PRICE NEGOTIATION

CONTRACT NEGOTIATION

Negotiation is a dialogue between two or more people or parties, intended to reach an understanding, resolve point of difference, or gain advantage in outcome of dialogue, to produce an agreement upon courses of action, to bargain for individual or collective bargaining, to craft outcomes to satisfy various interests of two people/parties involved in negotiation process. Negotiation is a process where each party involved in negotiating tries to gain an advantage for themselves by the end of the process. Negotiation is intended to aim at compromise.

Negotiation occurs in business, non-profit organizations, government offices, legal proceedings, among nations and in personal situations such as marriage, divorce, parenting, and everyday life. Professional negotiators are often specialized, such as union negotiators, leverage buyout negotiators, peace negotiators, hostage negotiators, or may work under other titles, such as diplomats, legislation or brokers. (wikipedia.com)

Preamble

My first appearance with contract negotiation happened without knowing that it was contract nego. It happened when I was working in Training Directorate (Air Force Department) between end of 1991until mid of 1993. My appointment as SO2 Training Finance (handling training budget and financial control). Then, I was handling courses of Air force personnel in UK. In those years the training activities in UK were very active in conjunction with the MOU Procurement Project (between Malaysia and UK) which involved the procurement of Hawk Aircraft and Martello Radar.  The dealing mainly involved in the allowances and  entitlement for the RMAF personnel in UK.  Even though the contracts were already signed, a lot of dispute and dissatisfaction raised due to high cost of leaving and insufficiency of cash allowance.  Some of the course participant gave up from the course and voluntarily returned to units.  

Finally, after series of nego, the UK Government agreed to increase the allowance.  Though I was not directly involved in the nego, my input in terms of students' course report contributed to the decision making process. 

One more experience in that office was dealing with another British Company named International Test Pilot School (ITPS). The RMAF sent Kapt Ackbal Abdul Samad for that course.  Again, the argument was related to the entitlement and allowances.  This time, my involvement was more contributing- sat down together in the meeting. Finally the outcome of the nego was very fruitful. Beside the basic overseas training obtained from the government (based on the AFCI), Ackbal received additional list of allowance and entitlement given by the company.

And, my real experience dealing with contract nego started when I was transferred (posted) to Government Procurement Division, Ministry of Finance in January 2000 (upon completion my staff course in MTAT).  My four year tour in MOF really taught me with the world of contract management. Directly involved in preparing the tender document- start from processing the proposal papers from the Ministries and Departments (for the Minister's approval)- preparing the tender document - tender advertisement, tender evaluation, negotiation until the signing the contract document. 

I have a lot of experience of sitting in Contract Nego.  In fact until today, my job as KSK includes performing the Chairman of Price Nego Committee.  A mandatory board in MLU for all procurement involves schedule servicing and technical services. Without the approval from this Committee, the indent cannot be issued to the company. When I was working in Treasury I involved directly in many Contract Nego meeting. Dealing with British (for RMN Super Lynx), dealing with French (for Sea Skua Missiles), dealing with Swiss (for PC7 Mk II), dealing with Russian (for RMP Mi-17), dealing with Italian (for FRD's Agusta 109), dealing with Indonesian for CN235, dealing with American/Canadian for Global Express and etc.  Off-course with also dealing with local companies such as AIROD, ZETRO and etc.

In Feb 2006- when I was working in MTU-Kontrak, I attended a 5 day course known as 'Negotiation: Training of Trainers' in INTAN Kawasan Selatan (IKWAS), Kluang. The facilitator was Prof Amminu from University of Cambridge.  He is a Nigerian. But the focus of this training was more toward political negotiation.  However, there were some similarity in terms of principles and techniques. Contract Negotiation (Nego) is part and partial of the procurement system.


In this topic, I will write some theories and my experience in conducting Contract Negotiation. 

The contents of this blog page will cover the followings:

• Types of Negotiation
• Negotiation Strategies
• Negotiation Techniques
• Negotiation Tactics
• Barriers in Negotiation

I hope this collection of notes will help the readers who interested to know some knowledge on Negotiation.

