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3-0 it's the magic number yes it is welcome back viewers to procurement basics 101 this is episode three so technically we could say that this is 103. this is where we finally get to the meet episodes one and two set the table told you what procurement is told you about the different roles within procurement this is where we start to get into strategy this episode is about buying and properly negotiating now if you know some procurement people especially some old school procurement people they'll probably tell you stories about back in the day in the golf courses handshake deals over martinis while i don't doubt that those type of situations still occur it happens a lot less frequently this video is going to cover the basic tools and strategies that most organizations use today to negotiate prices down and it doesn't involve martini sadly for your benefit and for mine let's hope this video doesn't go 40 minutes my plan is to give you sort of a cheat sheet of some basic concepts and some strategies to negotiate pricing now if you want to go deep if you want to really start to study negotiating and contracting i'm going to give you two recommendations books number one a great book on negotiating is called never split the difference by chris voss it's 19 on amazon i highly recommend it and there's even an audiobook version if you're not into reading the second book is the contract negotiation handbook by stephen r guff it's 40 but it's a really good book typically when i have new employees that are doing negotiation roles i usually go out and buy them that book it's the first thing i tell them to do is to read that book it was written a while ago but it's still really good so highly recommend it and he actually wrote a series of books on how to negotiate specific types of contracts like software contracts so he's got a series you might want to check them all out i'm going to tell you what the worst part about procurement is history i'm not talking about history books i'm talking about the fact that most of us who are doing a job today don't have the luxury or the opportunity to walk into a completely brand new corporation who's doing everything brand new and can leverage the best of the best practices that are net new and all the books that are being written today and leveraging all the best technology most of us have worked for places that have been around for a while they have culture they have history and there are layers upon layers of mistakes and problems if you work in procurement part of your job is being a detective again unless you have the luxury of working for a completely brand new baby company you're going to be going in to an organization you're going to be trying to find old contracts read old contracts hope that all of the documents and all the amendments are still there you got to go through a whole bunch of history to understand the payments the structures when the contract ends et cetera et cetera in addition to rummaging through old documents and trying to find contracts you also have to understand the relationship between a supplier and your business partner your business customer in many cases those business customers they have a favorite supplier they don't want to move away from somebody or maybe they hate a supplier that's actually doing a good job for some reason there's history it's not always clean it's not always just about service level agreements and contracts there are people involved and you have to understand the people elements of these relationships and contracts and then you also have to deal with the fact that the supplier that you're working with also has history so you may be in a situation where supplier a bought supplier b who bought supplier c and then supplier combined supplier abc spun merged into supplier d and they're all operating under different contracts and histories i'm looking at you hewlett packard so before you can negotiate a new contract or bring in a new supplier there are a whole bunch of things that you have to do you have to check on before you can move forward you have to do research on if there are suppliers that are playing in that space who are legitimate competitors you have to make sure that you didn't already have a relationship with that supplier and some previous incarnation and they royally messed up if you have an existing supplier that's already providing a good or service you have to check when the last time you negotiated the rates it could be that you renegotiated terms and prices the previous year and now is not the time to rattle their cage or could be that it's been the better part of a decade and you haven't renegotiated rates and it's time to crack that claim open i have no idea why i just used the claim analogy i find them to be disgusting one of the hardest things to do in procurement if not the hardest thing is to determine what is an appropriate rate for a good or service i don't have any magic bullets here there are some strategies that i'm going to give you in other videos but this is hard it doesn't matter if you're paying for a service or a subscription that may give you intelligence none of them are great at best they're average or mediocre at best they'll give you some insights but there's not going to be some magic subscription service or some data on the internet that's going to tell you exactly what you should be paying for a good or service well maybe for some goods you know tangible materials but it's really hard for services before i get into all the negotiating strategies i want to go back to something i said earlier about how it's hard to go back and find old paperwork and contracts you may be lucky your company may have invested in a contracting tool where all the contracts are loaded and