Internal Negotiations in Procurement
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Procurement and negotiations are closely linked and negotiating in contracts is one of the best practices accepted in the profession. While recruiting for Procurement, the negotiation skills are highly valued and sought after. When we talk of negotiations in procurement, the first thing that comes to our mind is the negotiation between a buyer and a seller. However, there is another negotiation which is equally important and which may be carried out more often than the negotiation with the seller. It is the internal negotiation, which lays the foundation for the next steps in procurement. Because the internal negotiations are carried out as a matter of routine and in a much flexible and informal format, they are often done not as consciously as the external negotiations, nevertheless, they can equally impact the price, quality and terms of the contract as much as the external negotiation. Only when the importance of internal negotiations is recognised, Procurement can make it part of the process, carrying it out in a structured way for better effectiveness.
Parties to internal negotiations
Very often, the ultimate decision makers in a procurement are not just the procurement people, it may include the end users, the technical department, facilities department or any other function that needs material and services. The functions that are impacted by procurement, users of the material and services procured, the entities that are involved in the decision process and those that influence the decisions are all stakeholders in procurement and therefore become a party to the negotiations. Identify such functions and engage with them early on. Early engagement and effective internal negotiations should give them a sense of confidence of more valuable outcomes.
Time for internal negotiations
It is best to carry out all internal negotiations before the bidding process starts and arrive at a common understanding between all stakeholders. Carrying out simultaneous negotiations with both internal stakeholders and external vendors after bidding starts can be a complex and daunting task. It indicates lack of proper planning. This however does not mean that there are no internal negotiations once the RFQ or Tender is out. Some internal negotiations do take place during the bid evaluation process and even during contract execution process. The variation orders, change orders, deliverables assessment and payment approval etc. are some of the instances where internal negotiations take place after awarding the contract.
Difference between internal and external negotiations
Although the basic characteristics and process of both internal and external negotiations are similar, there are some distinct differences between the two. Some of the key differences are discussed below.
In external negotiations, the cost, risk distribution, and terms and conditions are the key considerations of which, the cost (monetary aspect) often becomes a key negotiating point. In internal negotiations however, the scope, time, specifications and terms & conditions often take primacy over cost.
An external negotiation is generally with a single entity i.e. the supplier, whereas the internal negotiations involve multiple functions and the negotiations may involve one-to-one or with all the entities as a group. In some of the internal negotiations, the Procurement may not be even a party to negotiations, it can just play the role of a facilitator or moderator for other entities.
In internal negotiations the strategies must always be based on a collaborative approach. There is no scope for competitive and adversarial approach.
Mutual trust can be one of the biggest hurdles in external negotiations, especially when the vendor is new or believed to have a stronger negotiating position. This is not so in internal negotiations because of the fact that the parties to the negotiation work together and are known to each other. In some cases, there is even a possibility or role reversal due to internal transfers etc. and therefore usually the internal parties are more accommodative. In internal negotiations one of the advantages Procurement has is that they know the stakeholders, their perspectives, their long term goals etc. better than the external entities because they interact with them on a regular basis. Due to this, there are less surprises.
Internal negotiation style can be more flexible, you may start negotiating informally with one, formally with the other, then switch over to a workshop style or a meeting to think aloud and arrive at a consensus.
Managing the work culture based resistance can sometimes become a challenge in internal negotiations. The work culture cannot be changed for each procurement project. The strengths and influences of each function differs for each procurement. One of the tactics that is often used in managing resistance in internal negotiations, although as a last resort is management directive, which is not available in external negotiations.
Another advantage Procurement has in internal negotiations is the carrying forward of benefits i.e. certain common goals agreed between various stakeholders for one Procurement project can easily be carried forward to other current or future projects. This advantage is minimal in external negotiations. Every successful internal negotiation reinforces the mutual trust and the benefits are accumulated and carried forward within the organisations, even when the individuals involved in the negotiations change.
Situations requiring Internal Negotiations
Every procurement does not require internal negotiations. Some of the situations when internal negotiations are required are discussed below.
