NEGOTIATING WITH A SOLE SOURCE
Having worked with leading firms across the spectrum of American business, the stiffest negotiating challenge faced by procurement and sourcing professionals is trying to make a favorable agreement when buying from a sole source supplier. This topic was the focus of an article I co-wrote with Howard Levy, the Sourcing VP of Zimmer Biomet. The article, running in the current issue of SUPPLY CHAIN MANAGEMENT REVIEW, is titled “Power to the Buyer.”
Power to the buyer? Wait a minute. How does the buyer have any leverage at all when the supplier is holding all the cards? That question is part of a broader issue: How does any party in any negotiating situation level the playing field and get in a position to vigorously negotiate, rather than just knuckle under to the other side’s demands?
In the sole source situation, although buyers may start off feeling powerless, they actually have more power than they think because… they overlook the pressure on the seller. In consulting with procurement organizations this is the first question we ask: How is the Account Manager for the supplier measured; and more importantly, how are they compensated? What sales goals do they have? When is their quota period? Do they have to produce numbers on a quarterly basis? A monthly basis?
Next question: What percentage of their sales quota is dependent on your account? Is it 10%? 25%? Half? Or do you represent most of it?
How do you uncover this information? Surely not in the middle of the negotiation. If while discussing the contract, you suddenly blurt out: “When is the deadline for reporting your sales numbers?”, the response is likely to be a puzzled look and shake of the head. But supposing you raise the same question three months before the formal negotiation over lunch? Or when you’re on a site visit? Or even more effective: Do your engineering people interact with the supplier’s engineers? Or do your operations folks interface with their client service group? If so, can they find out something about the Account Manager’s situation?
Accomplished negotiators have another way of gaining leverage – creating alternatives to show the seller that other options may come into play if they start taking advantage of their sole-source position. Those options may include accessing the used market; breaking out part of the work to give to another vendor; or simply stretching out the decision, going beyond the seller’s quota period.
We just began scratching the surface in this short piece. Join us in our upcoming webinar, where we will lay out an extensive leverage-building strategy for better handling a sole-source supplier, and then how both parties (the buyer and the seller) can use that exchange to find value-creating opportunities.