A speech to Salomon employees by Warren Buffett included the words: “Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless”. In his famously succinct and incisive way Buffet put his finger on a fundamental principle which must to be borne in mind by any negotiator – the difference between Money and Value. Money can come and go, but something like Reputation is what a business is built on – the long-term success and very survival of a business depends on it. It takes a long time and effort to build it, but it’s very easy to lose, and often once it’s gone, it’s gone. So, it needs to be protected, almost at any cost. Once a business has lost sight of those aspects that represent Value, for itself and for its customers, it is usually on an inevitable and downward spiral, until it can find it again.
This article discusses the concept of Value and the role that it plays – or not, as the case may be, in negotiations. The article will explore what defines Value for a person or an organisation, the obstacles to negotiating in a Value-creative way and finally seek to provide some advice to help you and your organisation extract more value from your negotiations.
I spent several years working in the buying office of a big UK supermarket; during that time I was responsible for many categories. One of my roles was running the buying team responsible for the Health & Beauty category. I remember when a buyer joined my team from the Grocery department, his name was “John”. One of the categories John had been responsible for previously was rice; rice is as close to a “commodity” a supermarket gets. John had spend much of his time buying thousands of tonnes of rice at a time from many parts of the world. He had had a shortlist of suppliers, they could all supply rice of equivalent quality, and their service levels met our specifications; therefore the negotiations would all be focused on one thing and one thing only – price. As cordial as the human relations with his counterparts may have felt, ultimately his negotiations were of a transactional nature.
As soon as he joined the Health & Beauty team, the first thing John tried to do was improve margins. After years of focussing largely on price, this was his “comfort zone”. Several months’ negotiations ended in deadlock with his main counterparts – some of the biggest brand owners in the world. Communications broke down as he invoked the buyer’s ultimate lever – “cutting out day to day contact”. What, rather predictably, happened over the next few months was that his categories’ performance started to suffer; our market share stagnated while our main competitor’s was going from strength to strength. They had the most eye catching point of sale materials, they were launching new products earlier, they seemed to have the best promotions, exclusive packs, etc. In the meantime, John was holding out for better prices from his suppliers…
John had to undergo something of a paradigm shift to understand a valuable lesson about Value. Value is a relative and sometimes elusive concept, it varies from company to company and even from one department to another within the same organisation. Value in the world of hair care, skin care and shower products was less about the gross margin, and more about creating a shopping experience for our customers which made them want to buy premium products, week in, week out. Value came from having a clearer, brighter shopping environment, with the right mix of innovation, exclusive initiatives, promotional activity and competitive prices, among many other things – this produces higher and more consistent sales, and higher profits. It was about facilitating consumer “trade up” to premium products, feeling good about it and increasing basket spend; that was the most efficient source of incremental profit. Once he understood this, John turned his attention to other ways to extract investment from my suppliers, which in turn helped us deliver value to our customers and to our business.
However, to generate all this Value, he had to learn to work with his suppliers rather than against them – he was forced to understand what Value meant to them too.
Value can be defined as the output of all those activities and assets which help a business meet its goals, solve its problems and deliver profit.
While every business needs to make a profit, different businesses have different ways of making that profit; they have different business models, according to the markets in which they operate and according to their chosen strategy. This drives what they define as Value. It’s not difficult to see how an airline like Ryanair, “Europe’s largest low-cost airline” is likely to consider items such as cost reductions and logistic efficiencies as most valuable, whilst a business like Virgin Atlantic, for example, is more likely to place the highest value on such things as innovation, luxury furnishings, and whatever brings a better travel experience to its customers. Absolutely.
And yet, is this always necessarily the case? What if Virgin Atlantic did have to look closely at its bottom line in the light of a fall in customer numbers? What if Ryanair felt that they needed to upgrade the quality of their service in the light of negative customer feedback or media coverage?
The point is, what a company defines as Value is not something static, but in fact it is also ephemeral, it can shift more or less radically according to changes in its environment (economic, social, legal, etc), in its performance and in its strategy.
