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Global Economy – Considerations For Negotiators

May 20, 2010

IACCM has just issued its quarterly report on the state of the global economy. It noted continued volatility in market conditions and the emergence of significant trends that are impacting negotiations, in particular the focus on methods to reduce costs and a growing focus on pricing mechanisms. IACCM also commented on the impacts of public procurement and policy shifts, both in terms of economic activity and in respect of the impacts of new governance and oversight initiatives.

The survey is unique in bringing together both buyer and seller perspectives (which it will be no surprise, are often not aligned!). It discovered a continued battle over terms and conditions, especially price-related, but increasingly those complaints come from both sides, suggesting that the imbalance in negotiation power that was created by the recession is fast receding. However, circumstances vary considerably between regions and within industries.

Asia-Pacific continues to show the greatest buoyancy in market sentiment, with net positive index of 42% (up from 22% in the previous quarter). The Americas are now close behind, with +38% (previously +16) and Europe / Middle East / Africa continuing to lag, with +13% positive sentiment, up from +4% last time. The frequency of renegotiation has continued to decline, with primary focus now on new contracts or extension / expansion of existing relationships. This suggests a change of pressure in negotiation.

Most negotiators remain concerned about price-related pressures – though in both directions. While sellers report continued ‘unilateral actions’ by their customers to force reductions (or to leverage other cost-related terms), there is now evidence that many suppliers are using the recovery – and supply shortages – to push up margins. While some are doing this through direct increases, others appear to be improving their P&L through cut-backs in service or support or more draconian attention to change management.

There are substantial variations in the fortunes of different industries, and sometimes within industries. Automotive is a good example, with a substantial fall in those reporting positive conditions in the last 2 months, though a similar number reporting improvements – clear evidence that bad news for some suppliers is good news for others. The strongest industries – in terms of recovery – are Electronics, Retail, Manufacturing / Processing and Transportation / Logistics. Those showing greatest weakness and uncertainty are Aerospace and Defense, Automotive, Engineering and Construction and Public Sector.

In their webcast accompanying the report, IACCM highlighted a number of trends for negotiators to consider. These included the weakness of the Euro and associated actions within a number of EU countries to cut public debt; the fragility of supply chains, which has been exacerbated by the cost-cutting actions of the recession; the steady increase in regulation and oversight, which is increasing nervousness in trading relationships and may lead to large-scale reconsideration of bonus and incentive schemes (a welcome development for many negotiators); the wider impacts of public procurement cut-backs and delays, especially in areas like IT, defense and construction. The summary also touched on the switch of market focus to the Far East and the impact this may have on negotiation practices and terms, plus the recent collapse of the traditional annual agreements in the metals industry and the extent to which ‘spot pricing’ may become more prevalent. IACCM believes that pricing mechanisms and indices will be a major area for focus in contract negotiations over the coming year.

In advice to contract negotiators, IACCM observed that they must be flexible in their approach and do their market and competitive research before entering the negotiation (the latest IACCM report represents a good starting point). Negotiating power and positions will be significantly impacted by the state of conditions in the negotiator’s industry and that of their trading partner. The survey shows that many suppliers felt unfairly treated during the recession and that unilateral action by buyers has tested supplier loyalty. As these established suppliers now start to push back in an attempt to recover lost margin, some buyers will be more inclined to consider switching their source of supply, providing competitive opportunities.

Competitive intelligence is therefore more important than ever in negotiation planning, with terms and conditions increasingly a factor in winning or losing. Among the areas to research when preparing to negotiate are whether companies are engaged in major cost-cutting; whether they are changing their service and support model; whether major customers are imposing price cuts, changing volumes or amending payment terms.

IACCM also commented on the erosion of trust that has accompanied the recession and the rapid shift in confidence over supplier and customer financial stability. A recent report from the International Chamber of Commerce noted a sharp up-lift in requirements for Letters of Credit or bank guarantees, as well as growth in requests for Performance Bonds or guarantees. With the banking industry itself in a risk-averse state, it is proving both hard and expensive for many firms to obtain the required support. Once again, an important area for negotiators to consider and prepare.

All these factors suggest extreme variability in the flexibility that negotiators will encounter. They may also offer increased opportunities for value trades and perhaps, in some instances, a greater understanding that partner loyalty and collaboration is often more important than the superficial transaction cost. As we recover from recession, it may indeed become evident that the world of negotiation will never be quite the same again.

A recording of the IACCM webcast introducing this report and discussing its findings is available to IACCM members at www.iaccm.com

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