Back around 1990, I found myself on a panel with W. Edwards Deming, the engineer, statistician, and management guru who was still going strong into his nineties. Deming was the American who inspired the Japanese economic miracle after World War II. His ideas about quality—how to attain it, how to keep improving it—changed “made-in-Japan” from a synonym for shoddy workmanship into an emblem of industrial world-beaters, as U.S. carmakers would learn to their chagrin.
Deming’s premise was that American business was hamstrung by overly competitive negotiations—say, between General Motors and the companies that made GM’s tires or glass or carpeting. Toyota, by contrast, treated its suppliers like partners at each stage of the manufacturing process, from tooling and design to sharing any profits that accrued from cost efficiencies. It was a revolutionary concept. Deming was out to change how people approached negotiation, to strive for agreements that boosted both sides.
And so I asked the great man: “How do you strike a balance between competition and cooperation in negotiation? Deming answered, with characteristic vehemence, “Balance? Why the hell do you want balance? Just get rid of the competition!” A win-win fundamentalist, he went so far as to say that companies with close, well-established relationships could get beyond negotiating altogether.
How LTAs Go Sideways
A quarter-century later, it’s clear to me that Deming was on to something important—but also that he missed an essential point. As I’ve observed in this space, all negotiations begin with competing viewpoints. (Without disagreement, after all, you wouldn’t need to negotiate.) At Mobus Creative Negotiating, we aim to capture added value through a more collaborative mechanism. But you never entirely lose the competitive aspect; you can manage it, but you can’t erase it.
Finding a balance between collaboration and competition is most critical in long-term agreements (LTAs). As Bill Sanders and I noted in our article in Supply Chain Management Review (“Creative Negotiating: Rethinking the Right Way to Ink Purchasing Agreements,” May/June 2016), there are two ways an LTA can go south. One is overreliance on price-driven bargaining, or “caveman negotiating.” The other error is more common and more insidious. It’s when either or both sides fall back on Deming’s hope that negotiation could be a non-conflicting activity—that a successful LTA can simply steer away from differences. This confusion has killed many a promising business relationship.
In the context of our “on the edge” series, caveman negotiating means dealing from “the outside,” strictly from self-interest, with no abiding commitment to the relationship. Conflict aversion is negotiating from “the inside.” Over time, your sense of dependence on the LTA erodes the pursuit of your own best interests. Your vision clouds; you lose objectivity.
What’s the solution? It’s a third path, “the edge of the inside,” a two-sided view that respects the other party’s value without sacrificing the mutual long-haul benefits that prompted the LTA in the first place.
There are practical, concrete steps we can take to stay on this optimal third path. But first let’s consider the forces that pull negotiators—and buyers in particular—off the edge and too deeply to the inside.
Getting Too Cozy With Your Negotiating Partner
The problem with many business-to-business LTAs is that they start out so well. Unlike one-off transactions, they’re filled with close and easy harmony. Contention seems like bad manners. No one launches a strategic relationship by saying, “That sounds good now, but let’s think about what might go wrong later.”
The big mistake is to assume the honeymoon will last forever. Like friendship or marriage, LTAs cannot be taken for granted. Staying on the edge of the inside requires constant vigilance and perpetual negotiation. Otherwise, the most equable relationship will fray. The attention initially showered on the buyer’s organization begins to taper. Opportunistic vendors pad their margins by charging more for less. On-time delivery rates fall; lead times stretch out; prices inch up; joint innovation projects lose steam and grow half-hearted.
Even when both sides continue to act in good faith, problems emerge out of misunderstandings, unanticipated events, or changes in personnel. In a healthy relationship, none of these need be fatal. But when buyers and sellers work closely together, honest disagreement is inhibited. People don’t like saying, “Here’s how you let me down.”
When a favored supplier effectively becomes a single source, buyers lose leverage. With diminished bargaining power, they get even more gun-shy about negotiating. Left unchallenged, lower performance standards become the new normal. The LTA spirals downward until management gets fed up and tells purchasing to throw the bums out—or, at minimum, to expand the supply base. Either way, the advantages of a special relationship with a dedicated vendor are lost. In many organizations, this “accordion” syndrome cycles every ten years or so.
But as we promised, there’s a way to stop the accordion and preserve a healthy strategic relationship—to stay on the edge of the inside. We’ll tell you how in our next newsletter.