Tag Archive for: Negotiation

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HOW MUCH for a soap dispenser??

Stories about apparently grotesque over-payment by public bodies for mundane items is always good for a headline or two. We saw that back in the days of the Private Finance Initiative (PFI) in the UK, with reports that schools or hospitals were having to pay hundreds of pounds to get their maintenance provider to carry out minor tasks. During the National Audit Office’s 2011 investigation into PFI it was revealed one school paid £333 to have a lightbulb changed.  That was often down to very badly constructed contracts, with suppliers expecting to make most of their money from ongoing service charges of that nature rather than from the initial financing and construction. 

In the USA, it often seemed to be military spend where costs were dis-proportionate; the famous ‘$435 hammer’ back in the 1980s, for instance. Now there is another example hitting the media this week. A new report from the Defense Department inspector general accuses aerospace and military giant Boeing of massive overcharging.  The contract with the US Air Force allows Boeing to buy the required spare parts for the C‑17 military transport aircraft, and the Air Force reimburses Boeing for those purchases, according to the report. About 220 C-17s are used by the Air Force, Air National Guard and the Air Force Reserve Command. 

But overcharging accusations covered around a dozen spare parts (which does not seem many, to be honest). The much-quoted example was soap dispensers used in the bathrooms of C-17 military aircraft, where the overcharge was estimated at 7,943%. So the dispensers were charged at some 80 times the price of similar commercially available products.

“The Air Force needs to establish and implement more effective internal controls to help prevent overpaying for spare parts for the remainder of this contract, which continues through 2031,” said Defense Department Inspector General Robert Storch in a statement. 

Boeing has issued a holding response, saying they are reviewing the report, “which appears to be based on an inapt comparison of the prices paid for parts that meet aircraft and contract specifications and designs versus basic commercial items that would not be qualified or approved for use on the C-17″.

This is often the truth behind these stories. The specification for special ‘military’ items turns out to be significantly different to the apparent equivalents we might pick up in Walmart or on Amazon. However, that often means that it is a different type of Bad Buying that is taking place. It may not be a rip-off by the supplier, combined with poor scrutiny and contract management by the buyer. It may actually point to a poor specification.

So why exactly would a basic commercial soap dispenser not be fine for a cargo plane? Its not as if they fly at the speed of sound or anything.  In fact, do you really need a dispenser that needs to be cleaned, refilled and so on, at all? Why not a simple bar of soap?  The military and indeed some other public bodies do have a history of over-specifying, sometimes without realising just how much that can add to the costs.

It’s worth remembering that an industry-standard specification, or something that is readily available, perhaps even an item sold to consumer buyers, is almost always a lot better value than something we design and specify ourselves. If the most fundamental way of saving money is just  by saying “don’t buy it”, the next best and most basic route is to say, “buy something simple”.

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Memories of Charlie Hurley – Negotiating with your Hero!

Charlie Hurley passed away on April 22nd at the age of 87. That name will mean nothing to most people but to football fans of a certain generation, and in particular Sunderland fans, he will be remembered with great affection and respect. I met him twice, once at the age of about six, then again many years later, as I described in my “Bad Buying” book. Here is the relevant extract.

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After I left the Mars Group, I worked for a smaller food firm that owned a dozen small to mid-sized businesses. I worked on acquisitions as well as looking to save money through “group buying”.  One firm supplied several of our businesses with plastic trays for frozen and chilled meals, so I wanted a meeting to discuss a central deal for all our firms – with the aim of achieving a substantial discount on current pricing, of course.

Their sales director came to see me. I didn’t quite catch his name on the phone, but he introduced himself as Charles, and after a few minutes, asked me where I was from – “I’m picking up a bit of a north-eastern accent”? Yes, I said, born and bred in Sunderland. Ah, he replied. I worked in Sunderland for a few years. What did you do? I asked.

“I played for the football team. I was Charlie then, Charlie Hurley”.

My jaw dropped as I processed this. Hurley, a skilful and imposing centre-half, was voted “Player of the Century” by Sunderland fans in 1979[1]. He was team captain and also captained the Republic of Ireland team. Some consider him the greatest centre-half of his generation, and if he’d been born the other side of the Irish Sea, would probably have won a 1966 World cup medal. He was also my boyhood idol, the first person to sign my little red autograph book, in 1964 when I first stood outside Roker Park players’ entrance with my father. 