When there are multiple stakeholders
As we discussed above, in procurement usually there are multiple stakeholders having divergent views and objectives. In such a scenario, to ensure successful procurement, before the requirement goes out for RFQ or tendering , it is essential to arrive at a common understanding for the satisfaction of all stakeholders. The internal negotiations provide stakeholders a deeper understanding of the requirement and help in seeing a bigger picture. At times, the influential entities may not be the impacted entities. In such a situation, Procurement has the responsibility of safeguarding the interests of the end users by tactful negotiations.
All stakeholders that are impacted by the procurement outcomes must be party to the negotiations. In such a scenario, a stakeholder analysis based on their interest and influence precedes the internal negotiations.
As part of Procurement need assessment and validation
The procurement process of all major requirements starts with need identification and Procurement Need Analysis. The internal negotiation can be a part of the need analysis process, where the need identified by the end user and the assumptions leading to that need are challenged and rationalised. In this process, the Procurement negotiates the long term objectives of the organisation with the end user against objectives of their own immediate functional needs.
For consolidating or splitting the scope of Procurement
Procurement achieves cost savings by adopting strategies of requirement consolidations and sometimes requirement splitting. This involves negotiations with internal stakeholders involved in the procurement. For example, combining the supply, installation and maintenance or even operations of a plant can provide greater opportunities for cost savings and risk management in the long term. In a construction contract for example, splitting the design, construction and fitments into three contracts as against a single contract may produce better opportunities. All these instances require hard negotiation with the end users, who may face some inconvenience on account of this and may prefer the contracts to be otherwise.
For procuring common material and services
Having organisation wide contracts or call-off agreements for common items is very common. Such contracts and call-off agreements need standardisation of specifications and terms of delivery as a pre-condition. With multiple end users, each having their own requirements with some variations, Procurement has to negotiate with them all to arrive at a common specification, satisfying them all. These negotiations are more for optimising the benefits for all at lowest acceptable specifications and terms.
When the negotiation involves multiple business units or divisions , the task can be tough because each entity would like to maximise the benefit to itself and in such a situation, Procurement may be required to play a moderator’s role.
While developing RFQ/Tender documents
The scope of supply, specifications, terms & conditions, time of tender and delivery are all required to be finalised as part of the RFQ and Tender documents. All these are important in deciding a procurement strategy. Intensive internal negotiations take place at this stage between the end user function and the Procurement function. From the end user perspective, it may look justifiable to make the scope as wide as possible, covering features and things to cover all possible scenarios. But all this costs money. Before the tender or requirement goes out to the market, it is important to review and revise the scope so that only what is really necessary is included and at the same time the near future needs are taken into account. It is also important to include common needs of other departments or functions. This involves coordination with all stakeholders and coming to a scope of supply or service delivery that does not miss anything and also does not result in paying for unwanted things. The specifications may call for certain features that may not be necessary or that may restrict competition because only a few vendors can provide them. It is important to take into consideration the financial constraints and limit the scope within those constraints and at the same time not to go ahead with procurement that does not offer a complete solution to the need. If necessary, it is better to postpone the procurement rather than procure an incomplete solution.
The technical requirements are discussed at this stage. The technology must be futuristic and at the same time compatible with the current systems or those planned to be acquired in the near future. The deliverables is another aspect that frequently requires negotiation. The end user for example may require daily meetings and progress reports from a consultancy project, but this can take unnecessarily high resources and that costs money.
The terms and conditions in a contract are important to determine the contract compliance and at the same time they distribute the risk between the buyer and the seller. From an operational perspective, the end user would like to transfer all risks to the seller, but from a procurement perspective the cost and long term relations with the vendor also are equally important.
As a role-play in preparation for external negotiation
For large contract negotiations, a multi level and multi layered negotiation is necessary, which can be complex and for which a lot of internal preparation is required. It is usually carried out by a cross functional team and during negotiation with an external entity, each member in the negotiating team must be on the same page about the objectives and the role of each member. Not all functions are well trained in negotiations, nevertheless sometimes there are compulsions to include them in the negotiating team. In such a situation, the role-play becomes a training session to such members to ensure successful outcomes. They start appreciating the process, the boundaries, the trade-offs and provide greater support in implementing the outcomes.
Such internal practice negotiation can be used for bringing clarity among the team members, which helps in anticipating challenges likely to be faced in actual negotiation with the vendor and be prepared to effectively face them.
Though very rare, internal sabotaging of an external negotiation is not unknown. A well conducted internal negotiation reduces the possibility of such actions.
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