Types of Negotiation

The dialogue between individuals to come to a common conclusion benefiting all is called as negotiation. Negotiation refers to the discussions among individuals evaluating the pros and cons of a situation and coming to an alternative best suited to all. In negotiation, individuals try their level best to come to a conclusion which would satisfy all. In simpler words, it is also called as Bargaining

Negotiation takes place in various ways in corporates for increased output and better relations among employees. Among the types of negotiation are:

• Day to Day Negotiation at Work Place. Every day we negotiate something or the other at the workplace either with our superiors or with our fellow workers for the smooth flow of work. These are called day to day negotiations.
• Negotiation Between Employee and Superior.  At the work place, an employee has to negotiate with his superiors so that he is assigned the responsibilities as per his interests and specialization. Don’t accept anything you are not comfortable with. Sit with your boss and discuss things with him. Let’s suppose your boss wants you to prepare a report on branding and marketing strategies of the organization and marketing was never your specialization. It is better to negotiate at the first place to avoid conflicts and misunderstandings later. An individual before accepting any offer should negotiate his salary with the concerned person to avoid tensions later. If you are not getting what you deserve, you will never enjoy your work. Don’t just accept any offer just because you need a job, its always advisable to negotiate well before joining any organization. If the nego is between the employer and the Trade Union, it known as Collective Bargaining.
• Negotiation Between Colleagues- Negotiation is essential among team members to reduce the chances of disputes and conflicts. Any particular team member should not be over burdened while the other member is relaxing. One should negotiate with his fellow workers and accept only those responsibilities he feels he is best capable of doing. The responsibility of achieving the targets should not rest on only one shoulder, but equally divided among all. Negotiate with your team members and accept the responsibilities willingly. If you want to go for a leave for some days, negotiate with your team member to take care of your work in your absence. When he takes a leave, you can help him in the same way. Negotiation helps to increase the output of the team and eventually the productivity of the organization. People achieve what they expect and hence misunderstandings and conflicts are reduced to a large extent and the office becomes a better place to work. 
• Commercial Negotiations. Commercial negotiations are generally done in the form of contract. Two parties sit face to face across the table, discuss issues between them and come to conditions acceptable to both the parties. In such cases; everything should be in black and white. A contract is signed by both the parties and they both have to adhere to its terms and conditions. Example:  Cherry was representing the administration department of a reputed organization. He was assigned the responsibility of buying bulk laptops for the office employees from a vendor. He asked the vendor to quote a price for him. Cherry found the price was beyond the company’s budget and thus sat with the vendor, negotiated the price with him and finally both of them agreed to a price suitable to both. A contract was signed between Cherry and the vendor mentioning the payment details, mode of payment, date of delivery, warranty details and other important terms and conditions. Commercial negotiation generally involves an external party and thus a contract is essential so that no party backs out later. 
• Legal Negotiation. Legal negotiation takes place between individual and the law where the individual has to abide by the rules and regulations laid by the legal system and the legal system also takes into account the needs and interest of the individual.

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Negotiation Strategies

The worst contract negotiation objective is to bleed every last cent out of the vendor for the lowest price. Remember, you want to "partner" with your vendor so that both of you will meet your corporate goals and objectives by signing the contract. Successful contract negotiation means that both sides look for positives that benefit both parties in every area while achieving a fair and equitable deal. A signed contract that benefits both parties will provide a firm foundation to build a long lasting relationship with your vendor.

