As one of their incumbent providers, we’ve just been part of a paper-based UK Government tender for training services – an experience that turned out to be a lesson in buying and selling from both sides of the fence
This tender process was given an added layer of complexity by a concrete deadline by which individuals being trained had to be registered to ultimately receive their qualifications in Procurement and Supply Chain Management. Proposals were required within a week and the contract had to be in place some ten days later. We submitted our proposal on time, but an extension was shortly thereafter granted to our competitor for another five days…
On the day of the deadline, one of our directors was at the client site, delivering an existing training project. Having been told that the ‘tender’ would not be proceeding because of budgetary constraints, he was surprised that morning to learn that last minute funds had been found and that the project could go ahead. That good news was however swiftly followed with a request for a 40% reduction from the tendered price.
Human behaviour kicked in at this point. Of course negotiation is about seeking the optimum deal for both parties, but such a reduction from any standing was dramatic. The tendered rates had been based on those agreed after a previous tender 18 months prior, which had been reduced to win the business at that time. Since then, over 18 months significant value had been demonstrated with countless compliments from the team and senior management.
On the other hand, a target price had been provided and, the point was emphasised, must be met as the other provider had submitted a proposal at that level – leaving no room to come in anything under -40%.
Our response to the buyer (like that of most esteemed sellers!) was have you considered the value proposition, the elements not costed for, and our proven capability demonstrated over the preceding eighteen months to surpass requirements? This wasn’t simply hot air: the full cost model had been calculated from the bottom-up; margins were already tight and, at the price requested, it was simply not possible to deliver against the Contract on the basis of knowledge being transferred and value being realised. A ‘sheep-dipping’ solution could perhaps have worked at the -40%, but this was not the proposed scope – nor one that as a business we wanted to be associated with.
So, the polite response was that we could not reduce down to that level. Another few hours later we were told we had lost the business. No doubt, the buyer was delighted to have saved -40%, especially on their very first procurement event!
As a traditional process, there were arguably some flaws: requesting such a dramatic reduction simply generated a human defensive behaviour combined with anger – which simply leads to one party retreating and disengaging from the process. The selection process appeared highly tactical and geared solely towards price, as opposed to a weighted solution recognising the value proposition that is paramount in any training.
Training is not a commodity, but this process clearly regarded it as such – with no differentiation made between buying paper from a stationer to engaging an organisation to help with achieving professional qualifications and, in doing so, being up-skilled in category management.
Their demand, and our subsequent disengagement, meant that the seller (us) simply didn’t play and the buyer failed to get us to make any price-based concessions – although other value-based concessions were offered (e.g. additional training time thrown into the package as we could amortise costs). The huge gulf between positions, meant our BaTNA was to walk away. The buyer’s financial constraints and their need to save face meant that they now had no other solution than to award the business to the other provider.
The outcome now means the buyer has many hidden costs and issues to consider:
- Two suppliers to manage over the next 18 months, as we will continue with pre-existing work
- Different methodologies from each provider
- Delivering on assurances that IP will not be infringed
- The need to deal with teams and individuals who are receiving potentially conflicting messages from both parties
- Whether we will continue to add value or simply do the bare minimum, as there is no ‘incentive’ to do so
How an e-Sourcing may have got a better outcome…
Interestingly, regardless of whether a reverse or forward auction, ranked or not, an e-Auction would have got a different outcome.
The result may well have been the same, in that we lost the business, but the buyer would have had another choice. Why? Well, had both players been competing ‘openly’ in an e-Sourcing environment, the psychological response that the initial -40% request provoked would have been avoided.
Instead, assuming the correct auction type was used, both parties would have reduced their bids to a level they were comfortable with and engaged ‘openly’ with the process. The ‘human’ element would have been removed from both sides of the equation: from the buying side, the novice who was being guided in the background; versus a veteran from the seller side who found the whole event something of a debacle and insulting at a professional level.
The moral of the story…
There are two key lessons that observers can take away from this case study:
- Understand how human dynamics play a massive role in negotiated events and how initial ‘openings’ in negotiation can deter the other side, resulting in behaviours that, instead of creating an agreement staircase, lead to one of both parties defending a position and refusing to come to the negotiation table.
- Evaluate too whether e-Sourcing could derive a better outcome, particularly where the negotiating skills are perhaps mismatched and technology can be relied upon to drive the process.
What effects have you found e-Sourcing solutions can have on the outcome of a negotiation? Are they positive or negative? Let us know below.