1. State the problem
1.1 The context
A long-standing graduate leadership development training contract provided to a UK-based, capital-intensive, high profile engineering and energy business was due for renewal. Responsibility for the negotiation had been transferred from the customer’s HR team to the Procurement Department. The feedback and regular performance reviews on the contract had been consistently very positive for at least ten years of delivery.
Specifically, the programme is run by two facilitators, for up to 20 participants. Each intervention consists of two modules of 5 days each, delivered four weeks apart so that participants can return to their home base to apply and test what’s been learned in the first session.
The principals in the negotiation were the supplier’s Director (and leading trainer) responsible for the delivery of the development programmes and the Procurement Manager – Services (and his supporting team) acting for the customer. Because there had been a strong relationship between the supplier and the HR team, it was deemed important to consider that team as a key stakeholder too, even though it was thought they were likely to be ignored by the Procurement group.
Initial proposals had been invited from the incumbent supplier and six other possible providers. The incumbent’s proposal was said to be the second most expensive of the seven bids taken. Final negotiations were to be held with the incumbent and one other (significantly cheaper and local) contractor.
1.2 The incumbent supplier’s position
Because of a number of historical factors and its longevity, the margin generated by the contract for the supplier was the lowest of any contract they ran. It was also an intensive and relatively expensive programme to manage from their point of view because of its “reach” and high profile in the customer’s business.
They described their position as follows:
We need to raise the revenue generated by this contract as it is hopelessly out of line with what we know we are worth and what we can achieve elsewhere. We have a superb reputation within their business and yet we’ve been forced into this bidding process. On the upside it has given us quite a lot of revenue over the years because of its high volume. Also, requirements are tied to the graduate recruitment programme and are therefore planned for a year in advance, so revenue streams are predictable for us. We have positioned our bid at roughly twice our previous daily rate.
We believe the main competitor for this contract is very local to the customer and has a good reputation. They have done a limited amount of business with them over recent years although not in the leadership development area. Their daily rates are thought to be significantly lower than our typical fees.
We do not know the Procurement Manager at all, but imagine he will be out to prove a point.
1.2 The Procurement Manager’s position
This contract is sensitive because of its’ very high profile. Participants on it come from every area of our business and those who did the programme some years ago are now beginning to rise up the managerial ladder. It seems to do a good job according to the performance reviews. We wonder if the results are skewed somehow because there has been a very long-term relationship between this contractor and HR. We know that if there is a long history like this, then there is a high risk of collusion between supplier and client. This needs to be tested thoroughly. There is also a lot of executive focus on cost reductions right now, and this is quite a large piece of business for its type so we have the chance to display our expertise. Small fry in relation to our major capital purchases though.
We can only win – either we’ll get them at a low price or we’ll get a new supplier who we think will do at least as good a job. Even if we keep them, we can screw them down because they won’t want to lose this volume of business.
2. Chunk up to higher interests.
2.1 The incumbent supplier’s higher level interests
Key question: What does holding on to our current position do for us?
- Increased fee ⇒ more margin ⇒ happy contractor
- Keep the contract at double previous margin⇒ programme content known ⇒ limited development costs ⇒ much better effective margin when compared to new business ⇒ high profitability
- Keep the contract, but at low margin ⇒ known volume delivery ⇒ stable revenue ⇒ less stress on new business sales ⇒ happy(ish) supplier
- Programme content known and well-tested ⇒ no additional development costs ⇒ less costly to maintain ⇒ needs less margin to be profitable
- We understand the client’s needs ⇒ can provide a service that works ⇒ raises our confidence ⇒ deliver it consistently, better and better ⇒ contract is secure ⇒ predictable revenue
2.2 The customer’s higher level interests
- We want to save the company money ⇒ we look good ⇒ our credibility improves ⇒ we strengthen our position and profile
- We prove we are better than HR at purchasing ⇒ we save the company money etc
- We show we are strong ⇒ shows the decision to give us the responsibility was the best one ⇒ we look good etc
- We teach this contractor a lesson ⇒ word will spread to other suppliers ⇒ we’ll do even better deals ⇒ we look good to the executive etc
- I (PM-S) get personal credit for leading a successful negotiation ⇒ I look personally good ⇒ promotion possibilities open up
A secondary question: What do we get out of not achieving a deal with this supplier?
- We know their competitor is keen to do a deal ⇒ so we achieve what we need anyway ⇒ we can suggest they’ve run away ⇒ we look strong etc
- HR might get upset ⇒ doesn’t matter as we’ll be able to prove our case ⇒ the executive will believe us because of the numbers ⇒ we look strong etc
There is another indirect stakeholder, of course: the HR Department. When stepping in to their world it becomes evident that things are challenging for them:
- We feel affronted because of Procurement taking over what has always been our responsibility
- We know and respect the effectiveness of the current contractor
- We know the pricing needs to rise as we know what the market charges elsewhere for services which are almost certainly not as good as what we’ve been receiving
- This is a battle we are unlikely to win because of the current focus on cost saving within the business.
Although they are unlikely to participate directly in the negotiations the supplier believes they could be an ally in securing renewal of the contract.
3. Chunk down to barriers
Key question: What stops us resolving this right now? – From any stakeholder’s perspective.
Current margin too low; unacceptable price; don’t trust Procurement people; don’t trust suppliers who’ve been in place a long time; desire to show HR who’s boss; Procurement need to show some change; quality of supply likely to be ignored; deal likely to be decided on price; no relationship with Procurement; can’t see how to achieve a fair deal; our contacts are not in the negotiation; suspicion that Procurement need to show their skill; clash of values (supplier Level 7, customer Level 4).
4. Identify a leverage point
Key questions: What is common to all these barriers? And, what drives all these barriers?
The obvious response is that it is almost certainly the daily training fees (currently too low for one party, proposed terms too high for the other). However it is certain that focusing on this will just cause a fight over the rate per day … arguing over a potential reduction of x or y. Thinking systemically, we began to consider two key points
- How it might be possible to reframe how the contract and its costs and benefits are perceived in the whole organisation, as distinct from appraising a contract purely on its gross cost.
- How to utilise the difference in values
5. Identify a new goal
The contractor’s new goal was defined as follows:
To find a way to redefine their final proposition by utilising much more of the logic someone operating out of Level 4/5 values in such a way that it is much more likely to appeal to the Procurement team. As a result, the Procurement Manager and colleagues would feel they’ve “forced” an (apparently) unwanted change in the supplier’s approach.
6. Check against higher level interests
It becomes apparent that if this challenging new goal could be achieved it would indeed give the customer a sense of power and being in control while still enabling the contractor to get something close to the daily rate they wanted.
So, what actually happened?
Defining a new objective in this way initially led to calls being made to some previous participants who’d stayed in contact over the years to identify anyone who might be able to influence Procurement, particularly on the issues of quality and long-term benefit.
The major breakthrough came when one of these calls gave a clue as to how the company accounted for its training programmes internally. In brief, it emerged that each operational division, department or section was re-billed for every participant they nominated for attendance. Once this was known it was a relatively simple task to calculate the re-billable cost to each participant’s department or section: a daily fee of £1500 per day for 10 days, for 20 participants generated a cost per delegate of £750.
A discussion led to a review of how the training programme itself was structured and whether it could be streamlined. The conclusion was that it could be condensed into two 4-day modules (instead of the previous 5 days) and that the number of participants could be increased to 26 with no impact on quality. The new equation, including an increased daily rate of £2400, generated a cost per delegate of £738.
Furthermore, it was possible to demonstrate additional direct cost savings to the company because of the reduced number of hotel nights required for each module, plus some indirect savings because each participant is away from their home base for less time.