FRONTIERS CONNECTION COLLABORATION EXCELLENCE READINESS

How to Handle
“Extreme”
Negotiations
with Suppliers
By Jonathan Hughes, Jessica Wadd, When negotiating in high-stakes, high-risk (“extreme”)
and Jeff Weiss
situations with suppliers, the tendency is to act quickly
and forcefully. Yet acting in haste to take charge and look
Jonathan Hughes is a partner and
head of the sourcing and supply chain in control often leads to disappointing, even dangerous,
practice at Vantage Partners, a global results. A better approach: slow down the pace of the
strategy and management consulting negotiation, understand the other side’s position, and
firm. Jeff Weiss is a partner and
work toward a more collaborative negotiation process.
head of the firm’s sales effectiveness
practice. Jessica Wadd is a senior
consultant at Vantage Partners,
and a member of the firm’s supply

I
chain practice. They can be reached n 2010, Jeff Weiss and Jonathan Hughes, together with
at: [email protected]; Major Aram Donigian, published an article in the Harvard
[email protected]; and Business Review entitled “Extreme Negotiations.” That
[email protected]. article explored lessons from the U.S. military about
negotiating in high-stakes, high-pressure situations—
lessons with potential relevance to complex negotiations in
the business world. A key insight underlying the ideas from the
article is that negotiation behaviors tend to be deeply ingrained

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and are often reactive rather than deliberate, especially This article is a companion to the Harvard Business
under conditions of significant stress. By carefully ana- Review piece, and addresses how the same approaches
lyzing how military officers in theater were often able can be employed in especially challenging negotiations
to defuse dangerous situations, five replicable strate- with suppliers. Over the past several years, we have
gies emerged. Although these strategies differ from helped sourcing and supply chain executives and profes-
most people’s default reactions to stressful negotiating sionals employ these strategies when traditional forms
situations, the ability to implement them can indeed be of leverage seemed unavailable (for example, with single
learned. and sole source suppliers), and/or when business-critical

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Collaboration

suppliers seemed to be engaging in opportunistic or even most (if not all) the leverage—and the sourcing team felt
adversarial negotiation tactics. These strategies are not that leverage was increasing with every day that brought
only useful at the bargaining table, but can (and should) expiration of the current agreement closer. The sup-
also serve to reshape planning and positioning far in plier was the largest in its industry, and seemed clearly
advance of formal negotiations. to be the only company with the scale and capabilities
necessary to meet the pharmaceutical company’s needs.
Strategy 1: Broaden your field of vision, Additionally, through various strategic projects and sup-
question assumptions, and re-think ply chain initiatives, the supplier had become deeply
objectives. embedded in the customer’s organization, such that
Start by identifying key assumptions and subject them to switching costs, even if there were an alternate supplier,
scrutiny; use negotiation planning and execution to con- were deemed to be unacceptably high.
tinually gather new information and revise strategies Despite substantial pressure to move quickly and
accordingly. decisively, the sourcing team decided to conduct a series
of focus groups with internal stakeholders to identify
To do this . . . and prioritize what they would like to see improved
Avoid Instead, try under a new contract. To their surprise, the team dis-
covered high levels of dissatisfaction with the incum-
Assuming you have all the Being curious: “Help me
facts: “Look, it is obvious understand how you see bent and unexpected openness to considering alternative
that…” the situation.” solutions (both for day-to-day equipment and services,
as well as for support on strategic supply chain initiatives
Assuming that the supplier Being humble: “What do I
is biased (but you’re not). have wrong?” underway with the current supplier)—even if that meant
a difficult transition period. Moreover, further evaluation
Assuming the supplier’s Being inquisitive: “Is there of marketplace options indicated that there was another
motivations and intentions another way to explain
are obvious (and likely this?”
supplier that might be able to provide the full breadth
nefarious). and global scope of services that the company required.
In a significant deviation from their original plan, the
One hallmark of “extreme” negotiations is a feeling of sourcing team decided to conduct a non-traditional RFP
danger that creates pressure to act fast, and thus reduce process—one consisting of a series of workshops with
the level of perceived threat. In the face of this pressure, both the incumbent and the potential alternate supplier.
negotiators often begin acting before they fully assess the During these sessions, they shared information about
situation. They react, quickly, based on a gut feel and ini- the company’s R&D strategy and key long-term objec-
tial perceptions. Given the added pressure to look strong tives for the category. They also explored the two sup-
and gain (or remain in) control, they tend not to test or pliers’ unique capabilities and alternate approaches to
revisit their initial assumptions even as the negotiation meeting the company’s needs.
progresses. As a result, they often negotiate based on Pursuing this approach initially felt risky to some mem-
incomplete or incorrect information. This often leads to bers of the team. They feared it would signal weakness to
conflict, impasse, or, at best, a resolution that addresses both suppliers (particularly the incumbent), by implying
only a part of the problem or opportunity at hand. too much reliance on external ideas and expertise. They
A senior sourcing executive for the research division also expressed concern that by sharing more information
of a major pharmaceutical company approached us a about the underlying business drivers for the category, and
few years ago for assistance with a complicated, high- by failing to define highly specified requirements for sup-
stakes negotiation. The company had a contract with a plier solutions, they would lose what little leverage they
single-source supplier that comprised hundreds of mil- might have. Nonetheless, careful assessment of the strat-
lions of dollars in spend. The supplier appeared to have egy’s risks and benefits eventually persuaded everyone