are relatively easy to find or you may work for a company that keeps all of their contracts in a shoebox or on an electronic sharepoint or a folder those are two very different things and if you're in the situation where you have no electronic solution or you have all the documents scanned in a folder well you're not going to have a very good time so if you don't have a real tool for contracts i'm going to make a recommendation and this is really important before you go off and do a negotiation or you start bidding on contracts you have to know what your inventory is you have to know what you're playing with and if you don't have a tool that gives you that information you got to go dumpster diving what does dumpster diving mean well you're going to be putting a lot of information on an excel file so i would recommend you start an excel file you start going through the contracts that are in your purview in your space and you start to track down when the start date is when the end date is what the total contract value is if you have a breakdown year-over-year spend write that stuff down it will be invaluable trust me try to write down who your business partners are your business customers their expense centers or budget codes right you want all that stuff lined up in a neat little table so you can go back and reference it later and if you're in a situation where the supplier has multiple sows statements of work or change requests that's a really good way to track everything down and make sure you have everything you need before you go off and the last thing you want is when you're starting to compare prices between a new supplier and your existing supplier and you suddenly find out that there is scope that you haven't included with the new suppliers pricing not a good situation once you have a good inventory of your contracts you'll start to get a better feel for what should be renegotiated and when you may have a situation where you just signed a contract you're going to leave it alone you may determine that it is a low-value supplier the prices don't change much it's not a situation where you need to revisit and reopen the contract for renegotiation procurement resources are not unlimited you have to pick and choose your battles you're not going to be able to touch every contract every year and you have to decide what is the most strategic some contracts you will just renew and move on to the more complicated and sophisticated sows engagements and opportunities for savings so if you are going to make a supplier re-bid or bring in other suppliers to evaluate their services the time-honored way to start that rodeo is to do a request for proposal an rfp sometimes you may see that designated as an rfx the x is a variable because it could be a request for information a request for proposal there's probably 50 other things that they call it but an rfp you're reaching out to a variety of suppliers that may be able to satisfy the good or service that you're looking to buy so again they're typically competitors of the existing supplier that you're working with assuming that you have an existing supplier or service that's already in-house in most cases that is what's happening if you haven't viewed episode 2 this is a good time to do so because i'm going to reference the supplier relationship manager the person executing the rfp should be working with their supplier relationship manager to determine competing suppliers in that space they should be aware of them they should have some degree of market intelligence on them and the combination of the negotiator and the relationship manager should be working together to come up with a list of potential suppliers in many cases these are suppliers that you're already doing business with for other accounts and for other services an rfp is a great opportunity to address some of the ills of an existing supplier if you have a situation where the certain supplier is not responding fast enough they're not getting goods fast enough they're if they're providing software their uptime isn't great this is a great time to restructure your requirements because when you push it out to bid all the other suppliers will be negotiating that so even if you never have the intention of changing the supplier you're going to change the variables and what you're paying them on whether it's again uptime or some other component of the service they provide response time delivery time you can get them to improve that contractually and also reduce price that's the beauty of an rfp you're getting multiple suppliers to compete for your business and they're all very aware that this is happening but it's extremely important to set very good requirements when you send that rfp out if the requirements aren't good all the responses are going to be terrible and you're going to be spending all of your time reworking those responses to make sure you're getting the things that you need you have to be clear and you have to make sure that your customers clear on what they want the second great pricing reduction tool is a good old-fashioned reverse auction auctions are fun they're dramatic they're visual this is a situation just like an rfp where you're bringing a bunch of suppliers together they're competing for your business and what happens is they're logging into a tool they're setting their prices they're watching their competitors do the same and then they're consistently dropping the prices you get to sit there and watch the prices go down you get to sit there and basically watch the supplier do your job for you auctions are awesome and it is extremely cool to watch the supplier bring those prices down but you're building a trap an auction is a trap that a procurement person is building for a supplier the supplier knows that they're walking