Guide to procurement negotiation

What is negotiation in procurement?

Negotiation is one of the final stages of the overall procurement process. It’s the moment where representatives from both parties meet to iron out the details of their partnership, including timelines, payment terms, metrics and KPIs, and any other detail that pertains to the success of the project.  

Once you’ve whittled down the suppliers and platforms you’re interested in, the submission of an RFP will trigger the step of negotiating contracts. In the world of SaaS licenses, one example of procurement negotiation would be a discussion on end-user numbers and whether there’s capacity to increase this. Platform integrations are another common area of discussion during the negotiating process.

Business representatives should enter discussions with a clear negotiation strategy; without one, organizations risk suffering from disadvantageous contract terms, commitments to unsuitable subscription time frames, and tarnished relationships with vendors.

The benefits of strong procurement contract negotiation

With businesses now requiring more subscription services than ever before, procurement professionals are in hot demand. Contract negotiation is perhaps the most important step in procurement workflows — it’s the primary opportunity for buyers to establish their objectives and determine the specificities of their arrangement.

As such, the benefits of strong contract negotiation in the procurement process are similar to the benefits of a strong procurement process as a whole. Take a look at the three key benefits below:

• Establish the service level agreement you need — SLAs are bipartisan commitments that define contractual obligations between service providers and customers. It’s in this agreement that both parties agree on the KPIs and metrics that can be used to effectively measure supplier performance, as well as key dates for contract management and potential renewal. SLAs are also crucial in determining the level of customer support available once the product goes live.
• Negotiate lower prices — In any transaction, the underlying aim is to negotiate a lower price. The right negotiated agreement will be the product of discussions with relevant stakeholders who set out the requirements of the partnership from their perspective. In SaaS, this often relates to specific features of software platforms, and negotiation in IT procurement is the means through which you can secure the right deal at the right price. For instance, your customer service team may really like one of the features of a higher Sprinklr pricing tier, but doesn’t require the majority of what’s on offer in the midweight tier; can we negotiate a price that reflects this?
• Develop long-term supplier relationships — Procurement negotiation can be thought of as the first opportunity to develop supplier relationships. Since it’s likely that negotiations represent the first chance for procurement teams to meet with suppliers face-to-face, it’s important to make a good impression. Successful negotiation is about being friendly but firm, knowing what your business needs but showing a willingness to compromise where possible. Remember that suppliers are managing businesses too, and that win-win outcomes help to foster fruitful long-term relationships.

What are the barriers to effective procurement negotiation?

Negotiation in purchasing is rarely straightforward. Tricky supplier negotiation tactics and poor decision-making during the first stages of procurement initiatives can lead to issues at the table.

Let’s elaborate on the barriers to effective procurement negotiation:

• Lack of strategy — Procurement negotiation is at its most ineffective when it’s not sufficiently supported by a strategic plan. If your negotiators haven’t been properly briefed on the specificities of the product they’re procuring, it’s likely that negotiations will become muddled, or that the product won’t perform its function to the desired standard. Make sure you give your teams what they need to make informed decisions.
• Supplier negotiation skills — Negotiation in procurement is a compromise between two negotiating parties: the supplier and the customer. Both parties want what’s best for their business, which means your representatives will need to match the supplier’s negotiating skills. Failing to do so can result in unfavorable contract terms and SLAs.
• Close-mindedness — It’s important to understand what your non-negotiables are and to stick by them. Equally important is the recognition that other parts of the agreement are up for discussion. Be open-minded wherever you can — a reluctance here has the potential to damage long-term relationships without gaining anything for the bottom line.
• Miscommunication — Be as open and honest as possible with suppliers before and during negotiations. As with all relationships, good communication is the cornerstone of a healthy business partnership; without it, the possibility for misunderstandings and grievances increases.
• Overthinking power dynamics — Avoid thinking of procurement contract negotiation as a tug of war or a chess match — as soon as one side detects an imbalance, discussions can break down. Instead, simply think of talks as an opportunity to voice your objectives and concerns in a conversation of equals.

Seven steps to improve your procurement negotiation tactics

Take a look at the seven steps below that will help improve procurement negotiation tactics before, during and after the event:

1. Agree on the conditions of negotiation — To help both parties relax, it’s important that everyone is happy with the location and timing of negotiations, as well as the number of participants involved. Agree on these conditions well ahead of the date.
2. Establish your BATNA — An established best alternative to a negotiated agreement (BATNA) will lay out the next steps in the event that no deal can be made. It’s a predetermined arrangement between both parties that takes place prior to negotiations, allowing for greater peace of mind during talks.
3. Build trust — Negotiation in purchasing is a human endeavor. The best way to improve negotiation tactics is to build trust, taking the time to get to know your supplier and its negotiating team by asking the right questions.
4. Active listening — Just as you’d expect your supplier to listen to you during negotiations, demonstrate your interest by practicing active listening, proving you’re just as invested in the success of their business as they are in yours.
5. Submit multiple offers — Procurement negotiation is about finding a happy mid-point between two parties. By submitting multiple offers — each reflecting a slightly different agreement — you improve the chances of striking this balance.
6. Include binding clauses — Commit your supplier to upholding their end of the agreement with contract clauses and warranties. If circumstances change and the agreement can no longer be met, these clauses will ensure your business doesn’t suffer.
7. Organize evaluation dates — You’ll want to arrange some dates for evaluating the success of the project — to see what’s working well, what isn’t, and how the overall partnership can be improved. These meetings are an opportunity for honest feedback and a chance to measure success, in line with the KPIs established during negotiations.

How Vertice can assist contract negotiation in the procurement process

Vertice is an essential partner in procurement negotiation. Following a phase of strategic sourcing and supplier vetting, our customer purchasing teams will negotiate the best subscription price on your company’s behalf.

Our procurement experts have unprecedented access to vendor sales records, offering visibility into exactly how much other organizations pay for their subscriptions. With these insights, businesses can maximize value whilst outsourcing vendor management.

And once we’ve secured the right deal for your business, the Vertice platform can further streamline your procurement operations. By highlighting contract expiration dates well in advance, the platform lends additional support to negotiating teams, giving them the time they need to prepare for fresh discussions and scorecard evaluations.

For more information on how Vertice’s SaaS purchasing platform can support your procurement needs, click on the link.