One hallmark of “extreme”

negotiations is a feeling of danger
that creates pressure to act fast.

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that this was the best course of action.
During this process, the company discovered that Stressful circumstances
not only could the non-incumbent supplier effectively often produce a temptation
step in and continue supporting several ongoing strate-
gic projects, they had also invested in new technology to use coercion or threats to achieve
and capabilities that would enable them to deliver sub- objectives—even when reasoned
stantial savings and improved service levels as well. After
careful “apples-to-oranges” analysis of two very different analysis shows that such efforts
proposals from the suppliers, and extensive consulta- are unlikely to succeed and may
tions with internal stakeholders and end-users, the com-
pany moved the business to the new supplier. well backfire.
As a result of slowing down, re-evaluating the mar-
ketplace, consulting extensively with internal stakehold- components upon which their business was highly depen-
ers, and engaging in collaborative “what if” discussions dent. The supplier was demanding a significant price
with both the incumbent and the alternate supplier, increase—one which the company could ill afford to pay.
the company realized millions of dollars in immediate However, any disruption in supply of these components
savings, identified a number of major opportunities to would have jeopardized production of a flagship product,
implement innovative solutions, and captured savings with potentially devastating revenue implications.
over the life of the contract of over 10 percent of total Feeling considerable pressure, the executives decid-
projected spend (compared to a continued relationship ed they could not let the supplier (which had long been
with the incumbent). seen as arrogant and aggressive in their negotiations)
push them around and attempted to take control by
Strategy 2: Uncover underlying motivations making a counter-demand for a price reduction. The
and invite collaboration. supplier refused to even meet to discuss this. The CPO
Uncover (often hidden) motivations and concerns; take then dashed off an email offering a small price increase
responsibility for proposing possible solutions; invite the and declared the concession to now be a “take it or leave
other side to critique or improve on those ideas. it” offer. As the risk of losing the supplier increased, the
posturing became worse. Ultimately, a deal was struck
To do this . . . at a number somewhat lower than the supplier had ini-
Avoid Instead, try tially demanded, which was considered to be a victory
Asking: “What do you want?” Asking questions: “Why is under the circumstances. Unfortunately, the negotiation
that important to you?” had never turned to any discussion of why the supplier
Making unilateral offers: “I’d
be willing to…” Proposing possible solu-
demanded the price increase in the first place.
tions for critique: “Here’s a Within six months, shipments from the supplier were
Simply agreeing to, or late and quality issues began to emerge. The executive
possibility; what might be
refusing, the supplier’s
wrong with this? team assumed, not without reason, that the supplier
demands
was not making full, good-faith efforts to deliver on their
contractual obligations because they were unhappy with
Danger (a high level of proximate risk) not only cre- the outcome of the recent negotiation. Almost immedi-
ates a desire to act fast, but also produces a perceived ately, the customer began to consider legal recourse. At
need to look strong and take control. This, in turn, this juncture, they also contacted us to ask for advice.
often leads negotiators to quickly put a stake in the We suggested that before taking any further action, they
ground, and to negotiate primarily by making demands. simply ask the supplier to explain why these problems
Unfortunately, this position almost always triggers or were occurring, and offer to jointly explore how to resolve
exacerbates resistance from the other side. As a result, them. To the company’s surprise, the supplier responded
such an approach tends to produce contentious and by being very forthcoming about the fact that they had
inefficient negotiations, running the risk that no agree- been experiencing major problems with their suppliers.
ment will be reached—even when one was possible. The supplier also pointed to costly quality control and
A couple years ago, the CFO and chief procurement yield management issues due to certain recent changes
officer of a large technology company confronted a dif- in the customer’s specifications. While it took several
ficult negotiation with a sole-source supplier of critical months to fix the quality and delivery problems, they