into the trap but you have to design it you have to have an expected outcome i'm going to say this and it's a pg-13 word you cannot half-ass the design of an auction you may have situations and auctions where you can award multiple companies parts of your business you can parcel out certain pieces of the work to multiple parties so you have to be very careful in how you design it and you have to have a strategy on what you're expecting to do one of the benefits of splitting the awards out is that you're keeping all of the suppliers active and engaged they may be losing horribly in one area but they know that they might be able to win another section so they're staying in the game it's all psychology you have to know how to play it as i mentioned before you may have a situation where you've recently signed a contract or you have a business customer that does not want to change suppliers and they don't want to do an rfp event and we can talk about the politics of that you should still push for these situations because it's for the benefit of everyone but let's assume that you're not in a position to do that then you're forced to leverage the existing data that you have with the supplier let's say that the supplier hasn't been hitting all of their service level agreements let's say that their delivery has been slow let's say there's been some issues with performance let's say that there's issues with the overhead they've been turning over staff that you've outsourced to all those things can be used to help drive prices down when you're in the middle of a renegotiation you can also threaten an rfp no incumbent supplier wants to go through an rfp event it's their business to lose they don't want to be put in that situation so you can push on them to reduce prices to avoid an rfp event now that's not something you can consistently do at some point you're going to have to do the rfp or an auction but you can threaten through a couple of renewal cycles a related point to performance data is market data as i mentioned earlier it is extremely difficult to get good market data to get good pricing data about suppliers however it is relatively easy to get information about suppliers in general whether it's organizational changes stock performance other market conditions leadership leaving divestitures and mergers six being successful or failing all of that is data that you can use to negotiate it's time consuming you have to set up a lot of google alerts if you don't have a subscription service that does this stuff for you but it is possible how do i know this because i've spent the last eight years doing exactly that you can check the source and you can see for a fact that i have been doing this for literally eight years every single week checking the suppliers that i care about to determine if there's something going on that i can leverage for a renegotiation and i can assure you when you bring up the fact that they've just gone through a massive reorganization and laid off thousands of employees and you question how they're going to be able to properly support you yeah that will catch their attention for sure one last thing i want to cover before i end this video because it's going kind of long let's hope i can edit it down is payments once you've landed on a supplier that you want to do business with that you want to sign a contract with before you celebrate at the signature and everybody's happy make sure you understand how the supplier is getting paid and when the supplier is getting paid now we're going to go deeper into this in another video but i think it's important to cover some of it here when you're in the middle of a negotiation when you're working on terms and pricing you don't typically think about net payment terms and payment structure at the end of the contract there may be a quick little paragraph in there and you don't give it a second thought but give it a second thought in many cases when you're negotiating a contract you're in a position to dictate when payments are released sometimes it's based on milestones or quarterly payments but for an ongoing multi-year contract the likelihood is there's a monthly set payment term and you can control when that payment is made so instead of giving a supplier a payment in 15 days 10 days 30 days why not 60. hold on to your money for an extra 30 days and collect the interest on it there's a multitude of ways to do that but just basic contract terms you can push those payment terms out from 30 to 60 days maybe 90 days and if the supplier is insisted about being paid sooner make them give you a discount for it make them work for it don't give that away for free and since i am someone who is currently in procurement operations i would be remiss if i didn't also say when you're signing that contract make sure you understand how the supplier is going to get paid is it a purchase order is it an electronic check is it a manual check is it some other type of payment term is it a credit card understand that before you sign the contract or as you're signing the contract make sure that your accounts payable department is aware make sure all of those steps are lined up you don't want to be three months out from contract signature and the supplier is knocking on a vps door saying we didn't get paid understand how the supplier gets paid it's not time consuming but it can be extremely time consuming after the fact having to track all that stuff down trying to find out where manual check went that can kill a whole day so avoid it be proactive and understand how your suppliers are paid so that pretty much covers episode number three thank you for watching again hopefully it wasn't too long my fingers crossed i appreciate you taking the time to watch this video and we'll be back next week with another one