If you are in business, you are negotiating!
The link between the two is so tight, that "business" in Spanish is called "negocios", derived from the Latin roots of "neg" and "otsia" literally translating into "no leisure". In today's practical terms a negotiation is a dialogue between two or more parties with the intention to reach an agreement. In organisations' functional context, this may be called trading, procurement, sales etc. It all amounts to the same end of reaching your company's objectives through an agreement with another party. A successful negotiation benefits both sides and helps both get closer to their goals.
Negotiations build bridges between buyers and sellers. Value comes from more than the simple exchange of products or services and money. Much like the Öresund Bridge (photo above) is more than a simple exchange of cars and trains between Sweden and Denmark. It enables people to explore opportunities.
Negotiations can be anything from very simple to highly complex. But in most B2B negotiations, they tend to be complex. For this reason a number of strategies are often used to work around negotiations. Ironically, this introduces new complexity as a kind of collateral damage.
Different ways to negotiate
Which negotiation strategy should you pursue? Sharing a pizza can illustrate the basic concepts. Is it better to get more small slices or fewer large slices? What about the toppings? Is this a one-off pizza or do you expect to share pizzas frequently with the same partner? In the illustration below, the value of an extra slice (marked by the yellow dot) is different for the small and the large pizza respectively.
With pizzas it is easy to understand how big a slice you get from the whole. Intuitively it is also easy to understand, that you could bake a bigger pizza and even decide on different toppings and this may lead to a better outcome for everyone. You may also intuitively sense, that this adds complexity (many more things to agree on) and takes time.
The zero-sum negotiation, or splitting the pizza, is the typical price-negotiation scenario, where the agreed price is a compromise between what the buyer and seller wanted respectively. It is called zero-sum, because in order for a party to gain 1 the other party has to lose 1. This approach is quite common, because it is easy and fast to execute. When time is in short supply and complexity is high, this is one way to get around it.
The integrative approach, on the other hand, is beneficial because more parameters can be included in the negotiations and the respective interests of the parties can be taken into consideration. When more parameters are included a wider range of positive outcomes of the negotiations can be explored through negotiation and the overall value of the deal increases, hence expanding the pizza. This approach is more complex and more time consuming. This kind of negotiation is called a win-win. This is where value with preferred suppliers and partnerships can really be created.
Considering this, one might conclude that the integrative approach would be the negotiation style of choice. But when there are real life considerations, it is not so black and white which model to choose. The biggest factor to consider is time. For example, when you negotiate frequently, with regular changes in pricing, then you need as short a negotiation process as possible. Otherwise, if you negotiate less frequently, say once per year or every second year, you can proceed with certain assumptions in order to agree on volumes and pricing.
With this in mind, it is perhaps not so difficult to understand, why many companies choose one of the oldest tools in the trading tool box: auctions.
Split the pizza
Expand the pizza
Auctions, in their simplest form, are excellent for making fast and transparent deals. Staying with the topic of food, think of fish markets, where freshly caught fish gets auctioned to buyers, like restaurants. A specific lot is put up for auction, the buyers place bids and the highest bid wins. A quick bang with the mallet and it's on to the next lot.
Why is this good?
First of all the process is fast. (The goods offered are perishable in the case of fish). It also ensures the seller gets the best possible market price, when buyers compete with each other openly. And through the transparency of the results, everyone can see who won the bid and understands that nothing fishy was going on (pardon the pun).
Naturally, human ingenuity has led to improvements in the process and the outcomes, as different kinds of auctions have evolved. These come into play in digital trading through various open and closed e-auction models.
Should you then simply use auctions to buy or sell your products/services? Not so hasty. There is a catch, in fact, several. Most of them have to do with the messiness of the real world.
The messy real world
In real-world situations things tend to get messy. It is very difficult to base a decision on the assumption "all things being equal" because they rarely are. Situations change, people change, markets change, prices change etc. To keep things under control the specification of terms and conditions becomes very important.
The specification for the auction defines all the conditions the bidders must comply with before, during and after the auction. As the specification has to be the same for all bidders, there are no individual deviations. The underlying assumption is, therefore, that the writer of the specification has perfect insight to the needs. The specification also serves to ensure that everything gets delivered exactly as specified and determines any consequences for deviations by the bidders. It therefore becomes vital for the bidders to perfectly understand the content of the specification, which means resources must be dedicated to thoroughly studying the specification prior to placing a bid. On the other hand the specification also represents an opportunity for loopholes, so that the successful bidder may recover some lost margin if any deviations can be attributed to mistakes in the specification.
The market price
The cost of participating in auctions is increasing, with one consequence being that some decide the investment in resources for preparing a bid outweighs the possible profit- should they win the bid. Unfortunately, this means some companies avoid participating in auctions. An auction should ensure the buyer (running the bid) gets the best market price due to the competitive nature of the bidding. But the market, in this case, is limited to the companies who choose to participate in the auction.
Due to the requirements of adhering to the specification, the auction format does not invite co-innovation between buyers and sellers. In an auction format, specified services, products or solutions are on the table. The option of co-creating a better service, product or solution is not offered. Today, when technical innovation moves quickly and the best solutions may require knowledge from all parties, this limitation may be problematic.
The value of trust
For some of the above mentioned reasons many companies are rethinking their use of auctions. Auctions will not disappear and in some cases they are even required by law. In fact, they are the best model in certain situations, and therefore, should be included in the trading tool box. Partnerships between buyers and sellers are increasingly more important due to the need for faster innovation, agility and flexibility. It’s impossible for one party to have internal access to all needed information and know-how.
Partnerships are built on trust which is enhanced through negotiations where the partners co-innovate together. Co-innovation allows room for flexibility, space for change, and value through means other than the lowest price.
Value comes, therefore, through trust and negotiations.
Negotiations remain a complex affair. But with AI-technology like the Rational Assistant it becomes possible to take negotiations a big step further, because it becomes possible to address the time/complexity issue and get to better results together with your partners. Faster.