“What is Value for you?”
A useful way to assess what might be valuable to another company is to utilise a hierarchy of needs. The diagram below is an example of a hierarchy of needs for suppliers of consumer branded products to supermarkets. A company may consider valuable the opportunity to develop joint business plans with its customer, as it delivers security; however, at a different point in time business circumstances may change such that the more tactical elements nearer the bottom of the pyramid become bigger priorities.
The hierarchy of needs underpins many of the requests that a company may make. It’s important to understand the fundamental needs and goals that a company has, because, as the saying goes, there are many ways to skin a cat. When people ask for something, it is usually a solution to a problem. So, a retailer may ask its supplier for a discount on a particular product; it may not be possible for the supplier to consider a discount at this point in time. A conversation between the two may uncover, however, the context behind this demand and there may be several ways of meeting that need – new higher margin products, promotions, delayed payments, free stock, etc. The key is understanding the underlying needs, or in other words, what our counterpart defines as Value. Then the full range of possible solutions can be examined.
Many negotiations do not succeed in unlocking the full potential value in the deal because people simply do not investigate or understand each other’s true needs and essentially what represents Value for each party.
Tangible and Intangible Value
Value can be tangible and intangible, as Warren Buffet pointed out. Aspects like convenience, reputation, visibility, quality, exclusivity, risk, time, can be very valuable indeed for an organisation at a specific point in time. Just look at the investment that many multinationals are prepared to put behind the visibility of their brands.
In many markets, from agricultural commodity markets to stock markets businesses use hedging in an attempt to offset exposure to price changes or fluctuations and minimise their exposure to unwanted risks. In the last fifty years the range of products to hedge financial market risk has seen exponential growth. Financial risk is a value that is well recognised and one that people and organisations are explicitly willing to pay a premium for, to reduce.
However, we find that in negotiation it is all too easy to underestimate the value we create for the other party when it’s intangible, and yet this is often where the greatest value is actually found. Indeed, many of the most valuable things in life are intangible.
For example, many small businesses may place a great deal of value simply in working with bigger ones, because it enhances their reputation. Or a big business may get a lot of value from dealing with a small, niche company which can deliver an exclusive raw material, brand or service. In our experience businesses easily underestimate the intangible value they create for others.
This means that the total potential value that could be extracted from the deal is often under-optimised.
Value creating negotiations
In essence, Value is whatever is important to someone or to an organisation at any point in time. Once two people or organisations understand each other’s needs and therefore what is truly valuable for each other, then the negotiation can focus on Low Cost, High Value trades between the two. “Help me help you”, in the words of Jerry Maguire. By working collaboratively, value is created.
This is a simple example of a low cost high value deal:
I worked for a Health & Beauty retailer who always wanted to be first to market with new products. One of our suppliers was launching a new female razor, which at the time was very innovative and their objective was to maximise trial. A national newspaper with the UK’s biggest female readership was interested in giving its readers new and different promotions.
After exploring different options, the three parties came to an agreement which saw a full page newspaper advert featuring the new product and offering 1 million samples available for free, “hurry while stocks last, etc…” exclusively in our stores.
- The newspaper gave a free one-page advertising space to the razor manufacturer. In exchange they got an exclusive offer for their readers.
- The razor manufacturer gave 1 million free razors. In exchange they got free advertising, high visibility in 1,000 high street stores and trial of their new product.
- The retailer gave visibility in multiple store locations, window posters, etc for free. In return they were first to market with a new product and got an exclusive promotion driving more shoppers into their stores.
The agreement enhanced the reputation for all three parties. It created value for all three, not to mention for the fourth and ultimately most important stakeholder of all, the consumer.
Crucially, the agreement was also achieved at minimum cost to everyone. Every party invested in it what they had, which was of low cost to them and high value to the other parties. Notice how no money exchanged hands.
The inescapable reality of money is that it is, by definition, the ultimate “high cost, high value” variable for all parties. The more focused a negotiation is on money, the more competitive it tends to be.
