Negotiations in Times of Crisis: Insights from the Experts
Rising inflation, unstable economic conditions, layoffs, disruptions in supply… The list goes on and on! If you are working in procurement or you have been simply following the news, you know the current situation is far from rosy, and predictions for the upcoming months don't paint an optimistic picture either. So, we wondered: is it all gloom and doom or is there something that procurement leaders can do to prepare for negotiations in a time of crisis?
To find out, we invited some of the biggest procurement leaders and negotiation experts, namely Philipp Michel, Simon Wasserroth, Christopher Miadzel, and moderator Alejandro Basterrechea. Individually, their expertise and skill set are a huge advantage but combined, they are unstoppable! So, on a cozy Thursday evening, we sat down in the Lhotse office and discussed some of the most pressing questions about negotiations during difficult and uncertain times.
What are some of the biggest challenges you see in procurement today?
Christopher Miadzel is the Global Head of Procurement for the Patient Care Business Unit of Ottobock and has more than 10 years of procurement experience across different industries and categories. He answered first:
“The biggest challenge is ongoing and begun during Covid: uncertainty. Prices are hard to predict and it is difficult to know when a product will be available or to know exact delivery times. Because of increasing costs, businesses need to drive up their revenue to stay competitive. It is very hard to predict when this will ease up, which makes planning very challenging.”
“Currently, we see that country organisations are not able to give accurate information about what is going to happen in their local markets in the next year, which is crucial when it comes to financial planning negotiations in my role. Whereas normally, they can give at least approximations (e.g. our sales prices will go up by a few percentage points), now there is a lot of uncertainty about the jump in prices and even more importantly how long these increases will last.”
“Therefore, backwards calculations of the goals for the procurement department and the margin predictions become extremely complex. Various departments are waiting on input from procurement, but providing them with more clarity is challenging right now.”
Simon Wasserroth, Principal at TWS Partners who supports German as well as international corporations in strategic projects, agrees:Wasserroth_Simon_tie_round
"There is uncertainty on so many levels - you hear many stories about capacity constraints, inflation, and price instability. Suddenly, suppliers are calling you every day telling you that prices are going up, but they are also under a lot of pressure themselves. It feels as if no one knows what is going to happen next year and everyone is trying to solve two complex problems - one is firefighting in the moment when you need to react quickly, but another one is making strategic decisions for procurement for the next 2, 3 or even 5 years, depending on what type of long term contacts you have.”
“This is why the uncertainty we currently see in procurement requires new approaches and new methods. For many years, it was all about global sourcing, bundling, and creating synergies. Now, localization, multi-sourcing, and allocating risk are all of paramount importance.”
Alejandro Basterrechea, Head of Procurement Excellence and Corporate Services at Zalando, adds:
“Every challenge is an opportunity - you need to take this challenge and make the best out of it. This is why now is the time to position the procurement team within the company and gain equity in the organisation. For many companies, procurement was simply part of the finance department, whereas now procurement is leading the budget discussions. Crisis time is procurement time!”
How can the right balance be struck in negotiations so that both partnerships are built and price requirements met without burning bridges?
Philipp Michel, who brings with him sales, commercial, and negotiation perspectives as well as experience of more than 20 years, answers this question:
"The power no longer lies in favour of suppliers. Therefore, companies need to think about their strategy and find the right balance between short- and long-term planning. For example, do you use negotiations to force through a price decrease today or do you look at the bigger picture to ensure both you and the supplier have a seat at the same table again?”
“The first thing you need to understand when it comes to negotiations is how important the relationship is. You can classify your suppliers based on your relationship with them - for some suppliers, you are considerably dependent on them and you need to ensure a long-term relationship because your company can’t function without them. In other cases, you might have a wider choice of suppliers that you can easily exchange.”
“A big mistake many companies make in negotiations is that they are not agile or quick enough to react because their setup and negotiation processes are too complex. It is not clear who makes decisions, how and when, what agreements can be made nor when they need to walk away.”
“Even though a lot has changed in the setup, the key principles of how you negotiate are always the same - you simply need to adjust your behaviour based on the situation. Too many business leaders don’t understand the principles of negotiations, but whilst the environment might change, those principles stay the same. This was true 10 years ago, it was also true 100 years ago. The difference right now is the huge, critical impact that suddenly some of those negotiations are having on the success of the business. Procurement organisations need to adapt and move quickly because the bigger and more complex your organisation gets, the more challenging everything becomes.”
