Negotiating a 'winning hand': Exhaustive prep work increases your odds of success
Handshakes and small talk done, I took a deep breath and headed to the whiteboard. Arrayed around the conference table, top execs from one of the world's best-known companies had canceled their evening plans to hear me out.
The president had asked me to fly out after I informed him we were putting our account in play. I was frank. Their pricing was a drag on our ability to compete, I told them, and only a significant cost cut could salvage the relationship.
Marker in hand, I detailed what we needed and why. We wanted to do business. But at the end of the day (literally, in this case) we would do what was right for our company, understanding that they would do the same.
Their response was immediate. "If we agree to your terms," the president said, "will you commit to a five-year contract?"
Inside, I was jumping up and down: "You bet! Where do I sign?" On the outside, I paused and turned to our purchasing veep. "Larry," I said, "are you willing to commit to that?" He thought for a minute (or at least pretended to), and nodded.
I turned to the president and paused for 30 seconds. "If we agree," I finally said, "will you draw up an agreement-in-principle for all of our signatures right now?" An hour later we were shaking hands again, cementing the deal. Larry and I saved our high-fives for the airport.
Thanks to exhaustive prep work and playing the right cards, we had lowered our annual costs by two million bucks.
Enlightened executives don't negotiate by the seat of their pants. They prepare a list of what they're willing to give up and what's non-negotiable. Then they stick to it. Don't take a seat at the table until you've studied these bargaining benchmarks. (They're targeted at suppliers, but most also apply to negotiations with customers, employees and strategic alliances.)
* Get good intelligence. Going into our conference room showdown, we knew our supplier was desperate for volume because a major account had just bailed. Get your corporate intel specialist to chat up industry insiders to find the latest dirt. Is the other guy running anywhere close to full capacity? What's his share of your market? Look for suppliers who are underperforming. They'll deal. The window needs only to be cracked open just so wide for you to grab a sweetheart deal.
* Find common ground. One-sided arguments lead to lopsided results. Turn win-lose into win-win by telling the other party exactly what you need and seeking to understand what they need.
For instance, in hopes of lowering costs, we asked a major tire manufacturer how we could help lower their costs. They suggested we improve our forecasting accuracy by digitally linking our inventory to their HQ, triggering automated ordering. They also recommended shipping some orders directly from their factory to our retail stores, bypassing warehouse expenses on both sides.
Caveat: If netting a win-win is a priority, you're working for both your company and the supplier. That's noble. And when it works, it's a beautiful thing. Trouble is, the supplier may or may not hold your best interests in the same high regard. By all means, give it a shot, but don't assume responsibility for your supplier's wins. If he's not happy, trust me, he'll let you know.
* Wear good walking shoes. Pinpoint the number that nets you the best possible package, yet provides the other side enough incentive to do business with you. You'll know you've overshot their number when they start to walk. If they're still at the table, but refuse to come within spitting distance of your number, it's your turn to walk. If they call you back to the table, you've got 'em. If they don't, and you can't afford to lose the relationship, don't panic. Call them a day or two later and say you've re-crunched the numbers and would like to reopen negotiations.
* Turn all the cards face up. Take nothing for granted. Before signing off, reach accord on every micro-issue, not just price, terms and freight. These things are going to come up sooner or later. Sooner is better. For instance, inventory issues -- what are the costs, how fast is turnaround, what happens if it doesn't move, what happens to volume discounts if supply runs out? Smart companies also add contractual clauses that mandate continuous improvement -- essentially brainstorming sessions between you and your supplier that aim to reduce costs and improve efficiencies for both parties.
* Be friendly. Smile. Make small talk. Share a laugh or two. In other words, lighten up. Suppliers are more willing to cut deals with people they like and enjoy working with.
* Timing is everything. Working with a mat maker? You better know that sales of big, heavy entry mats are off the charts in peak slush and mud season -- but fall off the radar during summer months. Use that to your advantage. Arrange your contract to expire in July; the slow season's sting will loosen the supplier's hand. In general, you'll improve your horse-trading odds by hitting up vendors for deals at the end of the month, when they're scrambling to nail monthly targets.
* Have another dance partner in the wings. The morning of our two-million-dollar meeting, we told our big-time supplier we had an offer from their competitor. That gave us more confidence going in. It also created more urgency on our supplier's part, especially when we told them -- truthfully -- that an agreement had to be inked that day because their competitor's offer expired the next afternoon. (We were literally racing against the clock. After poor weather scrubbed our afternoon flight, Larry and I dashed to the only other airline with an impending flight. Only one ticket was available -- until we sprinted to the gate and I shouted to a cluster of passengers that I'd pay someone double for their ticket.) The best deals are struck when there's competition in the hunt. Suppliers who think they're the only name on your dance card leave zero wiggle room.
* Get in the driver's seat. A rule of commerce: Never let the seller dictate the transaction. Manufacturers often called with one-time offers that would expire by day's end (the old "standing room only" close). They hoped we'd get excited about the diamonds in the deal and not notice the coal buried beneath.
