seller loses profit.

No one wins in a lose-lose negotiation. If the buyer pays good money for a machine that regularly fails, he's bought a lemon. The buyer loses productivity because of downtime. The seller loses because he shoulders the burden of extraordinary warranty costs trying to correct the problem.

The third type of basic negotiation, and by far the best, is a win-win scenario. Each negotiator walks away from the table with a win. An example: A buyer purchases a maintenance contract for an excavator. The buyer wins by allocating man-hour resources to more productive activities. The seller wins by selling additional parts and labor.

The Skills of an Effective Negotiator

For any fleet or shop manager to gain complete control over negotiations requires a combination of negotiating skills and corporate politics. The latter comes into play when others in your company, such as the purchasing manager, aren't eager to give away their negotiating position with fleet and shop suppliers.

By becoming a skilled negotiator, you have a better chance of flexing your internal muscles as well as walking away a winner at the negotiating table.

Here is a baker's dozen of characteristics that identify an effective negotiator:

  • Is a student of the negotiating process and makes a point of practicing skills associated with that process.
  • Develops a level of subject knowledge that is above his opponents.
  • Has general knowledge of business practices, including accounting and finance.
  • Understands his own strengths (and exploits them) and weaknesses (and hides them).
  • Uses pre-planned objectives and achieves them with well-thought-out strategies.
  • Understands his opponents' history, current situation, and future outlook. With this knowledge, the manager can exploit his opponent's weaknesses and counter his strengths.
  • If negotiating from the buyer's side of the table, the manager has to be a good salesman. Sell the seller on why his company needs to put a better deal on the table.
  • Understands the power of persistence and patience. More negotiations are won through bulldog tenacity than through fancy tactics.
  • Understands the power of a deadline and uses long-term planning to make sure the deadline belongs to the opponent, has well-developed listening skills, takes notes, and reconfirms all agreements. Better deals come from information that is gathered from listening, not talking.
  • Is a calculated risk taker. Be prepared to purchase from secondary sellers. That allows you to gain power over primary sellers.
  • Has excellent character. You can be perceived as a hard-nosed negotiator, but you also have to be perceived as a negotiator who is true to his word.

More Tools for Talks

In addition to the seven power documents, here are five more tools that can give you an edge when negotiating with suppliers:

  • Contact all the credit-rating services and have on hand a well-documented good-to-excellent credit rating for your company.
  • Documents that show how much volume you purchase a year. The volume should be broken out, for instance, into equipment type such as graders, dozers, backhoes. The same breakdown should also apply to the annual purchase of accessories and other components. Copies should be given to suppliers with whom you are negotiating.
  • For the best negotiating position, you should have established a strong maintenance reputation with preferred suppliers.
  • Prepare well-documented computations of fully loaded vehicle, equipment and technician rental rate, and make sure it comes in lower than the supplier's rate.
  • Make sure that you have three to five high-quality suppliers available who can provide lower costs.

Hardly a day passes when shop or fleet managers aren't reminded by senior management that equipment costs and risks must be reduced. Yet, few fleet professionals ever take advantage of the easiest way to do this: sitting at the negotiating table with suppliers.

Of course, not many fleet professionals ever sit at that table. The reasons vary, but they often are rooted in the simple fact that too many equipment professionals don't know how to negotiate. Negotiating is not a God-given talent of birth. It is a skill that must be learned.

One of the first steps in learning how to maneuver through the maze of negotiations is realizing that there are certain "power documents" that will result in good-to-excellent reduction of costs and risks, if used consistently.

Robert Andrade, CEM, identifies seven power documents. Andrade is vice president, equipment asset management for Pasadena, Calif.-based Parsons.

1 Have an ROI (return on investment) worksheet for your assets that weighs what your individual organization requirements are for rate of return. This should be conveyed to your suppliers so they know how they fit into your business planning, says Andrade. "This shows them where their shortfalls are and what they can do to better fit your model," he says. "If they can't do better on price, then maybe they can do better on value-added features that will improve their ranking on your model."

2 Provide documents or records that clearly show that you have a strong, established relationship with preferred suppliers. "Suppliers need to know that you're not going to burn them on warranty issues or become adversarial," Andrade says. "You have to be flexible. Otherwise, you will kill the goose that lays the golden egg."

The supplier wants to know that you're on top of your game and that you are managing your operating costs, he says. This historical track record is increasingly important as you deal with warranty situations with them.

"They don't want to hear that you blew a transmission," says Andrade. "They want to see your work orders. They want to see documentation that supports your claim. You should be able to simply pull out such documentation from your paper work files or, if you're computerized, from electronic files. If you show them you're working through the problem with them, that you know what you're talking about and you're not just shooting from the hip, suppliers are very flexible.

"You've got to give them a hammer to go back to the manufacturer with," he says. "Otherwise, it's just hearsay. It's like a legal case. Either you have it documented, or you don't."