How did this deal take place? It took some creativity and flexibility for all parties. And communication. Many ideas were brainstormed in a climate of collaboration and trust. It took a degree of respect, not only for your own need for Value, but also the other parties’. The process was rooted in an underlying assumption that for the deal to work, value had to be created for each party.
This type of negotiation is different from price negotiations in that it is focused on maximising value whilst minimising the overall cost.
The principle fundamentally is: “there is little point in me holding on to something that is of high value to you, if I could give it to you in exchange of something that’s of high value to me.”
The razors promotion story is a simple tactical example of how working collaboratively, value can be created. There are many examples of more strategic collaborative working leading to synergy, where two or more parties in effect work together and in doing so create more value than working separately. Boeing buys composite plastic wings for its new 787 Dreamliner designed and manufactured by Japanese suppliers, and then sells the completed 787s back to Japanese airlines, all with a nice subsidy from the Japanese government.
Many joint ventures are based on the same principle. Two companies will merge and the synergies resulting from their composite capabilities and cost savings result in greater profits than the total of the two previous companies and a higher stock value.
Most people can see the advantages of working in a less confrontational and more cooperative way, in theory. And yet, I hear with regular frequency words like “if only they worked with us on X, Y and Z, we could invest so much more in their business”, or “if only they looked at the whole package rather than being obsessed with Price the whole time, they might realise how much value we could deliver to their business”, etc.
There are many obstacles which conspire against value-creating collaboration. These are some of them, in no particular order:
- Collaborative working involves risk. As two parties become closer they surrender some of their power. As the level of inter-dependency becomes higher, so does the level of risk. Risk that one party may be tempted to use some of the information shared by the other party against them in some way, or disclose some of the information to third parties. Risk as raising the level of intimacy with one party is likely to mean burning bridges with others and therefore reduce their options in the future. Etc. The level of risk is just too high for some people or companies to accept.
- The obstacle may be cultural. Some organisations do not have a collaborative culture. They do not see the benefits of working collaboratively with external parties, or they simply have a culture of mistrust of third parties; fundamentally, they believe that it is unrealistic for two different organisations with conflicting goals.
- Some people get very frustrated when they can’t get the negotiation past the usual tactical levers, they feel like they’re stuck in second gear. This may simply be a function of their counterparts’ Key Performance Indicators (KPIs). KPIs drive behaviours. Let us not forget, ultimately we negotiate with individuals, not corporations.
- The blocker may be to do with capability – as per the previous point, you negotiate with another person/people. They may simply not have the commercial maturity to understand the potential benefits of looking at the bigger picture, or the skill base to work collaboratively.
- Value-creating negotiations take time and effort. The obstacle may be logistical – sometimes your counterpart simply does not have the time (or, will not make the time) to invest in the process.
- Lack of trust. This is one of the biggest obstacles to working collaboratively. To negotiate in a value-creating value you need communication. Real communication takes trust. Sometimes when the trust has been broken, it may take years or even a change in personnel to begin rebuilding it.
What can We do?
The obstacles discussed above are related to your counterpart. You may be able to overcome some of them, influence others, but ultimately you only have direct impact on what you do and your business does. If you want your people to leverage more value from their negotiations, these are key areas you should consider:
- Culture. Earlier on I discussed how an organisation’s culture can be a hindrance to working collaboratively – it is virtually impossible to change the culture of an organisation from the bottom up. If you are in a position of leadership, and you would like your people to extract more value from their negotiations, what are you doing to create a culture where this way of working is encouraged? Are you talking about Value?
Do your people understand the issues, needs and strategies of the organisation such that they not only understand, but can also articulate the definition of Value for your company to their counterparts in other companies?
What level of conversation are you encouraging to take place in meetings, in corridors and in the staff restaurant? How are you making sure that people understand the bigger picture? What can you do to engender an open minded, solution-focused mindset, rather than a mindset focused on problems and blame?
One way to clearly signal your expectations of how people should work with their counterparts is also through their KPIs. If you want your people to think and work differently, look at their KPIs. Are your performance measures consistent with the behaviours you are trying to engender?