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Collaboration

were indeed solved. And in the process, the company’s with a single-source supplier for a large capital construc-
relationship with the supplier significantly improved. tion project. (The supplier was the only one with the
Some of the individuals involved at the company capabilities and available resources to deliver the proj-
remained bothered by the fact that the supplier had ect in the required timeframe.) The supplier demanded
not been more forthcoming from the beginning. Others a huge upfront payment, before completion of any key
acknowledged a history at their company of quickly ter- milestones. Paying it would have jeopardized the eco-
minating contracts when suppliers encountered difficul- nomics of the entire project, but the utility felt like they
ties, and pointed out the disincentive this created for had no viable alternatives, hence no leverage, and thus
suppliers to be open and transparent. A few individuals no choice but to pay it.
felt that it was inherently unfair that they had to take the We recommended a very simple strategy. Rather
lead in collaborating with a supplier perceived to have a than agreeing to what the supplier was demanding, or
long history of arrogant and even opportunistic behavior. refusing the demands, or trying to haggle over the spe-
(Not surprisingly, it later turned out the supplier felt the cific number, do the following: simply ask the supplier
customer was arrogant and aggressive, and saw their own why they were asking for such a large up-front payment.
actions primarily as a defensive reaction.) Ultimately The sourcing team did so, and was told the payment was
though, the business benefits of pursuing a strategy of needed so that the supplier could place orders with its
enlightened self-interest—versus responding in kind to own suppliers for expensive, long lead-time items. This
the supplier’s (perceived) bad behavior—yielded results was a valid explanation in theory, but in practice, the
that were undeniably far superior to what could have math did not seem to add up. We then conducted our
been achieved through any other course of action. own quick and dirty analysis, and came up with a rough
estimate of about 20 percent of what the supplier was
Strategy 3: Focus on fairness to persuade demanding.
and build buy-in. So the sourcing team went back to the supplier with
Use facts and the principles of fairness (not brute force) to this analysis and said: “We fully agree in principle that
persuade others; arm them with ways to defend their deci- we should cover your costs to purchase equipment you
sions to their constituents; focus on creating useful prec- need to deliver this project. That said, here’s our esti-
edents for future negotiations. mate of what those costs should be. What are we miss-
ing?” The team was careful not to imply in any way that
To do this . . . they thought the supplier was being dishonest or unrea-
Avoid Instead, try sonable; part of our strategy was to make it easy for the
Threats: “You better agree, Appeals to fairness: “What supplier to back down, without losing face. The supplier
or else!” ought we to do?” asked for a few days to review the numbers. When they
came back, they said that the sourcing team’s estimate
Arbitrary demands: “I want it Appeals to logic and legiti-
because I want it” macy: “I think this makes was in fact somewhat low, but that they (the supplier)
sense, because…” had based their initial estimate on some past projects
Being close-minded: “Under that were in fact quite different. So now that they had
no circumstances will I Considering constituent
agree to, or even consider, perspectives: “How could
an opportunity to conduct more detailed analysis, they
that proposal” we each explain this agree- would be willing to accept the figure the sourcing team
ment to our colleagues?” had come up with.
Afterwards, the sourcing team expressed surprise
that when asked what was behind the demand for
Stressful circumstances often produce a temptation to upfront payment, the supplier actually gave a reason,
use coercion or threats to achieve objectives—even when rather than simply saying: “That’s what we require if
reasoned analysis shows that such efforts are unlikely to you want to engage us for this project.” The team was
succeed and may well backfire. Even if such approaches even more astonished that the supplier then agreed to
succeed in the short run, they almost always breed resent- the figure we had come up with. Of course, things might
ment and sow the seeds for future conflict. Moreover, have turned out differently. Sometimes suppliers do act
even in the short term, a reliance on pressure tactics often to capitalize on the leverage they may possess to the full-
triggers a response in kind from counterparts, thus cata- est extent possible (and when they do, there are no sil-
lyzing a destructive cycle of threat/counter-threat. ver bullet solutions). In our experience, however, this is
We recently advised a major utility on negotiations quite rare.

