After the bite of the recession, many companies are having to do more with less. Many are working in a tougher market with fewer staff and fewer resources. The drive to be lean has seen many processes stripped back and some, including procurement, centralised. Adapting to the economic climate has meant that every negotiation counts. But research into the negotiation processes in place within manufacturing companies has revealed that surprisingly few give the area much attention. For the study, Huthwaite International and the International Association for Contract and Commercial Management collected information from more than 120 companies, including General Motors, Honeywell and Johnson Controls.
The researchers ranked each company according to their negotiation processes on a five-point scale. Companies that had no negotiation processes in place saw net incomes plummet 63% between 2007 and 2008. Those that scored highest on this scale saw net incomes improve by 25% over the same period.
The results suggest that many companies are ignoring, neglecting or ineffectively addressing the need to improve staff negotiation skills. Steve Thurlow, business director of manufacturing at Huthwaite International, says: “Fewer than one in five global corporates have any formalised structured planning tools for negotiation.”
He goes on: “Critically, the report shows that all the best-performing companies have re-engineered their organisational negotiation capabilities. As a result, they have significantly improved their bottom-line performance.” These companies have done this by transforming negotiation from an individual competency into an organisational capability.
Over the past few years, many manufacturing and engineering companies have changed their strategies for buying. They want procurement teams to get involved in deals far earlier than before. In the past, a factory manager and user of the product to be purchased would typically approach procurement with the name of one supplier with which to negotiate. But the arrival of professional buyers on the scene means that it has become more common to play several suppliers off against each other. In addition, salespeople are getting less time with clients.
This change in dynamic may pose a problem for some in engineer sales roles, explains Thurlow. Traditionally, selling within manufacturing has relied on the technical properties of the product or service.
These specifications would be described by the sales engineer selling the item to a production engineer. “They have probably got the same degree – they might have gone to the same university – and they talk technology to each other. For a long time that was enough,” says Thurlow.
But now the person buying the product may not be technically-minded and often will not use the product or service every day. This means that the sale will often rely on demonstrating the value that the product or service offers the customer rather than the technical details.
The fact that the product has a better tolerance or it operates at a higher temperature might not always be the primary factor. “The fact that it gives you a longer-term lower cost of ownership or that it saves money somewhere else – that is what professional buyers want to hear,” explains Thurlow.
He goes on: “It’s taking those facts and extending them one stage further into the commercial pay-off rather than the technical pay-off. Getting people to talk about the bigger picture, which traditionally sales people in industrial companies haven’t done because they tend to have engineering rather than commercial backgrounds.”
To address this, salespeople should start by understanding what the customer needs and what they really value – that is a fundamental part of it, according to Thurlow. Getting to grips with how the product or service for sale can fit into the customer’s value creation will also help.
Use this knowledge to build as much differentiation into the product as early as possible in the sales cycle so that the user can verbalise this to their procurement team, he advises. Effectively selling to people working in procurement involves talking about lifecycle management and total cost of ownership rather than unit price. Procurement staff need to know if a product costs 20% more but lasts 40% longer than those of competitors because the outcome of these teams is measured on cash savings.
Once the sales force are confident talking about the wider commercial context of the product or service, companies should work to improve employees’ negotiating skills to help keep more of the margin on the sale. “One thing professional buyers are good at is telling you that you are too expensive, and wanting to negotiate,” says Thurlow.
This trend has already hit many sectors of the economy. Thurlow believes that engineering is about 10 years behind the most forward-thinking sector in this area, IT. This is partly because, in a manufacturing environment, the products changing hands are two or three times removed from the final user of the end product.
Thurlow explains: “It’s very removed so the pressure to move to that mindset has been less. Whereas with IT, it is a lot more visible. The minute someone brought out something as obvious as Windows it was easy to sell the concept right through the production chain.”
Evolution of sales
1970s: Product innovation
Companies focused on building better products. These automatically sold because they worked better.
1980s: Focus on quality
Innovative products became the norm, so making high-quality versions became the way to stand out from competitors. International and British Standards became important.
1990s: Adding value
Companies looked to add value to products as everybody could produce innovative, high-quality goods. Many began offering advice and consultancy as well as products.
2000s: Arrival of procurement
Procurement brings an additional commercial dimension to sales and shifts the dynamic towards efficiency.
Top tips for success in negotiating
Steve Thurlow of Huthwaite International gives his top five tips for negotiating:
1. Preparation and planning are not the same thing
Average negotiators spend most of their time preparing by gathering data about relevant issues, ranges and targets. Skilled negotiators, on the other hand, spend most of their time planning and deciding how the data can be used to their advantage during the deal. The key is to weigh up all the relevant factors and then make sure that you plan how to use them during the negotiation itself. Be creative in identifying all the options available – especially those bargaining counters that may cost relatively little but are of greater value to the other side in the deal.
2. Don’t just split the difference
Negotiation and compromise are not the same thing. It may be tempting to settle at a midway point between both parties when the pressure is mounting. But this short-term thinking is a poor tactic. Take time to consider how to gain the advantage by bargaining your way closer to your desired position.
3) Listening is as important as talking
Skilled negotiators are good listeners. Adopt a consultative style and ask twice as many questions as usual to establish the other party’s position. This helps identify each party’s priorities and keeps them clear. By asking questions you can control the direction and content of the negotiation without appearing to.
4. With supporting arguments, less is more
Skilled negotiators avoid diluting their case with lots of different supporting arguments. Use one strong argument and expand it as necessary. Only employ a second argument if it becomes clear the original one cannot be upheld as the negotiation unfolds. Using lots of supporting arguments can backfire because, if one argument is weak, the other party can use it to undermine the credibility of your position.
5. Avoid ‘fairness’
Try not to use the words fair, reasonable or generous. They are not persuasive and can be condescending. When used in a heated exchange they may even damage the atmosphere.
Building good customer relations
Over the past five years, one company has taken significant steps to be seen by customers as a solution provider instead of a supplier. As part of this transition, bearings, seals and lubricants company SKF has had to shift the mindset of the sales team, too.
This has involved developing staff negotiation skills. Business development director Chris Rhodes explains that for SKF every transaction with each customer is different, and negotiation helps the company ensure that the value of the product is not undersold.
He says: “Our sales team need to really understand that value and to negotiate the deal so that we can redeem as much as we can. It’s not just a case of getting paid more for something, it’s a case of understanding the value and making sure we get paid for that value.”
Training staff in negotiation has helped to give more consistent results across the business.
“Previously we had some people who you might call natural negotiators and some who weren’t so natural,” says Rhodes. “Now we have moved negotiation from an art form to a process. It’s much more about understanding from the customer’s position and our position.”
Staff have also learned how to develop a positive attitude about negotiation. SKF has a good retention rate among its customers and negotiates with them on a frequent basis, so maintaining long-term relationships is important.
“Negotiation can sometimes be a hostile environment and we can only lose in that environment,” says Rhodes. “A good negotiator is able to relate to the customer and agree on the value of the solutions that we deliver, and keep a long-term relationship.”