A corporate focus on negotiations can help organizations reap substantial benefits, writes Alison Morris.
At a recent conference, a senior executive at a Global 500 company was overheard to say: "If only we could pick up all the money we are spilling in negotiation. It's a huge number, definitely in the tens of millions." He went on to describe how his company was in the early stages of negotiation development and still lacked a consistent approach. He could not disguise his real concern: "Our failure to develop the skill of our negotiators across the company will not be evident until it is too late."
Other businesses too have recognized the importance of negotiation in improving bottom line profitability and as a result have put together large-scale training programmes. However, too many still lack a clearly-defined strategy in driving such initiatives.
Today's best-performing companies show that the key to success is both simple and fundamental. In every case, they have transformed negotiation from an individual competency into an organization-wide capability.
So the importance of process is clear, but in implementing such organization-wide change healthcare and pharmaceutical companies should not lose sight of the fact that fully-developed behavioural skills remain vital for those members of the sales team on the negotiating front line.
The power of negotiation
The contrast in performance could hardly be more stark: between 2007–8, the net income of the world's top 2000 companies declined by over 30 per cent. Over the same period, the top 25 per cent of companies adopting a systematic approach to negotiation achieved an average net income increase of nearly 43 per cent. (These companies were identified as 'world class' on the Huthwaite International/IACCM (International Association for Contract and Commercial Management) 'negotiation maturity' benchmarking scale.)
So how can one explain such a huge variation in bottom line profitability? In the first study of its kind, Huthwaite International and the IACCM interviewed more than 120 major buy- and sell-side practitioners and benchmarked the negotiation maturity of the world's largest organizations. In particular, it explored how major international companies are trying to improve their corporate negotiating performance.
The resulting report — Improving corporate negotiating performance — found one common factor among the most successful of these companies: they have all re-engineered their negotiation capabilities. Despite this, the survey also found that in too many other companies, negotiation performance improvement is being ignored, neglected or ineffectively addressed. For these businesses, negotiation is still seen to be a very personal, 'soft' skill.
Such an approach is no longer sustainable. To secure multi-million euro deals in today's tough commercial battleground requires much more than this for, as the survey highlights, companies with no negotiation process suffered an average net income decline of no less than 63 per cent between 2007-8.
So what's the answer? The survey identified ten critical areas that businesses should address if attempting to re-engineer their corporate approach to negotiations with the intention of delivering significant and measurable improvements in negotiation performance. These include standardizing and documenting the end-to-end negotiation process, ensuring consistent inter-departmental collaboration and measuring negotiation success. Though some companies have started on the road to transforming their negotiation practices, few have succeeded in embedding a consistent process across different business divisions or geographic boundaries.
This should come as no surprise, as implementing such in-depth change is not easy. As a sales director of another Global 500 company bluntly put it: "We don't prescribe how our employees should negotiate — there is no bible for this. We have 45 divisions worldwide and it is impossible to have a standard process." Yet the impact of a successful shift is little short of astonishing. One respondent pointed to a saving of $37 million on a single deal following the introduction of a more structured approach to negotiation. And, as another global head of contract management confirmed: "Before the new process was put in place, the average negotiation cycle time on complex projects over $5million was 12-18 months. Today 75% of those deals are done in less than eight weeks."
In benchmarking the current stage of development of each organization, researchers adopted a five-phase negotiation maturity model. At one end of the scale are companies that have no process, are purely reactive and rely totally on individual skills and capabilities. In greatest contrast to this, best practice organizations — identified as 'world class' — have a formalized negotiation process which is subject to continuous improvement and incorporated into the broader buying or selling process.
So where do most companies sit? Overall, the survey identified low levels of maturity in global negotiation standards. Fewer than one in five global corporates have any formalize d structured planning tools for the negotiation. This can result in badly-prepared negotiators who feel that success will be based solely on individual merit.