www.scmr.com Supply Chain Management Review z July/August 2013 5

 Fairness—not only the desire to feel fairly
treated, but the desire to be seen as reason-
able and fair-dealing by others—is a funda-
mental human motivation. It is quite diffi-
cult, psychologically speaking, for individuals
Perhaps the most fundamental
to simply assert a demand and fail to offer lesson is that in the very contexts where
a justification for it—especially when asked
in a non-threatening way. Even the most
we feel the most pressure to act quickly and
aggressive negotiators, if you listen carefully, forcefully, it is best to do neither.
typically proffer some sort of justification
for their demands. When suppliers seem to have all the mollify the other side and reach agreement. After all,
power, and seem to be taking unreasonable advantage of that’s typically what their counterparts are demanding.
it, leveraging the potential of fairness to persuade is one Unfortunately, making substantive concessions in an
of the few strategies available—and it is often surpris- effort to buy a good relationship almost never works.
ingly effective. Doing so almost always creates a perverse set of expec-
tations and incentives; it invites future extortion, and
Strategy 4: Actively build relationships breeds disrespect or even outright contempt.
based on mutual trust and respect. Recently, a large multi-national company was rene-
Deal with relationship issues head-on; make incremental gotiating a half billion-dollar contract with their main
commitments to build trust and encourage cooperation. IT outsourcing provider. The negotiation was extremely
high-profile within the company. The negotiation team
To do this . . . was under great pressure to (1) improve service levels
Avoid Instead, try and reliability (from unhappy constituents who had
Trying to “buy” a good Exploring where and why recently experienced major outages, and who had come
relationship with a supplier a breakdown in trust may to suspect that the supplier had deliberately made prom-
by making offers or conces- have occurred, and how to ises they knew they couldn’t keep) and (2) cut the over-
sions that are not justified remedy it. all IT outsourcing budget by at least 15 percent (from
on the merits. executive leaders who were taking heat from Wall Street
Requesting (or making)
Demanding concessions concessions only if they are to improve the bottom line).
from suppliers to repair a legitimate way to com- Reacting to this pressure, the team informed the sup-
breaches of trust (actual or pensate for losses incurred plier that trust had been broken by the recent outages,
perceived). due to non-performance or and that if the supplier wanted to rebuild trust and prove
broken commitments. its desire to be a good partner, they needed to grant a 20
Always treating suppliers percent price concession. Not surprisingly, the supplier
with respect, and always pushed back. Yet confronted with an unhappy customer
acting in a manner that will and an important contract renewal, the supplier eventu-
command theirs.
ally granted a price decrease very close to the 20 percent
demand. At first glance, the negotiation seemed success-
Negotiators under extreme pressure are often tempt- ful from the customer’s perspective.
ed (consciously, or sub-consciously) to leverage a coun- Within a year, however, both the customer and sup-
terpart’s desire for a good relationship to extract conces- plier were in trouble. When new quality and perfor-
sions. However, holding a relationship hostage to extract mance problems arose—which were quite clearly caused
a better deal usually carries a high long-term price. Such in large part by the customer—there was no foundation
tactics breed resentment and often leave deeper issues for jointly engaging in effective root cause diagnosis and
unaddressed, which contributes to future problems that problem-solving. Mistrust and resentment were rampant
could otherwise have been avoided. on both sides. Consequently, neither customer nor sup-
Alternatively, high-stakes, high-risk contexts fre- plier was willing or able to listen objectively to the oth-
quently produce a temptation to try to “buy” cooperation. er’s concerns or suggestions, no matter how reasonable.
In order to build a relationship, or rebuild trust, many Furthermore, the supplier’s margins on this account (one
negotiators choose the quick and easy path of attempt- of their largest) had been reduced to the point where
ing to trade resources or make concessions in order to many of their top people had been re-deployed to other,

