Next level negotiation procurement – using game theory and psychology
Correct procurement decisions are crucial for the success of an organization, and negotiations are an integral part of any procurement initiative. With more than 20 years of procurement experience and with scientific insights from game theory and psychology, we take your negotiations to the next level.
Negotiations are an integral part of everyday life for procurement
Strategic business sourcing, annual price negotiations, make vs buy decisions, supplier claim management and many more are all examples of what procurement departments need to tackle on a daily basis. Procurement professionals must also negotiate internally with stakeholders from engineering, quality, marketing, and other departments to incorporate their needs and requirements and thus make sure that procurement initiatives achieve a successful outcome.
Our Negotiation Excellence (NEX) is a dedicated team of INVERTO negotiation experts who bring game theory and psychological insights to the negotiation table. This expertise ensures the right choice of the overall approach to the negotiation and of the tailored negotiation strategy that takes full advantage of leverage, accommodates business needs, ensures stakeholder collaboration, and proactively addresses challenges.
How we support all aspects of procurement negotiations
We help our clients to choose the right approach ranging from conventional negotiations to auctions and thus including process driven negotiations, which incorporate the best of the two extremes. We develop the tailored procurement negotiation strategy, wargame it with our client, and negotiate together. We also look at the big picture by classifying suppliers and strategically using negotiation timing and negotiated business.
NEGOTIATION APPROACH
Conventional negotiations
Negotiations are run in a conventional way whenever we or our clients are involved in one-on-one discussions with suppliers. These discussions might follow a predefined agenda but otherwise do not comply with any strict process. Human psychology becomes particularly important, and decision trees help run negotiations in a proactive and not reactive manner.
Process driven negotiations
Negotiations that are driven by a process follow a predefined set of rules and are based on game theory insights. Depending on the business needs, these negotiations might include auctions, exclusive discussions with incumbents or strategic partners, incentivized supplier requotes against strategically chosen target lines, and many more.
Various auctions
Auctions take many shapes and forms. They might be dynamic with several bidding rounds like English or Dutch auctions or static like one-time second-price sealed bid auctions. Depending on the strategic importance of the business, supplier landscape, and our client preferences, we can conduct auctions in person, via email, or using an online platform.
Any successful procurement negotiation follows the following principles
Principles of negotiations
➔ Competition meets collaboration: Competitive spirit is an intrinsic part of negotiating. It turns negotiating into an exciting process – or even a game. As a rule, however, the “players” in negotiations do not have all the information, they are not aware of the full extent of the other party’s interests and do not know what they could still offer or what might be of interest to the other party, and vice versa. That is why, the spirit of cooperation is invaluable. Thinking collaboratively will help you get what you want as you give others what they want. ➔ Remember, companies are made up of people: o It is as simple and as complex as separating the private and professional parts of everyday life. Businesses are led by people, but if things get personal rather than stay professional, particularly during tough and possibly heated negotiations, people might get into the fight-or-flight mode. This stops them from thinking rationally, makes discussions unproductive, and can ultimately damage business relationships. Being tough on business topics but considerate and respectful with people you are negotiating with will help you get what you want and need. ➔ Choose empathy: Negotiating can be an emotional business. You might think you have to choose between being tough and detached to keep a clear head in negotiations, or being sympathetic to the other party and their feelings, if you want to reach an agreement, but it is not the only choice. You can also choose empathy. It will allow you to assert your interests without being too harsh and to show understanding of the other party’s feelings without having to feel the same way. ➔ Be proactive rather than reactive: It is important to prepare for all potential courses of action if you want your negotiations to succeed. It is not only about having a plan of action, but also about being proactive in preventing unfavorable developments and in steering negotiations in the right direction. The right trade-offs, the right people, the right timing, and the right approaches are the key to success. Thorough preparation will help you to establish what “right” means in your business situation. ➔ Never lie: There are many reasons why lying is a bad idea. It is hard to keep track, both of the bigger picture and of the consistency of your claims. You will look foolish if your lies are discovered, because there is no easy way to justify them. It is a tempting strategy in the short term but detrimental to your reputation in the long term. You might feel you either have to tell the truth or lie, but that is not actually the case - you can simply decide not to share everything.
Game theory and psychology as key elements in negotiations
Why does game theory play a key role in negotiations?
Game theory is a study of strategic interactions, and negotiations are an excellent example of those. It provides a structured way to analyze leverage and to find the optimal way to apply it, to anticipate supplier’s reactions and to make offers that achieve the most favorable responses. It can be used to tailor the procurement negotiation strategy and to change the negotiation game to achieve the best outcome. Game theory is also at the core of process driven negotiations, which are a powerful negotiation approach in competitive environments. Competitive forces might be strong in general, but they do not always work due to procurement challenges like bespoke requirements or complex supplier relationships. That is exactly where the negotiation approach offered by NEX can be of help.
How does psychology affect negotiations?
Psychology is the study of human mind and behavior and humans are an inherent part of negotiations. It provides a foundation for understanding why people can influence and be influenced by others and thus why negotiation tactics work in the first place. It can also help successfully apply and rebuff the tactics to achieve the desired outcome. Psychology also becomes indispensable in conventional negotiations when there is no process to hide behind and a lot depends on negotiation skills of the people involved in negotiations. This is common in monopolistic environments when negotiating with brands or technical giants, and this is exactly where the emotional intelligence and psychological insights offered by NEX can be of help.
Get to know our procurement negotiation experts
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