Procurement gets a Ferrari

Posted on October 31, 2008 | Filed Under Negotiation Success Range™ (NSR™) | Leave a Comment

K&R does a lot of work near year-end.  In addition to delivering Negotiation Skills Workshops, we directly consult on sales that are projected (or sometimes just hoped) to close before December 31st.

Having had many of these discussions lately, one thing struck me as a pervasive problem.  Many sellers who consulted with us said something like this: “Procurement told me that they need to reduce costs with us to 10% below last year’s spend.  I have a plan to do it, and with that plan I think I can close this deal by year end.”  To me, this is Procurement asking for a Ferrari (or for any other very hard to obtain item).  Let’s talk about why.

Let’s recall the K&R Negotiation Success RangeTM.  The NSRTM is a tool for analyzing the range in which both parties can succeed in a negotiation.  It is often used with price, but can apply to service level agreements, completion dates or other factors which have ranges.  In working toward the NSRTM, each side will make an initial offer.  In almost all cases, the parties believe that there will end up being some movement in the offer - initial offers are not usually final.  Because of this, a plan that says, “Let’s meet Procurement’s 10% goal” will usually end up leaving money on the table that the seller could get.

In one of our sessions, I asked the seller if he considered that if he met the 10%, that Procurement might decide that 10% was not really the number, and ask for 12%.  He replied, “They have done that before.”  Apparently it wasn’t a sufficient learning experience.  Most of the time, if the stated goal is 10%, the real goal is somewhat less, and it worth your while to work on finding out how much less.  That return will not only count this time, but it will affect your starting negotiation next time.  The payback for sellers can be large.

Also, the business value that your solution generates should be related to the cost. In addition to the NSR considerations above, a number of the people we worked with had clients that were growing at 30% a year.  Procurement still asked for a 10% year-over-year savings. If your products or services are useful in either supporting or generating that client growth, you should consider if it is reasonable to support all rates of business growth with the same cost reduction target. Many times it isn’t.  Perhaps cost as a percent of revenue could decline by 10%, but on an absolute basis, it may be completely unreasonable to ask for and get a flat 10% reduction.  Procurement (again) asks for and gets a Ferrari.

I told my wife I wanted a Ferrari. I’m driving a Honda Civic Si.  I really like it. A real-life example of the difference between an initial offer and an acceptable alternative which is some (considerable) distance from that initial offer.  I don’t even think about the Ferrari anymore. Much.  (td)

BEA and Oracle (Part 3)

Posted on February 8, 2008 | Filed Under LeverageNegotiation Success Range™ (NSR™) | Leave a Comment

When last we looked, BEA had asked for $21/share, Oracle had offered $17, and key shareholder Carl Icahn was threatening the BEA board with a lawsuit to force action on the offer.  Now everyone is in agreement at $19.375.  What happened?  It’s negotiation leverage and the Negotiation Success Range™ (NSR™) in action.

Disclaimer: we know nothing from the inside. We just read the news, and view it with an expert negotiator’s perspective.

First, some background: BEA needed to restate earnings for 3 fiscal years as a result of an “options problem” and their stock mostly lingered below $15 for five years.  Oracle made an offer to buy BEA for $17/share.  BEA countered with $21.  Icahn said the company should be auctioned and he would take the decision to the shareholders, with or without BEA board cooperation.  In our last BEA/Oracle article, we discussed the concept of the NSR™, and how these positions and actions may have been used to either establish the price range for discussions, or be an attempt to shut them down.  Without inside knowledge, we can only suggest alternative interpretations.  In most negotiations, this is the case — the parties involved have different sets of information and different motivations — no one knows the thoughts of both sides. (And we don’t know the private thoughts of either side.)  That’s why they call it “negotiating”.