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Collaboration

more profitable accounts. Also, the supplier had put off Consciously change the game by not reacting to the other
investing in certain key technology upgrades that would side; deliberately take steps to shape the negotiation process
likely have improved performance. as well as the outcome.
As problems continued to get worse, conflict esca- Threatening circumstances produce a strong desire
lated, and ultimately the customer triggered a clause to avoid harm. This, in turn, short-circuits strategic
that led to termination of the agreement—forcing them thinking, and often leads negotiators to give in on criti-
to go through the pain of finding and negotiating with cal issues to avoid or minimize immediate threats. The
a new IT outsourcing provider, and managing a costly result, unfortunately, is often an agreement that creates
transition process. substantial future risk exposure.
During our facilitation of after-action reviews of this Several years ago, the president of a leading technol-
outcome, a consensus emerged among procurement and ogy company’s largest division committed to enter into
end-users that the situation might have turned out differ- a new market. His sourcing team led a market scan and
ently had they invested time and effort in exploring how evaluation process that identified a supplier with unique,
to work more closely with the supplier—rather than only cutting-edge technology to work with on new product
pushing for an immediate cost-reduction. As a result of offerings. Unfortunately, the potential alliance with
lessons learned from this experience, the company funda- this supplier was announced before the agreement was
mentally changed their model for governance of major out- fully negotiated, and expectations within the company
sourcing relationships, which until than had been focused and among the analyst community quickly grew. As the
largely on the escalation and resolution of problems. The negotiation entered into its final phases, the prospective
new governance has a dual equal focus: (1) cultivating and supplier demanded a substantial increase in NRE (non-
maintaining a transparent, collaborative relationship with recurring engineering) payments, revenue-sharing from
key service providers and (2) ensuring that a focus on hold- new, jointly developed products, and a minority invest-
ing suppliers accountable for performance is coupled with ment in their company.
openness to looking at the company’s own contributions to The senior executive and the sourcing team support-
supplier performance and delivery problems. ing him were caught by surprise, but time was now of the
essence. They had not expected to be confronted with
Strategy 5: Focus on shaping the negotiation such demands, and thus were unprepared to respond.
process, not just trying to control the Rather than seeking to slow down the pace of the nego-
outcome. tiation, the sourcing team responded by quickly telling
the supplier that their demands were unreasonable and
To do this . . . would never be accepted. The prospective supplier then
Avoid Instead, try threatened to walk away from the deal. Fearful that the
Reacting, without deliber- Talking not just about the potential relationship (and his new growth strategy) were
ate consideration of how issues, but about the pro- in jeopardy, the executive stepped in and accepted the
any action might advance, cess: “We seem to be at an proposed terms “as is.”
or impede, progress toward impasse; perhaps we should Two years later, tens of millions of dollars had been
your objectives. spend some more time paid to the supplier, new product development was way
exploring our respective
Acting without considering behind schedule, and the company found itself with
objectives and constraints.”
how the supplier is likely little recourse. In retrospect, it may seem obvious that
to perceive your actions, Slowing down the pace of the consequences of a bad deal were more costly than
and how they are likely to negotiations: “I’m not ready
the risk of delay in getting the original agreement signed.
respond. to agree, and I’d prefer not
to walk away either. I think But the risk of the supplier walking away (and of needing
Ignoring the future conse- to start the process over) was also very significant.
the issues warrant further
quences of a given action A better planned negotiation process, designed to
exploration.”
(later in this negotiation, as
well as other subsequent Issuing warning, without
minimize the time pressures that the division president
negotiations). making threats: “Unless you and the sourcing team found themselves under, would
are willing to work with me have helped (and was eventually adopted). Similarly,
to search out a mutually more robust preparation would have reduced the risk of
acceptable outcome, I can- not anticipating supplier demands that came late in the
not afford to spend more negotiation process. Finally, a less reactive and aggres-
time negotiating.” sive response to the supplier’s demands would have

www.scmr.com Supply Chain Management Review z July/August 2013 7

uncovered that the sup-
EXHIBIT 1
plier was motivated not
primarily by opportun- Two Perspectives on Negotiations with Suppliers
ism (as we later learned).
Instead, the supplier’s A Tactical View of Negotiations A Strategic View of Negotiations

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Slow Down, Collaborate negotiators know that it is quite possible to be asser-

At core, perhaps the most fundamental lessons when tive, without being adversarial, and to be collaborative
negotiating in high-stakes, high-risk (“extreme”) situations without being taken advantage of. The strategies in this
is that in the very contexts where we feel the most pres- article are about being strategic rather than reactive;
sure to act quickly and forcefully, it is best to do neither. thinking several moves ahead about how your actions
In the absence of traditional forms of leverage that many in a negotiation are likely to be perceived by the other
procurement professionals are accustomed to relying side; and making deliberate choices that elicit construc-
on, extreme negotiations are best approached by slowing tive responses and help move the negotiation toward
down the pace of the negotiation, diligently seeking an achievement of your ultimate objectives. (Exhibit 1 sums
unbiased understanding of one’s counterparts (even at the up the perspective needed for this approach, contrasting
risk you might begin to empathize or even partially agree it with the conventional, more tactical view.) It is up to
with their positions!), and actively trying to lead them into sourcing and supply chain executives to create an orga-
a more collaborative negotiation process. nizational climate in which their negotiation teams are
Often, this approach is dismissed as a “soft” or even encouraged and equipped to engage successfully in such
naïve way to negotiate with suppliers. But successful inherently challenging negotiations. 嘷嘷嘷

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