This article is co authored with Mr. Tim Cummins - President of IACCM. Part of the post was originally published in the Negotiator Magazine.
Business is finally coming to the realization that we need to adopt a more positive approach to contract negotiation. That is the encouraging news emerging from IACCM’s review of market trends in 2013.
Over the last year, the approach to negotiation has started to change, with a growing number of executives pushing for a more collaborative or partnering approach to their supply relationships. Negotiation has, for decades, been viewed as a zero-sum game, with the success for one party being at the expense of the other. A variety of factors are driving the shift away from this mentality, but the important point is that negotiators are focusing more on the performance and governance criteria that drive positive results and outcomes. Additionally, a number of industries are experiencing a great deal of pressure on their bottom line, which means that they are forced to look at different approaches to developing relationships and acquiring contracts. As a result, contracts and negotiations have the potential to become more effective at tackling risks at the source, rather than dealing primarily with the consequences when things go wrong.
Behind this shift in attitude there is a steady awakening in some industries to the fact that many of today’s agreements must be more sustainable and more flexible. The influences of a caveat-emptor world are diminishing, as the balance swings away from the purchase of direct materials and products and moves towards a growing volume of services and solutions (see chart below). These service and solution contracts require far more cooperation between the parties because value can only be gauged over time. Success is not defined at the point of signature, but is determined by the eventual output or outcome that is achieved.
In other sectors, the shift may be more pragmatic. It reflects a change in the balance of power. After a decade in which buyer-power has dominated, industries such as oil and gas, automotive, mining and utilities are confronting suppliers whose relative strength has been increased by new technologies and shortages in skilled labor. Customers in these industries are being forced to re-think their approach to negotiation as part of a wider need to become a ‘customer of choice’.
A Growing Focus On Collaboration
In the current environment, negative incentives to perform must be balanced by more positive attributes that encourage shared responsibility and collaboration and which create opportunities for innovation, continuous improvement, and shared benefits. Defensive, risk-averse, compliance-based contracts undermine results. The agreements now emerging are far more likely to establish principles for improved governance and to recognize the need for greater flexibility, consequently utilizing the potential to discover hidden values that the parties have not utilized in previous negotiation approaches.
There have of course always been negotiators who appreciated the need for balance and achieved win-win agreements. But they have tended to be the exception rather than the norm and in many cases their success proved difficult to replicate. Too often, these high value relationships occurred in spite of the underlying organization and culture, rather than because of it. The changes we see emerging are more fundamental and offer the possibility of a substantive shift in attitudes and capability.
The Importance Of Judgment
A major factor influencing change is the need for greater efficiency, speed and improved business judgment. The cost of getting contracts wrong is increasing, not only because of the traditional measures of cost, time or quality, but also due to more specific concerns over regulatory compliance, reputation risk and sustainability. The growing range of issues confronting today’s negotiators is resulting in a spiraling number of stakeholders whose views must be considered. This has introduced greater complexity and, as shown in the chart below, has resulted in longer lead-times to reach agreement. It runs directly counter to executive pressure for more speed and flexibility. Generally, today it is recognized that a contract negotiation does not simply end by signing a contract. Relationships in non-commodity oriented businesses tend to be more than just a one off business deals.
These are early days in the transformation needed to address the emerging challenges. It is interesting to note that much of the leadership for change is coming not from Procurement or Contract Management groups, but from lawyers. In part this is driven by their increasing workload and the need to change focus from repetitive, low-value negotiation to tackle the much bigger issues of regulation, corporate governance and enterprise risk. But it goes further, with more business-savvy lawyers wishing not only to cut time spent on traditional confrontation, but wanting to shift the focus of negotiation to terms that drive and manage performance. A growing number are pushing for industry standards that could dramatically reduce the frequency with which terms such as liability, indemnity, intellectual property and data security would need to be individually negotiated.
Starting from a more generally accepted set of core templates or principles is one way that negotiation can be made more effective. Another is perhaps the role of negotiators themselves. Increasingly, talented negotiators are not those who seek to gain advantage over the other side, but are in fact excellent communicators and facilitators of an extended negotiation team. The lead negotiators from each party work collaboratively to build and test consensus, rather than seeking to score points or redistribute value. The negotiation becomes an important element in building trust between trading partners and ensuring their compatibility and shared objectives.
There is a growing understanding among professional negotiators that negotiation is an independent science, and therefore requires a unique education. More and more lawyers are adding eMBA education to their law degrees as a result of the understanding of negotiation and relationships increasing.
Overall, trends in business-to-business negotiation are encouraging. Those who are responsible for negotiating show growing awareness that the focus needs to change. Progress varies by company and by industry, but the leaders are increasing their efforts to negotiate contracts that provide a more robust platform for on-going performance management. This is achieved through a shift in the negotiation agenda, away from risk allocation and onto commitments to governance and problem resolution.
Visit www.KeldJensen.com to sign up for my newsletter, “Finding SMARTnership.”
Author of The Trust Factor: Negotiating in SMARTnership This article is co authored with Mr. Tim