Strategies for Planning Contract Negotiations

• List Rank Your Priorities Along With Alternatives. As you develop your contract negotiation strategy, you may keep returning to this area to add additional items. You will not be able to negotiate effectively all areas of the contract at once. You want to be sure that what is most important to you is discussed and agreed upon before you move to less important items. In addition, you may want to refer to the least important items if you have to give up something to get your top items.
• Know the Difference Between What You Need and What You Want.  Review your priorities frequently throughout the contract negotiations planning process and one final time at the end. Be sure to ask the hard questions: "Is this really a priority for our company, or is it a 'nice to have'?" "Was this priority a result of some internal political jockeying, or is it for real?".
• Know Your Bottom Line So You Know When to Walk Away. Is there a cost or hourly fee that your company cannot exceed? Have you come to realize that one or two of the top priorities are truly non-negotiable and you will be better to walk-away from this contract if the vendor does not agree to it? List these along with the rationale so they are not forgotten. 
• Define Any Time Constraints and Benchmarks. In any substantial project you will want to set performance measurement standards that you will expect from your vendor. If these are essential to your business, then you will want negotiate a fair and equitable penalty when they are not met. For example: project completion dates, delivery date for first batch of parts, start date for the service, lead times, etc.
• Assess Potential Liabilities and Risks. What is the potential for something to go wrong? What if unforeseen costs are encountered? Who will be responsible if government regulations are violated? Whose insurance will cover contract workers? These are just a few of the more common questions that must be addressed in any contract. 
• Confidentiality, Non-compete, Dispute Resolution, Changes in Requirements. These are other items that could be a potential negotiation stumbling block or deal closer. For example, if the vendor (or an employee) have the possibility of being exposed to confidential information, you will want to be sure a confidentiality clause is put into the contract with the liability assumed by the vendor.  
• Do the Same for Your Vendor (i.e. Walk a Mile in Their Shoes). Now that you have completed the contract negotiations planning process for your business, repeat the same process as if you were the vendor. What area do you think is most important for them? What risks or liabilities will they want you to assume? Your list won't be perfect, but it will succeed in putting you into a frame of mind to look at things from their perspective. This is how great partnerships between client and vendors are built.

Preparation. Before the actual contract negotiations begin, make sure the following items are reviewed and confirmed:

• Determine If You Will Need Legal Counsel. Negotiating a contract for one year of janitorial services in a small office is vastly different than negotiating a contract to outsource a fairly large call center. If you feel the least bit uncomfortable reviewing contract "legalese", do not hesitate to retain a lawyer specializing in contract negotiations. 
• On-Site or Teleconference. Agree upon where the negotiation session(s) will take place. If you think you have the upper-hand by negotiating at the vendor's site, then propose up front that you will travel to them. If the distance is too far to travel cost effectively, set up a teleconference to accomplish the negotiation session. Make sure it is a video conference because body language speaks louder than words.
• Make Sure the Person Representing the Vendor Has Authority to Negotiate. Before your people travel to the vendor's site or the vendor travels to your site, make sure the person/people representing the vendor have the authority to negotiate on behalf of the vendor's company. It would be a huge waste of time to hear at the end of a long negation session "Well, let me get back to you after I hear what my boss has to say about this."

Negotiation Techniques

Negotiation is referred to as the style of discussing things among individuals in an effort to come to a conclusion satisfying all the parties involved. Discussions should be on an open forum for every one to not only participate but also express their views and reach to an alternative acceptable to all.

It is important how we negotiate with each other. One must know the difference between negotiating and begging. Do not stoop too low to get a deal closed. Negotiation must be in a dignified way. One has to be extremely patient and also understand the second party’s needs and interests as well. Never impose your ideas on anyone. Let everyone speak their mind and decide something which would favour one and all.

Some of negotiation techniques:

• The first and the foremost technique for an effective negotiation is one should be well informed with everything related to the deal. Find out even the minutest detail you think is important and you might require at the time of negotiation. Be prepared for everything. Remember the second party might ask you anything.
•  Take good care of your posture as well as your body movements. Look confident. While speaking, don’t look around or play with things. It’s just a discussion, no one will kill you if you are not able to close the deal. Don’t stammer in between or start sweating in front of others. The second party will take undue advantage if they find you nervous. Take care of your dressing as well. Don’t wear anything which is too casual. If you dress casually people will not take you seriously.
• Be very focused. One should be very specific what he wants. First ask yourself what is the purpose of this negotiation? What do you actually want? What is the affordable price for you? Be firm and stick to it. Be very specific and clear.
• Never keep things to yourself and crib later. Don’t assume that the other person can read your mind on his own. One needs to ask for what he wants. A mother will not feed her child unless and until he cries. Speak your heart out. If you are not satisfied with the deal, show your displeasure to others. Express them that you are not very happy with the price and it needs to be revised.
• Be a patient listener. Listen to others as well. Think about their interest and needs as well. Don’t ask for anything which would not benefit the second party. Don’t jump to conclusions and never interfere when the other person is speaking. Listen to the other party’s proposal as well; he might come up with something unique which you could not even think.
• Be realistic. Don’t ask for something you yourself know is not possible. Don’t quote anything just for the sake of it. One should be a little practical in his approach. Don’t ask for irrational discounts. Be logical. It’s nothing bad to think about your personal interests, but one should not be mad for it. If you want to purchase something, also remember that the store owner has to earn his profits as well.
• Don’t be in a hurry to close the deal. Take your time to discuss things among yourselves. Make sure you are deciding something which would be a win win situation for all. Never drag any discussion and make the conversation too long. Too much of pleading and persuasion result in a big zero and no conclusion can be drawn out of it.
• Know where to compromise. An individual has to compromise sometimes to come to an output. If you feel that if you accept some terms and conditions, things would be better and it would not harm you much, go ahead. Everyone needs to compromise sometimes or the other. Even in marriages, one partner needs to negotiate with the other for better understanding.
• Communication is also important in negotiation. Speak clearly and precisely. One should not confuse others. Playing with words is one of the biggest threats to negotiation. Don’t use derogatory or lewd remarks against anyone.
• For a third party it’s always better to sign a contract or have something in black and white so that no body backs out later. It’s always better to sign agreements in the presence of both the parties for better transparency. At workplace after every discussion and negotiation, emails or minutes of the meeting must be circulated among all the team members for everyone to get a clear and the same picture

Negotiation Tactics 

• Know Your Customer.   It’s important to understand the customer’s timetable for launch.  If implementation is not imminent, conserve your resources by responding only as necessary to keep the deal alive until it makes sense to proceed.  Repeated starts and stops and deal changes increase costs unnecessarily. Other important points include: 
• Understand the customer’s familiarity with your product/service and whether the customer is entering a new technology arena or market.  If so, expect delays and build in time for education. 
• Learn the customer’s approval process and identify the decision-makers.
• Assess the parties’ relative leverage:  do they need you, or do you need them?
• Appreciate that the customer’s attorneys, whether in-house or outside, will be highly motivated to avoid any risk.  In most cases, the incentives to avoid risk will override the incentives to get the deal done.
• Set the Customer’s Expectations.  Educate the customer at the outset of your contracting process, from both a business and legal perspective, and remind them as necessary during the negotiations. Set expectations early as to what is/is not possible/negotiable, from both a business and legal perspective. And at all times, make sure that front line sales is selling the terms as well as the product/service.
• The Contract is Key.   Always present the customer with a pristine contract.  While it is easy to push back on a lawyer who is “moving commas,” you will quickly become bogged down in defending typos, grammatical errors and ambiguities. Also, move as many of the “negotiated” terms as possible to the exhibits.  Not only will this take focus away from the provisions that you would rather not change, but it will facilitate identifying non-standard terms throughout the term of the customer relationship. Consider whether lower-value products or services can be separated from the bundle and sold or licensed on a PO or a click- or-shrink-wrap agreement.  It might be worth moving an SLA or other highly technical terms to a webpage that can be cross-referenced in your customer contract.  The idea is to remove as many terms as possible from the negotiation process. Also, maintain a compilation/database of acceptable compromises and educate negotiators about them. And avoid separately pricing consulting services and the resulting “if we pay for it, we own it” response.
• Control the Paper. Don’t expect that sending a document in a form that is not intended to be edited will discourage comments.  Technology and custom have left those days behind.  Do impress upon the customer that versions of your agreement will be controlled at your end and commit to turning revisions timely. It might be best to encourage your customer to discuss comments by phone rather than inputting changes (once made, the customer becomes wedded to the changes). And always provide a marked copy.  Failure to do so promotes unnecessary suspicion.
• Control Your Counsel.   Make sure your outside counsel is aware of company “hot buttons” and is clear on the chain of command. And if there are legal budget constraints on the deal, make sure your outside counsel is aware of these, as well. It’s smart to check your counsel’s availability for conference calls and notify him/her in advance if “on call” availability is necessary. And make sure the business representatives are controlling the deal.
• Just Say No.  Disagreements are going to happen. When they do, the tone should always be respectful but firm.  If antagonized, the customer’s representatives are likely to dig in their heels. Make sure, also, that the team members are supporting, rather than undercutting, one another.  “Good cop/bad cop” only works when everyone knows his/her role. Resist deal fatigue, threatened deadlines, and last minute nickel-and-diming; make concessions only if assuming additional risk makes sense in the context of the entire deal. Your contract negotiator should also not be someone who will own the ongoing customer relationship.
• Business Versus Legal.  Separate the business issues from the legal ones and have the each party negotiate separately.  Having attorneys present during business negotiations is usually not an effective use of legal resources. (On the other hand, astute business negotiators can contribute to negotiation of the “legal” issues by making decisions about the appropriate level of risk the company should assume.) Be sure also to have your counsel hold training sessions with contract negotiators to sensitize them to the importance of warranties, limitations of liability and indemnification provisions. 
• Get On the Same Page.  Internally, take 5 or 10 minutes before a scheduled call to bring the negotiating team up to date on interim developments.When you’re with the customer, insist on getting all requested changes before responding; don’t negotiate against yourself.
• Get Momentum.  Initiate calls yourself – and make them (rather than waiting for them) when they’re scheduled. And never end the call or leave the room without agreeing upon next steps and a timetable.  Hold your team accountable to meet its commitments.
• Contract Evolution.  Constantly update contract templates in response to historical comments and convene periodic meetings with counsel to review and evaluate issues arising in contract negotiations. It’s better to err on the side of reducing the level of detail.