When we met, he was by now in his fifties, and he told me that he now pretty much ran his father-in-law’s packaging firm. He’d been more successful than most of his old footballing mates, as well as still being in a happy first marriage, unlike many. Players were not highly paid in the 1960s, and many ended up working as taxi drivers or running small shops, or more sadly, drank themselves to death.

Of course, when we got back to business, my whole negotiating approach had disappeared completely. I seem to remember he offered me a 5% “group rebate” in return for making his firm a preferred supplier, and I accepted, still in a daze.

The message, which I will come back to later, is that personal issues can affect the outcomes in buying negotiations, and rarely in a good way.  The best negotiators keep emotion and personal feelings out of the equation, even if they know how to use “fake emotion” when it is appropriate. But generally, if you are looking to negotiate well, try and avoid coming up against your childhood heroes on the other side of the table!

[1] https://www.safc.com/history/the-roker-roar/charlie-hurley

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Don’t Be a “Bad Negotitor”

As it is the holiday season, here is a short extract from my Bad Buying book rather than a fresh article – taken from the chapter on negotiation.

Nothing Else Matters   

While this is not a “how to negotiate” textbook, let’s just run through a few basics, in the spirit of avoiding failure.  We talked about the BATNA concept earlier, and that broadens out into the importance of planning before face-to-face negotiation. Understand the market, your own situation (including your BATNA) and the other party’s situation too. In addition to that, here are three more vital points to consider; they are relevant to anyone who has to conduct business (or indeed personal) negotiation of any kind.

Don’t take it personally – in business negotiations, don’t get hung up on the people involved, your personal pride or status (as in my Charlie Hurley story).  Look on this as two parties coming together to solve a business problem; i.e. reaching a satisfactory agreement for the purchase. You can be tough, but you should never be personally abusive or insulting. And in business, very few negotiations are pure one-off bartering. It’s not like buying a carpet in the souk, where you will never see the trader again in your life. In business, you tend to work with people after the contract is agreed, and you may well need their support at some point. If you called their CEO a “fu****g idiot” during the negotiation, you can guess how they will respond if you need their help later!

Be creative – the classic task in negotiation courses is to ask two people to share an orange “fairly”. They end up halving it, of course. But if one really wants the orange for the zest (which comes from the skin) and the other wants the juice… then both can have, in effect, the whole orange. Understand what the other party really wants and think about options and creative ideas for the negotiation. One trick is to find aspects that the other party values more than you, that you can trade for benefits you do care about. For instance,  suppliers often value highly your endorsement or being able to use your organisation as a reference when they’re trying to win other contracts. That costs you nothing – but has a value to them. You can trade that for a longer warranty period, better payment terms, maybe even a price reduction. Or if your organisation is cash-rich, very prompt payment may be worth a lot to a cash-starved supplier.

Try to be objective – determining what is a “fair price” is rarely easy. But if you have evidence, your negotiation will be smoother and more successful. “Your price is too high” might work fine as a negotiation stance. But “I’ve benchmarked your price against two databases, done my own analysis of what I think it costs to make this product, and I’ve got prices from two competitors. I do want to work with you, but all of that suggests you are still 20% above a fair market price” is much more powerful.

Negotiation is a fascinating topic, and as well as the classic books, I’d recommend looking at the latest thinking in behavioural psychology from Nobel Prize winner Daniel Kahneman and others, in books such as Thinking Fast and Slow[1]. Their work has increased understanding of how issues such as priming and anchoring affect our negotiations.  I was taught years ago that the first offer in a negotiation could set the tone – so if a realistic price might be around £100, offering just £50 might reset the seller’s expectations. I always had my doubts about this, as you can look stupid if you make a really unfeasibly low offer. But the psychology of “priming effects” suggests there may well be something in this tactic after all, if used appropriately.

[1] https://www.penguin.co.uk/books/563/56314/thinking–fast-and-slow/9780141033570.html

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Why Did Apple Sack Top Procurement Guy?

Tony Blevins was sacked as Apple’s VP of procurement recently. He was at a car event in Pebble Beach with his Mercedes-Benz SLR McLaren when he was approached by TikTok creator Daniel Mac, who asks the owners of expensive cars what they do for a living. Blevins answered “ ‘I have rich cars, play golf and fondle big-breasted women, but I take weekends and major holidays off. Also, if you’re interested, I got a hell of a dental plan.’ 

That’s an approximate quote from the 1981 comedy movie, Arthur, where Dudley Moore says ‘I race cars, play tennis and fondle women, but I have weekends off and I am my own boss.’  So it wasn’t an original comment, which doesn’t really excuse him – also, if you are going to say something some might consider offensive, at least make sure its funny!

