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Negotiation: I’ll tell you what I want …

December 17, 2015

Many organizations are focused on simplification and cycle times. They know that initiatives in these areas can boost revenues, reduce costs and contribute to market reputation.

Those initiatives include  growing interest in steps to simplify the contracting and negotiation process. For example, many large corporations are now engaging in discussions over ‘industry standard terms’, in an effort to cut the frequency and extent of negotiation. At IACCM, we are working with several industry groups on such projects, as well as specific company assignments on simplified contract structure and design.

There is mounting evidence that both of these approaches yield benefits. For example, we have seen companies like Hewlett-Packard introduce ‘principles-based negotiation’ and as a result, market perceptions of ‘ease of doing business’ with HP have improved. In another example, a large corporation that worked with IACCM on contract design has seen average cycle times to reach contract closure improve by almost 40%.

But while Finance may be pleased with the results from projects such as these, it often fails to undertake market impact analysis when it introduces new policies and can finish up adding complexities that undermine speed and simplification. Action on payment terms is a good example of this.

As anyone in the world of contracting will be aware, the long-term trend by large corporations has been to extend their payment terms. IACCM reported on this in May 2015, showing that the average payment term is now around 60 days, with the largest companies moving to 90 or even 120 days. In a recent blog, I questioned the logic behind such a move at a time when interest rates are negligible. I observed the complexity that is being introduced to the supply chain when such moves are accompanied by the introduction of factoring.

An article in GTNews confirms this point. Essentially, what seems to be happening is this:

  • Finance departments want to reduce input costs from suppliers
  • Aggressive price negotiation is no longer generating enough return
  • Finance is turning to other mechanisms to create levers in negotiation: payment terms is one of these
  • Right now, extended payment terms offer little real value …. BUT
    • when interest rates start to increase, it will be useful to have flexibility on when to pay – keeping cash for longer will have real value
    • the longer the payment period, the greater the discount that can be demanded for early payment – and hey presto! We have just created a lower price

Of course, suppliers are not stupid (they have Finance departments too), so they add to their prices to reflect these longer payment terms ….. but they can’t do that with established customers, they can only do it with new customers.

So here is where the games being played ultimately undermine the simplification of other initiatives. Through this one policy change, Finance have added considerable complexity to the underlying business process; they have added new relationship sand elements to the supply chain; they have impacted supplier costs and undermined supplier loyalty, further encouraging the need for regular re-bidding and supplier switching.

Was there really a business case behind all this? Is there a business case supporting many of the practices and policies that drive contract negotiation? When it comes to negotiating, do we actually have much idea of what we really want and why we want it?

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