What did BEA do?  Made a deal with Icahn to show him the books, so that he would be more supportive of the higher price.  Subsequently, they got him to agree to actually delay their shareholder meeting by a month, and drop his lawsuit.  This removed Oracle’s leverage to use a member of the BEA “team” (Icahn) to pressure the BEA board to accept the lower offer.  Next, they announced significant profit growth (on slightly declining revenue), bolstering their argument that $17 was not enough.  Finally, in either a response to an approach from BEA, or for another reason, HP said they had “no interest” in acquiring BEA.  This weakened BEA’s position, since it removed HP as a “bidding competitor” against Oracle.  As an interesting side note, HP may have made the statement because of unrelated motivations.  While they have a relationship with BEA, they also have similar relationships with other vendors who compete with BEA.  One result of the HP announcement could be to calm the fears of HP’s other partners that they might be disadvantaged if HP bought BEA.  It is often the case in negotiations that the actions of the parties are driven by unrelated motivations.

Back to BEA.  Having competitive bidders does not change the value of BEA.  However, BEA is valuable in different ways to different bidders.  So, Icahn’s desire to have an “auction” will generally work to raise the price - if there are willing bidders.  One mistake BEA apparently avoided - publicly, they never said, “Well, if not $21, how about $19.95?”  This could be a signal that they lacked confidence in their position.  And, unless they give a business reason for the change, the discussion changes from a negotiation to “haggling”.  The way out of this is to change your position with a business rationale.  For example: “Our revenue and profit projections were being revised , and we didn’t want to err on the low side.  Based on our released projections, we believe that $19.95 is a fair price.” That is an example of a Principled Concession™ — one related to business value.

What did Oracle do? October: offered $17. November: we are “happy to pay” $17.  Later in November: “we will no longer pay” $17. December: Oracle’s CFO says, “no friendly deal can be done with the current BEA board at a price and terms acceptable” to Oracle. January: the gavel bangs at $19.375.  There are several lessons here.  First, the CFO may have hurt his personal credibility and Oracle’s credibility.  Why?  Because his public positions about the “fair price” didn’t match the end result.  This may have been a considered strategy - testing the resolve of the BEA board.  Good negotiators may do such things.  We only suggest that the decision to take strong public positions and then alter them should be done with the implications and risks in mind.  (Remember this if Oracle makes an offer for your company.)  If BEA had rushed down to $17 through lack of confidence, it would have been seen entirely differently.  An alternative approach would have been to say, “I am very pessimistic that a friendly deal can be done (and so on).” It leaves room for a change in position.  There is both art and science to negotiations.

What does all this demonstrate?  Negotiating is often complicated, but some principles apply again and again:  K&R’s NSR™, the concept of negotiating leverage, the use of Principled Concessions™ when you change your price or terms, the importance of your credibility as a long-term asset, and bringing your team together.  The result for BEA was a 14% improvement in the offer price within 90 days — that’s a pretty good ROI. (TD)

BEA and Oracle (Part 1)

Posted on October 26, 2007 | Filed Under Negotiation Success Range™ (NSR™) | Leave a Comment

In recent articles, it was reported that BEA “spurned” a $6.7 billion offer from Oracle to purchase the company.  It amounted to $17 per share.  BEA countered with a statement that $21 per share would be a more reasonable figure.  These actions established a “Negotiation Success Range™” (NSR™).  Negotiation skill will determine at which end of the range the deal closes (if it does).  Beyond skill issues, BEA also may feel pressure to answer to stockholders who may find the offer attractive as a share price.  So BEA’s counter-offer could have one of several meanings, including:

  1. A deal can be struck, probably at some intermediate price between $17 and $21.  The parties must find compelling arguments to make the other side move closer to closing.
  2. BEA may have no intention of accepting.  If a seller makes an offer that is too high, buyers often walk away, and BEA might want this.  It depends on BEA’s knowledge of their own value.
  3. BEA may need to convince their shareholders that BEA’s value is far above the offer.  In this case, the counteroffer may be more an argument to convince their shareholders than a real counteroffer.

In the same article, Oracle was reported to give BEA a deadline to decide, or Oracle would directly approach the shareholders.  This is an attempt, common enough in negotiations, to apply pressure by escalating to a “higher power” (shareholders, in this case).

These tactics are the same ones that are used in everyday commercial negotiations: escalation, creation of an NSR™ within which a deal can be struck, and appealing to people with different motivations than the ones you are presently dealing with.  You should be prepared to see them in your negotiations.  We can help.  We bring superior knowledge of negotiations to add to your superior knowledge of your negotiating counterpart at your client or supplier. (TD)

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