If people are only measured on turnover and gross profit, don’t be surprised if most negotiations are about price and you notice lack of flair where value could potentially be added.
You need to get creative with your measures, because that will influence most people’s behaviours. How about starting to look at level of customer satisfaction, number of first to market launches, number of joint business planning sessions, logistics savings, net margin rather than gross margin. And how about sharing objectives across functions, in order to stimulate collaboration cross-functionally. This will facilitate Value Creative initiatives with third parties.
- Skills. Having the right mindset is not enough. People need the skills to extract knowledge from the other party, to create and maintain an appropriate climate of trust, to leverage creativity. This way of working is far more complex, it requires thorough planning and preparation. And of course, the ability to engineer and negotiate deals that really deliver the maximum value. All these skills and many more need to be honed in order to move seamlessly through the various stages of planning, information sharing, questioning and probing, idea generation, proposals, counter proposals and coming to an agreement. Not to mention the execution of the agreement.
Formal training is the way to accelerate the development of these skills, supported by on-the-job coaching on a continuous basis.
- Knowledge. The right skill set needs to produce, among other things, knowledge. It’s crucial that each party has a thorough and accurate understanding of each other’s strategy and operations, in order to appreciate its business needs and therefore what represents true Value.
There is often a difference between what people say they want and what they truly need.
Information is key. Intelligence comes from many sources – a variety of stakeholders within your counterpart’s organisation and published sources. Cross functional meetings where each side shares issues, goals and strategies are essential precursors to any negotiation. These cross functional meetings serve to identify opportunities for value creation. We need to understand what the company we are dealing with is really trying to do, and what their problems are. What is their positioning in the market? Looking at the hierarchy of needs, what are their needs? Are they trying to attract new customers? Are they looking for innovation? Are they looking for expansion? Or are they struggling to survive? The answers to these questions will determine what they define as Value.
The negotiator needs to act like a doctor diagnosing their patient’s symptom first, before switching to being an advertising’s creative director to generate possible solutions.
- The fourth fundamental ingredient of Value Creative negotiation is related to Process.
Focussing on Value means looking at the full range of possibilities, and this is complex. It requires tools and ways of working to help people plan and manage a high degree of complexity efficiently and effectively.
If your negotiators would like to work in a more collaborative way with the other party, but they feel like they’re hitting their heads against the proverbial brick wall, maybe they’re not talking to the right people. Because of their KPIs, maybe their counterparts are simply not empowered to broaden the discussion. That’s when the conversation needs to be escalated to a higher level. This is always a sensitive and risky process. The right conversations need to take place between the right people at the right time, or the whole relationship may be put in jeopardy resulting in value destruction rather than creation.
What is the escalation process in your business? Are there existing top-level relationships which can be leveraged in an appropriate way when necessary?
As has already been discussed, collaborative working means a higher level of risk. This must be evaluated against the potential benefits of a possible collaboration. It’s essential to segment your counterparts to decide, strategically, which businesses hold the greatest potential for working in a Value creative way, and which don’t.
Culture, Skills, Knowledge and Process are all important and they all need to be considered to develop Value-Creating negotiation capability. It’s not sufficient having a collaborative culture if one doesn’t have the skills to negotiate collaboratively. And it’s not enough to have the appropriate culture and skills if one has not understood what Value means for their counterparts, and so on.
Which of these do you consider your areas of strength, and which do you believe need further development? Perhaps you could start by asking your counterpart.
Value creation is not for everyone. We are not advocating that this way of working is necessarily the optimum option in all cases. Indeed, it is unrealistic to assume that it is. Sometimes, there is little or no value to be extracted from a negotiation beyond price. Sometimes, the potential value is simply not sufficient to outweigh the efforts required by this type of negotiation.
However, if Warren Buffet is right, there are some things for every organisation which are far more valuable than money itself. If you manage to identify what these are for your counterparts, and build these into your thinking, then you might be getting closer to optimising your negotiations – reducing the costs, maximising the value. And that, with the right business partners, is something worth striving for.