- Dec 14, 2001
This article is derived from Negotiating Partnerships: Increase Profits and Reduce Risks by Keld Jensen and Iwar Unt (Financial Times Prentice Hall, 2001 ISBN: 0273656597).
Financial Variables and Conditions
Price and terms of payment are ingredients of any business transaction. Frequently, companies follow routines and normal practice for the industry without testing to see whether changing the conditions might yield added value. Often, negotiators are not event-authorized to discuss conditions other than the standard ones. The people who have determined what these standard conditions should be are rarely present at the negotiating table, and therefore have little knowledge of what can be achieved by letting their own negotiators have a free hand. Among financial variables, we find the following:
Terms of paymentcredits
Purchasingleasingrentingresidual valueshared ownershipoutsourcing
Splitting up the price on various accounts and types of costsbudgetstaking tax regulations into account
Currenciesmoney, goods and services
Autogirofrequency of invoicingmode of paymentcredit cards
Terms of Payment
The following dialogue is not unusual. The seller asks, "Would you be willing to consider paying an advance?" The customer answers, "No, that's out of the question." This is a knee-jerk reaction on the part of many buyers. They do not think that the supplier should be given an advance. The buyer slams the door without knowing what it is he is declining. He does not have enough information to make an appropriate decision. How big an advance is the supplier asking for, and if he gets the advance he is asking for, what is he willing to give in return? It is only when the buyer can see both elements of the equation that he will be able to determine whether any added value can be created by changing the terms of payment.
What are missing are dialogue, openness, and a clear proposal through which you clearly show what you want, and what you can give. Taking and giving.
We have come across buyers and project managers working in companies that invest several billion kroner every year, and who state that they never include any interest costs or gains in their calculations. The money allocated to them for their projects can be spent at their own discretion during the project period. These companies risk losing potential added value to the tune of tens of millions every year.
We come across negotiators in large and small companies who will admit that they do realize that a great deal of money can be found in alternative terms of payment; but even so, they will not embark on any discussion to change the terms and conditions. The gains realized will end up in the wrong account on their books; they will not benefit their project at all.
Purchasing, Leasing, Renting, Residual Value, Shared Ownership or Outsourcing
Is it ownership or use that matters? What is it we need? Do we view it as an investment that must be profitable, so that we will get our money back when we sell the object? Is there any enhanced status associated with actual ownership? Is the need permanent or only temporary? Is our requirement spread evenly over the year/day, or is it cyclical? What are our financial opportunities? Do we have the necessary manpower to maintain the equipment? Where else would we benefit more from deploying our financial and human resources? Are our requirements today the same as they were five years ago?
A price can be structured in accordance with many different principles. It can be firm or flexible; it can be a rate price, an orientation price, or an incentive in which we share extra costs and profits; and a price can be adjusted by means of indexes.
Price is of central importance in most business transactions. Our success and ability are often measured by the price we achieve. Price is unambiguously reflected on the bottom line. Price can be measured. Often, price will constitute the point in a negotiation where the interests of the parties are on a collision course. This is by no means inevitable. It is possible to create added value out of this conflict. We need more information about the way in which the other party views price, and what price means to him to test whether it is possible or not.
We do not always have to go to battle over the price level. It may be possible to create added value by first taking the discussion and then agreeing on a method for fixing the price.
Firm price. It can be difficult to make a correct assessment of contribution in terms of effort, costs, problems, and risks. It is more difficult for the buyer than for the seller to carry out this calculation. The buyer who is not keen to run a risk, who has had unpleasant experience with open account terms, who must stay within a given budget, or who must be able to compare the costs involved in different alternatives needs a fixed price. This buyer might well be willing to accept having to pay a risk premium for this firm price. A risk premium that might exceed what the supplier needs in order to cover himself. With a firm price, there is an incentive for the supplier to be cost-effective to get his calculation to hang together and yield a profit. Without this incentive, many buyers know that the price can be all over the place.
Flexible price. In those situations where uncertainty concerning a project is considerable, firm prices are impossible. The risk premium can become excessive. Risks may be underestimated, which will lead to future disputes over unforeseen extra costs. It can be difficult to ascertain whether bills are unfairly inflated. Disclosure agreements and entitlement to scrutinize bookkeeping may be a solution. The supplier will be paid for documented costs plus an addition for profits and costs.
Time and price combined. A buyer who is allowed to keep the year 2000 price, up to and including the last of February 2001, will find it easier to accept the supplier raising the price on 1 March.
Orientation price. The parties have a shared responsibility for assessing the costs of the project. If they go up, they will have to share the extra costs. Savings are shared in the same way. The parties' joint interest in operating in a cost-efficient manner will increase when they can share risks and gains. It is important to find the appropriate orientation price and distribution key.