Presenting such documentation is easier for larger companies, but even smaller businesses can achieve the same results if they make use of good maintenance software packages that are designed specifically for small shops. Andrade suggests talking with colleagues or asking industry associations for guidance.

3 Create a spreadsheet of questions, product specifications, and other criteria that help you determine what the pluses and minuses are. "Do your homework," Andrade says. "Go to the product manufacturer's website for information, read the product manual to find out what the product is supposed to do, study the characteristics of the machine or component, then move on to the next manufacturer."

Once you have that information, he says, try to determine where they fit into the marketplace. Are they a leading supplier or lower-tier supplier? Compare them to the competition. "I talk to people in associations that I belong to and I talk to the suppliers themselves," Andrade says. "I'll also talk to two leading competitors. From that product and technical information, I draw up a list of questions and specifications."

What the fleet manager is aiming for, Andrade says, is to know as much as, and preferably more than, the supplier's representative in the meeting. "Sometimes I already know the answer to a question, but I'll ask it anyway just to find out if the sales rep knows the answer.

"I don't talk to salespeople who don't know their product," he says. "As soon as they don't know the answer, I disqualify the salesman completely."

4 From the spreadsheet mentioned previously, compose a list of questions showing your analysis of the supplier's product or machine versus the competitors. If they don't get the sale (and salespeople always contact you to see if they got the sale, he says) convey to them what their shortfalls are. This is one way to show that your reputation and business ethics are everything. "You'll never negotiate the best pricing and terms if your word is not your bond," he says.

By telling them, for instance, why their machine didn't measure up with the competitor's, you build strong relationships, says Andrade. "I have some very good relationships with some suppliers from whom I never buy their machines in a particular range," he says. "They understand why, and they understand that the competitor's product was better than theirs. They know why,or should."

Andrade says suppliers appreciate the candor because they are given a fair shot and a fair answer. "Too many times, equipment guys don't give them a fair answer and that's not ethical, in my opinion," he says. "You have to let them know why they failed so they can improve their product, or try to make sure they meet your expectations the next time around. A lot don't do that."

5 Document the fact that all suppliers are on a level playing field. "It's unfair to make suppliers step up to a certain level, such as providing a service or some type of product support, free oil changes, free oil analysis or warranty, and not hold them to it," says Andrade. "If you don't make them deliver, you're being unfair to yourself on a cost basis and unfair to the supplier by eliminating something you're not holding them to. You have to be the one who authorizes payment terms, rental terms or whatever it is.

"Otherwise," he says, "it takes away from the reputation of your company and the way you do business. If you don't do this, some suppliers feel you are holding them to a higher standard than you are their competitors."

6 Make sure you have a well-written bid contract for annual and major negotiations. Clear bid formulas are helpful and narrow the field, says Andrade. Sometimes, however, working relationships and product support should outweigh the formulas. "Organizations that will cover you at all hours of the day and night should always be given preference over the formulas," he says.

With that in mind, bid contracts should clearly define the services that you want, and specifications should be detailed to the level that everybody is bidding the same attachments, the same options. Everybody should have an apple-for-apple quotation.

"So many times when you get quotations on a machine, managers take a generic description and don't weigh the options or limitations of the product," Andrade says. "Just saying you want a three-year warranty isn't enough. The content of one warranty isn't necessarily the same as another warranty. One manufacturer might say a three-year warranty covers only hydraulics. Manufacturers all define warranty differently."

The only way a fleet manager can know exactly what he's getting is to define (in this example) a three-year warranty. "Be specific," Andrade says. "Say I want a three-year warranty that covers the power train for 5,000 hours and I also want hydraulics covered. Specify what your parts availability is: 'I want 90 percent parts stocking availability on a 24-hour basis.'"

Sometimes, manufacturers will offer a lot of product support and service in generic terms when they're bidding against someone else, Andrade says. "So you really need to define what you want as far as product support and warranty is concerned."

If you do obtain apple-to-apple bid quotations, your final decision could "circle around many things, depending on where you are working," he says. If you are on a project out in the wilds of Colorado, you might focus on the issue of product support because if your machine goes down you are out of business, says Andrade. If you're in downtown Seattle or New York City, your focus might be on price.

"There are many areas where you have to be flexible, depending on such things as application and production requirements," Andrade says.

7 Make use of your pricing files and vendor histories. "If you bought a machine years ago and the supplier said he was going to do all these wonderful things and he fell on his face — couldn't get the parts there, wouldn't honor a warranty, didn't respond 24/7 — then obviously the next time you're up for a major bid or annual negotiation, that vendor history should red-flag you," says Andrade. "They didn't deliver."

At the end of the day, says Andrade, fleet professionals should make use of these seven power documents to be fair with all suppliers. "Everybody should be on an equal footing and everybody should have a shot," he says. "Too many times favoritism, or things like that, enter the picture and they shouldn't. It's really not fair to other suppliers."