Anyway, the video hit the Internet, staff at the firm complained to Apple HR, and he went. He apologised, telling Bloomberg, “I would like to take this opportunity to sincerely apologize to anyone who was offended by my mistaken attempt at humor”.  

Blevins reported to either the CEO Tim Cook or COO Jeff Williams. He was known as the Blevinator and had a reputation as a fearsome, tough negotiator, with stories of his tactics reported in the press – including getting FedEx to hand-deliver his rejection of a price proposal to their rival, UPS!  To be fair, some of his tactics seem pretty smart. Running what was in effect a real-life reverse auction by going from supplier to supplier in their hotel rooms, negotiating to drive down price on glass for the new Apple office seems a reasonable approach to me. He also rotated staff every couple of years to avoid them forming close relationships with suppliers – again, many firms do that and to some extent it is not a bad idea from a complacency or indeed corruption poot of view.

But we might wonder why Apple needed to take such a tough line with suppliers given their very healthy profit margins. The simplest answer is – because they can. Power is still the basis of commercial relationships, as Professor Andrew Cox always told us. Where Apple hold that power, why wouldn’t they use it with their suppliers? We could argue however that sacrificing a little margin in order to develop stronger relationships with key suppliers would be worth it in the longer run. And if Blevins tough negotiation actually drove suppliers out of business or out of Apple’s supply base, then it certainly wasn’t sensible.

So there are three reasons why Apple might have got rid of the Blevinator. The most obvious is the (arguably) offensive nature of his comment, and perhaps what it might indicate about his general attitude. Tim Cook, CEO of Apple, has spoken about the need to get more women into tech roles so his CPO making such comments is not the best support for that objective.

The second might be that Apple wants to move away from the old-fashioned leveraged approach to procurement and become more collaborative, working in a more harmonious manner with suppliers. Blevins might have stood in the way of that, representing as he did that previous tough approach.

And finally, in many firms, a CPO driving a supercar might ring some alarms. I remember a Ministry of Defence procurement official in the UK years ago who earned maybe £60K a year (in current terms), yet lived in a multi-million pound mansion in the Thames Valley. Surprisingly, no-one asked the key question – where did he get the money from? The answer of course was “bribes paid by suppliers”.

Now I’m not accusing Blevins of anything of that nature – I’m sure he earned plenty from Apple. Finding the odd half-million for his car wasn’t a problem for him given his likely stock options. But perhaps driving that sort of car just isn’t the sort of image a CPO should project.  And a supplier might well think, “Apple can afford to pay me a bit more for my product if its VPs are driving supercars!”

Anyway, this is a “Bad Buyer” story rather than bad buying, but fascinating, nonetheless. And if you want to learn more about it, do listen to Kelly Barner’s excellent podcast on this topic at Supply Chain Now  – it’s a very enjoyable, informative and interesting 20 minutes during which time she goes into more detail on Apple’s approach to suppliers – and how that might be changing.

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“Give Us More Money” – Handling Professional Services Fee Demands

I was talking to a friend who is (very) close to the professional services market recently, and he told me some horror stories about suppliers demanding huge price increases in response to the inflationary environment. Proposed fee rises of 20% or even more are being proposed. In one case – a pretty unusual situation perhaps – the supplier was looking to more than double their rates!

So how do you respond in that sort of situation?

  1. If you have a contract in place, make sure you understand what that says. A contract that covers professional services input to a long-term project or programme might for example have included some price adjustment clauses. Make sure you know what they say before you get into negotiations!
  2. Remember that the opening proposal from any supplier is often a case of positioning or anchoring, as behavioural psychology guru Daniel Kahneman would put it. If a firm is suggesting a 30% fee increase, they may well be hoping that they end up achieving 10% – which a naive buyer might see as a success for them given the starting point. You might even get in first on the anchoring front and suggest a 10% fee reduction given the difficult economic times your organistion is facing…
  3. Suppliers will also stress the most extreme cost drivers when they justify their proposed increases. Even professional services firms will be moaning about the dramatic increases in energy costs. But that probably represents only a couple of percent of the cost base for most firms in that sector.
  4. Staff costs are of course the biggest single element of the total cost picture for firms in this sector. But inflation here is at least partly self-inflicted. If I was negotiating with PWC right now, I would be saying, “look, you chose to give your staff a 9%+ pay increase, that’s not my problem!”
  5. The other issue I would be introducing into the negotiation is the earnings of partners (or equivalent) in the firms. The proposed increases in reality are all about sustaining the income and the lifestyle of partners who are accustomed to making £700 – 900K a year (the big consulting / audit firms) and well over a million in the magic circle law firms and probably some of the top boutique / strategy consulting firms. That’s what we are paying for as customers.
  6. As in the case of any other spend category, the strength of your negotiation position depends on your options and alternatives. If you are in a position where “our CEO will only work with McKinsey and Linklaters”, then you have a problem. But this might be a suitable time to raise the issue with the CFO, and ask the question – “are we always going to be prepared to pay whatever these firms demand”?  If the answer is “yes” then you will simply get ripped off forever.