Firm price linked to an index. Instead of sitting at the negotiating table, arguing about who is the most skilful forecaster and who is best at guesstimating price developments, it is possible retroactively to regulate price deviations and project times by means of an index or a follow-up calculation. It is important to agree the index and the basis month, and whether the index is to apply to all or only some of the costs.
Price on the basis of results. The price will be calculated retroactively, and the supplier will have to pay in relation to the results achieved.
Price split up on different accounts and types of costs and budgetary years, or by taking tax regulations into account. The problem does not have to be total costs over a period of time. Sometimes, the problem can be related to the technicalities of bookkeeping, and a redistribution of costs over time or between different accounts can solve it. What will be the tax implications of redistributing costs? Some costs can be written off right away, whereas others must be written off over a number of years. Some costs are tax-deductible, whereas others are not.
The psychological connotations of price. Many buyers focus their interest on the purchasing price. It might be of greater psychological importance to them than to you. By allowing the buyer to "win" the price discussion, the quid-pro-quo that the seller gets in return may easily more than offset the costs involved in the price reduction.
Currencies: Money, Goods or Services
Should the price be fixed in dollars or in Euros? The answer to this question entails risks and opportunities. If you are knowledgeable and willing to take risks, you can create added value.
The price does not necessarily have to be expressed in money. What are the opportunities and risks involved in receiving payment in goods or services? A newly started enterprise will be in much need of consultancy, but will not have a lot of money. You are a consultant with a well-established firm and a sound economy. Why demand payment in money? Make sure you get an option, so that you can get a share of your customer's future profits on easy terms.
Airlines try to get the loyalty of travelers by being generous with bonus points. Not in the form of money, but in the form of airfares nobody wants to pay for. It does not cost them extra to put you in one of the empty seats.
AutogiroFrequency of InvoicingMode of PaymentCredit Cards
How exactly will the physical payment be affected? For those who have many but small transactions, handling invoices, payments, and cash will be costly. This problem was solved by the telephone operators by means of cash cards; the customer pays money in advance, and can make phone calls until the money runs out. Others have reduced their administrative costs by getting their customers to agree to automatic debiting via some kind of credit card.
You can use your credit card as a basis for bargaining. It costs a store some percent to accept card payment. You are going to purchase a new TV and video recorder. Take out from among the cards you carry the one that is most costly for the store. You offer him cash payment if he is willing to give you a discount, not in money, but in goods. Thus you both make money on the deal.
A company is going to develop a system for secure payments over the Internet. How are you going to be paid? Firm price for the entire assignment. Flexible price for the number of hours taken up by developing the system. Why not choose remuneration on the basis of each transaction when your system is used? This is appropriate if the customer is sensitive to the size of development costs, and in those cases where he can debit his end customer for transaction costs. Will a customer perceive a small cost as prohibitive each time he uses his smart card to pay for purchases made over the Internet? The amount is negligible to the end user, but it will make the developer of the system a multi-millionaire.
Quality and Performance, the technical specification of requirements
The design of the technical specification of requirements not only determine the quality and performance of a product or a system, they also influence costs, times, risks, and useful effects. How should a specification of requirements be perceived? Are we talking about non-negotiable demands or are they merely preferences? What knowledge of existing alternatives does the person who has written the specification of requirements have? How have the priorities been set? What has been intentionally left out? What needs have governed the wording of the specification?
There are many questions requiring an answer before we can understand the thoughts and wishes behind somebody else's specification of requirements. Only then can we attempt an unbiased discussion about what the optimal specification of requirements will look like, and what the room for maneuver is creating and exploiting added value.
Quality and performance will affect costs during the different phases of the project. The technical specification of requirements is made up of a mixture of requirements that have to be met for the project to work, and of a list of wishes for more or less valuable and interesting functions. For technical reasons, by way of bargaining chips, there might be demands that you are willing to waive in the course of the negotiation.
The specification of requirements should not be left entirely to users and technicians. Their reasons for including or deleting certain functions may be of a personal nature rather than in the best interest of the company, functions of which the costs to the company are in keeping with their useful effect. Be aware of the techniques of the "negotiating trap:" techniques that mean that they will not develop new techniques and systems without taking into accounts the costs, loss of time, and risks. Costs, risks, time consumption, and physical effort must always be related to the useful effect that can be achieved during the different phases:
- Service and maintenance
- Winding up
The specification of requirements will influence
- Flexibility, extensibility, and compatibility
- Possibility of selling to several users
- Possibility of extending the useful life of the product
- Reliability and environmental impact
- Useful life
- User friendliness and working environment
All over the world, there are thousands of oil rigs and nuclear power plants that will soon have to be demolished. This is both costly and risky. What account was taken of this at the time of their design? Is there an in-built possibility of dismantling the nuclear power plants and oil rigs in a risk-free, environmentally friendly manner, and at low costs?