Read more at http://venturebeat.com/2011/02/24/10-ways-to-expedite-contract-negotiations/#yxiDOh1Gg4uukl9o.99 

Barriers in Negotiation 

When we consider the types of negotiation that occur in a professional environment, we tend to think first of salaries. But nearly all of our relationships involve some form of negotiation. From defining roles and assigning tasks in a team environment, to managing deadlines and assets, to dealing with clients, lenders, suppliers, and government bodies, we engage daily in a process of balancing conflicting interests or limited resources. To develop a fulfilling professional life, we must be prepared to negotiate effectively and with confidence.

• Confrontation. Participants in a negotiation can sabotage the outcome by characterizing the exchange as a confrontation or a conflict. The purpose of negotiation is to promote dialogue and, ultimately, to achieve agreement. An adversarial or uncooperative attitude can easily scuttle any positive results and plunge the discussion into pointless hostility. Language plays an instrumental role in determining the tone of a negotiation. Neutral, inclusive statements set a calm and reasonable tone, whereas declaring an absolute position leaves little room for compromise.
• Negative Emotion. Negotiation can be stressful. It can evoke feelings of fear and anger, especially when it seems that one’s best interests are threatened. And it is more than likely that everyone involved in a thorny negotiation will experience some negative emotion. The key to overcoming this barrier to a successful resolution is to acknowledge that diverse perspectives and interests exist and to address them openly. Instead of reacting to emotional outbursts with escalating emotion, a symbolic gesture expressing empathy or even an apology can go a long way toward defusing the situation and creating a more collaborative atmosphere.
• Limitations. Limited resources, whether they are budgetary, human, or material, are what most often give rise to competing interests and create the need for negotiation. During the course of a negotiation one party might introduce obstacles attributed to limited funds, time, personnel, policy restraints, or a combination of reasons. If the limits put forth are real but the parties share a mutual desire to reach a compromise, then a collaborative exercise in problem-solving will usually yield an agreeable outcome. However, in some instances the limits are artificial and may signal an unwillingness to negotiate. A sincere attempt to brainstorm a solution represents the most productive course of action; one that will invite the active engagement of the participants or encourage them to reveal their true intentions.
• Negotiation Strategies. Thorough preparation can make all the difference to the outcome of a negotiation. Not only must you know what you hope to achieve, but you should research the interests of the other parties involved.

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