I know this isn’t easy – as a CPO I’ve been told politely to f*** off by a big firm consultancy partner when I tried to negotiate rates. “Your MD has already signed this, what makes you think you can change our agreement”?  

But you need to try and resist these inflationary demands. Remember, every extra pound, dollar or euro you give away is a reduction in your own organisation’s shareholder value, or less in the taxpayer’s pocket in the case of the public sector. And it is another step on the way to the next Ferrari, cottage in Tuscany or bottle of Latour 1945 for the professional services partners.

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Children’s Social Care – A Broken Market

Sometimes Bad Buying stories are amusing, or we can learn from events without feeling too emotionally involved. But reports last week about the procurement and management of children’s care services brought just rage and sadness.

These are children who don’t have parents to look after them, or have been placed in care. Many have behavioural issues, or addiction problems.  So keeping them safe and providing an environment where they can learn and thrive is far from easy, and perhaps that is why public sector bodies (local councils) have over the years increasingly outsourced provision of residential facilities and care. The work goes to private sector firms, ranging from very small (individual foster parents at the extreme) to larger firms, including those funded or owned by private equity.

The Times reported problems both with the performance of some firms plus what looks like a rip-off in terms of the prices charged. The average cost per week is now £4,130 per child, and there is evidence that through the pandemic, new “get rich quick” firms have come into the scene, providing poor care and facilities but taking advantage of the lack of physical inspections by the regulators.

The Times highlighted cases reported by Ofsted (the regulator):  

  • Children were able to steal knives from one home and take them to school.
  • Staff dropped a young person off at the home of a drug dealer despite being warned by police to avoid the area; at another run by the same company a child was discovered riding a bike on a motorway hard shoulder.
  • A young person at a third home was found weaving through traffic and high on drugs. On another occasion inadequately trained staff locked themselves in a car when a resident became violent. One of the three people who set up the home was a scaffolder prosecuted for having an eight-inch knife behind the sun visor of his van.

A government review of children’s social care services is underway, and an interim report was also issued last week. The review is being chaired by Josh MacAlister, the founder of Frontline, a charity that has developed a scheme for fast-tracking bright graduates into children’s social work – similar to the Teach First scheme in the education world. I have worked with Frontline a number of times, and MacAlister is one of the most impressive people I have ever met. If anyone can address these seemingly intractable issues, it is him.

However, I did smile at his comment last week (made in a conference speech) when he appealed for large firms to moderate their prices and margins.

“I would implore those of you who are owners of private children’s homes, particularly large groups, to act with responsibility to bring down costs and reduce profit-making and to be responsive to the needs of children. It is better that plans to make this happen are started now”.

Asking firms with private equity behind them to reduce profits is like asking a spider to stop making webs or a fish to stop swimming.  Josh, it’s what they do. I think we can confidently predict that his appeal will have no effect at all.

In his speech, MacAlister also cited figures published in 2020 by the National Centre for Excellence in Residential Child Care (NCERCC) and Revolution Consulting, which identified a 40% rise in independent children’s home prices from 2013-19. The 20 biggest independent children’s social care providers were making combined annual profits of £265m, at a margin of 17.2%. However, the private sector argues it provides care that is as good as that provided by councils directly, at a lower cost.

Coming back to Bad Buying though, this strikes me as both market failure and a failure of procurement strategy. When we look at which services can most sensibly be outsourced, we should consider factors such as:

  • Are the services strategically critical for our organisation?
  • Is there a healthy, dynamic market out there to buy from, open to new entrants?
  • Could we move our business between suppliers or back in-house if we needed too?
  • Will there be a reasonable power balance between us and our suppliers, enabling us to exert  some negotiation leverage?