Occasionally, time-sensitive offers are valid and you need to go with the flow. Typically, however, there's room to maneuver. Our purchasers were trained to snap up good-quality products at bargain-basement prices. But when we said no thanks to marginal deals, the drop-dead expiration date and details were suddenly negotiable.
* Dissect the details. Our uniform company was taking us to the cleaners. Literally. Once a week, they laundered uniforms for our shop employees. If a shirt was stained with oil, the company pulled it from rotation and charged us for a new one. And whenever somebody quit, his shirt and pants disappeared into the Bermuda Triangle of uniforms.
Once we realized what was going on, our purchasing point man, Mel Donnelly, sat down with the uniform contractor. "Look," Mel said, "if a guy changes oil for a living, chances are good he's going to spill oil on himself more than once. Showroom salespeople need unstained shirts; technicians don't. Second, when an employee quits after a few weeks, his uniform's in great shape. We want to reuse those shirts and pants for new hires with the same measurements."
"Sorry," the uniform rep said, "that's not the way we do things."
"Well," Mel shot back, "you better change the way you do things if you want to keep our business." They saw the light and we saved the green.
* Assemble the whole puzzle. Let's say you're an industrial launderer shopping for a washroom chemical. Supplier A's solution will cost you 10 cents per hundredweight of white shirts. Supplier B breezes in at eight cents. Ah, but what Supplier B didn't mention is that his chemical requires a higher water temperature, which drives up energy costs. Further, water that hot demands another chemical to balance acidity. Plus, Supplier B's chemical also extends the rinse cycle, which extends your production time.
You get the picture. Doing some old-fashioned due diligence to ferret out hidden expenses lets you calculate the total cost of ownership. Whenever possible, contractually bind the supplier to a total-cost solution. Apply the same logic when comparing services.
Hotel Y will charge your sales force a no-frills $85 per night. Hotel Z's rooms are $100 per night, but include breakfast and Internet access. Run the numbers on what your people spend per diem on breakfast and the Net before inking the contract.
* Curb your enthusiasm. Be careful about blurting "yes" too soon. Zeal to seal the deal is good. But over-eagerness makes the other party think they left too much on the table. They may even try to pocket a few more chips before the final card is dealt. Wear a poker face. Let them think they're drawing blood. Ask for more than you actually need. When they balk, feel the pain. Then agree, reluctantly, to the number you wanted all along. Or, play the "If I do this, would you do that?" card.
For instance, when our big-time supplier said, "If we agree, will you commit?" I doubled down by hesitating and slowly replying, "If we agree, will you make it official?" Everyone left thinking they made all the right moves.
* Contract your contract. Locked into a contract for another eight months? No worries. Solicit and analyze other proposals -- the better to stay abreast of market conditions. If circumstances shift in your favor, ask your vendor to tear up the contract and write a new one. If he resists, play hardball. Tell him you'll honor the existing contract if he forces you to, but that he shouldn't count on your future business after it expires.
* Team up. To increase our purchasing clout some years ago, Larry Morgan, Dan Beach and I founded Tire Alliance Group (TAG), a consortium of six of the country's strongest regional tire dealers. (TAG has since expanded to include many dealerships.) Our high-wattage buying power gave us pricing leverage on everything from tires to insurance to office supplies. Caveat: Successful purchasing cooperatives can become mini-empires, complete with deluxe offices and big salaries, which gobble up cost savings.
Sweeten the pot
When negotiating, don't be shy about asking for value-added extras, says author and management guru Tom Gegax.
"We always tried to improve what we got for what we bought. If standard terms are two months, ask for three. Request geographical or product-related exclusivity. Get them to throw in additional training.
"If an ambitious ad campaign promises additional sales, ask the vendor to pitch in," Gegax says.
"Incentive trips are a fun add-on (and, unlike individual employee gifts, are earned). A vendor once offered a Caribbean vacation to our senior execs. We asked for, and got, more seats on the plane. It was a cost-free, and greatly appreciated, way to reward deserving employees."Best-selling author Tom Gegax, cofounder and chairman emeritus of Tires Plus stores, served as that company's chairman and CEO for 24 years. By the time he sold in July 2000, it had mushroomed from a concept sketched on a restaurant napkin to a market leader with 150 upscale stores in 10 states and $200 million in revenue.
Thanks to Tom's warm-hearted, tough-minded approach to management, and his team's relentless focus on customer service, the company's turnover rate ranked among the industry's lowest, and its guest enthusiasm index reached 98%. He was named Modern Tire Dealer's Tire Dealer of the Year in 1998.
In 2000, Gegax founded Gegax Management Systems (www.gegax.com) to help growing companies raise profits and reduce stress through fast and affordable business management guidance. His most recent book, "By the Seat of Your Pants: The No-Nonsense Business Management Guide," is already a national bestseller. It can be ordered on the www.moderntiredealer.com home page.
Gegax can be reached via e-mail at firstname.lastname@example.org or by calling (877) TOM-GEGAX (866-4342).