Focusing on effective change
In helping businesses improve performance, the research identifies ten critical areas throughout the negotiation process which must be addressed if any transformation initiative is to succeed. Changing the behaviour of an organization may be difficult, the survey concedes: "However, when companies with no process are demonstrably losing millions of dollars in negotiation, the status quo is not an option," it believes. In focusing on process as key to improving the bottom line, the survey recommends, "at the very least, the implementation of strategic cross-organizational negotiation planning from the very start of the sales or acquisition process, in order to have consistently successful outcomes". Or, put another way, start as you mean to go on.
There is no doubt, of course, that a large number of other factors influence negotiation performance, not least of which is the impact of new web-based technologies and the emergence of professional third party procurement specialists. The directors and senior managers surveyed were in no doubt that the following key performance areas must be addressed in order to ensure the success of any negotiation transformation initiative:
* Negotiation process
* Cross-organizational collaboration
* Data collection and analysis
* Preparation and planning
* Approval and escalation systems
* Negotiation training
* Measurement of negotiation success
* Motivation for negotiation success
* Common negotiation standards
* Board level support
Skilled negotiators — on their best behaviour
Despite the overall emphasis on a corporate process to secure a consistent, unified approach to negotiation throughout the organization, skills training for those at the rock face of negotiation — whether buying or selling — remains a central component to broader performance improvement.
Just as the survey found that few healthcare, pharmaceutical or other global corporates had any formalized negotiation planning tools, there was a parallel lack of maturity in the area of negotiation training. In particular, just 31 per cent of companies questioned have a formalize d approach to training, with only five per cent reflecting a world class level of maturity.
There is however clear light at the end of this tunnel. Any organization can easily access evidence-based, cost-effective training solutions which can have a substantial and immediate impact on negotiation performance.
So what separates successful negotiators from their less effective counterparts in securing long-term, mutually profitable partnerships with suppliers or customers? In helping negotiators enhance their ability to achieve win/win outcomes, the best performance improvement programmes have recognized the central importance of behavioural skills, in enabling a creative approach to bargaining which adds value for both parties.
The following two examples show how this works at the point of negotiation. Counter-intuitively perhaps, skilled negotiators ask twice as many questions as their average peers, in seeking to understand fully the other party's position, the reasons for this stance and all possible options for reaching a successful agreement. The best negotiators are similarly twice as likely to test their understanding of what the other party has said, in order to successfully maintain momentum and clarity, and so avoid potential conflict or misunderstanding further into the negotiation.
This highlights a common weakness among lesser negotiators, who tend to see negotiation in terms of straightforward 'horse-trading' rather than trying to understand — and so respond to — what is valuable to the person on the other side of the negotiating table.
By contrast, skilled negotiators have a broad behavioural repertoire and the flexibility to adapt their behaviour to suit the situation.
A step-by-step approach
Where little cross-organizational planning occurs, negotiators are typically unempowered with many constantly having to seek approval or authorization. It is little wonder that, in such circumstances, success can depend solely on individual talent. It may be true that 'pieces of paper don't help to generate business'. At the same time, as the survey demonstrates, there is no doubt that systems for strategically planning for negotiations must be in place to ensure consistently successful outcomes.
Moving to an effective corporate negotiation strategy requires the involvement of suitably-trained staff at all levels and across all departments. Equally, a set of common end-to-end processes and standards must be established, which can be properly documented and measured. This is a world away from a naïve reliance on the mental agility and verbal skills of your best salesman, or senior manger, when complex deals worth many millions of dollars or Euros are at stake.
As with any major change process, buy-in at executive level and the negotiation 'coal face' is vital. In implementing change therefore, start small and grow on the basis of the success stories generated - for mandating a process without adequate explanation of the benefits and potential payoff is doomed to failure. Each business needs to be realistic as to the speed and degree of change that can be achieved. By reviewing their benchmarking data and identifying the biggest gaps in current performance they can take action on a step-by-step basis.
It may be unrealistic to believe that there will ever be a 'Negotiation Director' sitting opposite their sales and marketing counterparts at the boardroom table. That said, the evidence from this benchmarking study suggests that a corporate focus on negotiation can help organizations reap substantial and measurable benefit.