If we carried out this analysis on these services, I’d argue that this is basically not a suitable spend category to outsource. It is very sensitive, it is difficult to switch suppliers, with limited supply in some parts of the country. Once a child is being cared for, the provider has the upper hand in negotiations, as changing suppliers is difficult.  

I don’t know whether there has ever been a national procurement strategy here, or whether every council has developed its own. I suspect the current situation has just evolved, and now we have the taxpayer spending £500,000 a year per child in some cases, and not even being sure the service is up to scratch.

There is also a market study into children’s social care provision underway, led by the Competition and Markets Authority (CMA). Maybe that – as well as the MacAlister review – will lead to a new approach to the procurement issues around children’s care. This really does need some serious thought and a national strategy. That doesn’t necessarily mean big national contracts, I would add, but it does need considering strategically, rather than dozens of individual councils trying to do their best individually.

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Here it Comes – How to Avoid Inflation-Driven Bad Buying!

Have you seen the price of compost this spring? I reckon it has close to doubled – three large bags from Longacres garden centre last year cost £10 (for 180 litres). Now, you will get just 100L for the same price.

Talk to a local builder, or gardener, or fencing expert, and they will tell you of shortages in markets such as timber, cement and other basic but vital materials. In another market altogether, farmers are complaining about a lack of workers to harvest crops, and restaurants of a lack of waiting and kitchen staff. Some are having to increase wages or other benefits to attract staff.

Without going into all the causes (Brexit, pandemic, lockdown-influenced career decisions), there is one very likely outcome here – inflation. There are already some warning signs, and consumer prices in the US jumped 4.2% in the 12 months through to April, up from 2.6% in March and marking the biggest increase since September 2008.  That seemed to take inflation from warning mode into “this is actually happening”.  But many economists believe the effect will be short-term, a blip rather than anything that becomes established.

But we can’t be sure of that. One test is whether price rises for materials and commodities then drive wage inflation, which can result in the sort of inflationary spiral we have seen in the past. But in any case, it seems likely that many procurement professionals will be facing a difficult time in terms of the cost of what they are buying. And for the younger members of the procurement community, this might be the first time they have faced suppliers coming in with demands for significant, maybe double-digit price increases.  

Those of us of an earlier vintage may even remember the days of the mid-70s, during which UK retail prices doubled over about 5 years. After moderating slightly, inflation picked up again and in 1980, my first full year as a graduate trainee with Mars Confectionery, inflation hit 18%.  Great for making your pay rise look impressive, less good for buyers. Suppliers often demanded massive price increases, and buyers would go to their boss and say, “good news, I’ve negotiated a great deal – the price is only going up 10%”!

If inflation does take off, it will also put pressure on all those procurement functions that aren’t really that capable, but have had an easy time over the recent years of low inflation, when claiming “savings” has been relatively easy. However, “cost avoidance” is never a totally convincing argument and will be even harder in an inflationary world when the CFO can see real bottom line costs spiralling.

There will also be a dilemma around locking in prices. If you think inflation has further to run, this might prove to be a very good time to negotiate long-term contracts and lock-in prices now with suppliers. On the other hand, if this is a “blip”, agreeing £5 a bag for compost now might look really silly if it is back to £3 by Christmas!  There is no right or wrong answer to this – but you will need to think carefully about the right approach, which in many case means balancing risk, cost and security of supply.

So this will be a real test for many procurement people and teams. If you want to avoid inflation driven “bad buying”, then here are three quick tips. There is much more that can be done of course, but these strike me as useful and sensible whatever your situation.

  • Market and supplier research is more important than ever in this situation. Suppliers will tell you all sorts of “facts” about the market, prices and so on. You need to be as well informed as them (better, if possible) so you can respond and understand what the real situation is.
  • Think carefully about your negotiation strategy – and if negotiations get tough, go back to basics. As well as research, look carefully at your BATNA (best alternative to a negotiated agreement), try and improve it quickly if it is week, and look at the range of negotiation preparation and approaches that might work. You don’t have to accept price increases – but you need to know how you would respond if your hard-ball negotiation really ends up with the supplier walking away.
  • That includes looking beyond price – are there other benefits you can offer the supplier maybe in return for better pricing? Or if you end up accepting some price increase, can you agree some other wins for your organisation (payment terms, additional services, etc).

There is a lot more we could say, of course, but that’s a start at least and might stimulate some thinking. Meanwhile I’m redoubling my efforts to create home-made compost. (We do have no less than four large compost bins and two “heaps”)!

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