Simon adds:
“Everyone now has the added pressure of prices and inflation going up and are, therefore, re-negotiating their contracts. However, I have seen companies deal with this pressure by committing to very long-term contracts because in many situations this is their biggest negotiations lever. However, companies need to be careful that they don’t fall into the trap of endangering the long-term success of their organization, in an attempt to secure prices for the next year.”
Christopher shares:
“It could be that offering a long-term contract is a good decision or a bad one, but there’s no way of knowing for certain today. For the first time ever, we are seeing suppliers coming to the organisation to justify their prices, instead of procurement knocking on doors and reaching out. For the first time in a long time, suppliers are receiving communication asking them to justify their prices for the next year, so the ball is now in their court to explain why their costs are going up and what they are doing to mitigate.”
With the Supply Chain Act coming up soon, are you implementing ESG-criteria into your negotiations with suppliers?
Simon is quick to respond:
“ESG is a very complex and multi-faceted topic. The first question is always one around the subject of implementation - why is it that you want to integrate ESG topics? First, you need to follow regulatory requirements. Then it depends on which business sector your organization is in - for some business sectors ESG topics (especially carbon reduction) are very commercial topics due to emissions trading. Reducing carbon (your own but also in your supply chain) becomes not a soft ESG topic but a true cost. Carbon equals costs in an emission trading system because if you don’t reduce it, you need to buy certificates. Suddenly, you are not negotiating costs, delivery times or quality with your suppliers, but you have another variable in the equation: carbon reduction.”
Christopher also shares his perspective:
“We are proactively asking suppliers what they are doing to be compliant with the Supply Chain Act. For a lot of them, this is only a side topic, so they are getting worried because companies are in the process of implementing a supplier scorecard system where ESG compliance will play a role. It is definitely giving companies additional leverage during negotiations with suppliers.”
Alejandro clarifies:
“ESG can mean many things. For certain suppliers, for example in logistics, CO2 reduction is key. For businesses where energy is key, green or renewable energy becomes more important. For commodities or categories that are labour-intensive, human rights play a bigger role. So, some companies divide their supplier base into those core elements and apply a data-driven process to score them, look at the risk and take action. However, the right infrastructure and set up in the company is instrumental in order to meet this end.”
How do you ensure success in negotiations?
Philipp takes the lead on this question:
“To be successful in negotiations in procurement (and overall), you need to combine the following elements:
- Have the right mindset and skills to negotiate
- Have the right data at the right time for the negotiator
- Have enough and the right governance
Negotiations are a very complex process and you need to provide the right training to your negotiators, have your data under control so that you can make quick decisions, and have the authority to set commitments and consequences. When you have a center of negotiation excellence that controls all three elements, you can move quickly and remove a lot of unnecessary silos. The goal here is to moderate and steer negotiations, have the bigger picture in mind, and set the framework for how to negotiate - only in this way can a company have the speed to implement successful strategies and decisions.”
“Mindset, right data, and governance. Only if you manage all three, you can be agile and successful in negotiations.”
Simon sums up:
“Governance needs to be anchored in the organisation. And most importantly, you need commitment. As a purchasing organisation, if you have the mandate and there is commitment from the organisation to the deal you are negotiating, you have essentially removed the biggest blocker. Giving the procurement team the mandate means that you are no longer just a service provider with internal customers, but you are now the driver. Therefore, commitment is essential - it is a big paradigm shift.”
Summary
Here are some of the key takeaways we want to leave you with from the discussion on "Negotiations in a time of crisis":
- Currently, the largest challenges in procurement are uncertainty and unpredictability. Above all, this relates to capacity on account of rising inflation and price instability.
- The issue of creating transparency and clarity is becoming increasingly more complex for procurement departments.
- Companies must rethink their strategies in order to find the right balance between short and long-term planning. Simultaneously, procurement departments must be both adaptable and quick in their response.
- In order to be successful in negotiations, the following elements need to be combined: the right mindset, enough and the right type of data, and governance and commitment from the organisation, so that quick decision-making is enabled.
It's clear: now is the time to better position procurement teams as an integral part of any organisation. Procurement is bound to play an ever greater role in the overall success of companies and further ways to optimise its processes can always be found through technological innovation.
If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!
