How to negotiate with your suppliers

As an ex-partner in a procurement consultancy, I learnt a lot about supplier negotiations, including how not to do it. In my experience, there is a way to maintain good relationships with (most) suppliers and reduce costs. In this article I’m going to cover:

• Setting the scene: what are you really trying to achieve?

• Delivery: a step-by-step guide to savings delivery

What are you trying to achieve?

Assuming that you’re not in free-fall, this is primarily about taking a scalpel to your cost base, not a chain-saw. What you’re trying to do in my experience is:

• Improve the financial health (P&L, balance sheet and cash-flow) of your business over the short, medium and long term.

• Focus on robust analysis and delivery with speed whilst being aware of the potential consequences on the other-side.

• Maintain quality relationships with suppliers, but on new commercial terms.

The way to achieve these outcomes is to follow some foundation principles at the outset:

• Data: make sure your AP data is mapped into a Spend Cube to aid savings identification

• Sponsorship: the executive leaders of the business need to take it seriously; make “supplier-optimization” and cost-savings one of your key reports in the monthly board pack

• Accountability: make it someone's job (not full time) to hunt out and deliver savings

• Reporting: put in place a comprehensive, repeatable system, for tracking savings

• Negotiation: train people in foundation negotiation skills and find a 3rd party coach/mentor/lead-negotiator for the bigger deals.

A step-by-step guide to supplier cost reduction

There are literally hundreds of books written on this topic. So, let’s boil this down to a few practical steps you can take today.

• Step 1: Data: Get your data sorted. Ask finance to extract all the supplier spend data from the accounts payable system for the last 36 months. Then, ask them to add some extra fields to the data-set including: spend category, direct/indirect, core/discretionary, contract start date, contract length, cancellation notice period, contract renewal date, payment frequency, etc. For more information, read the Spend Cube book reference above. Remember, you’ll need to run the same data extraction and augmentation process on a monthly basis.

• Step 2: Analysis and opportunity: Analyse your augmented supplier spend data. You’re looking for patterns, anomalies, outliers, anything that stands out. Talk to cost center owners and start to work out where there are potential opportunities. In my experience, it’s likely to be a lot of smaller things and a few big things. The pareto law usually applies and therefore prioritization is key.

• Step 3: Priorities, accountability and strategy: Build a spreadsheet of prioritised savings opportunities, set targets, and hold senior people accountable for delivery. Ask for their strategies in order to hit their savings target whilst maintaining good quality supplier relationships.

• Step 4: Negotiations, tracking and reporting: Start engaging with suppliers based on your analysis, opportunity identification and negotiation strategies. Keep track of progress using a 'savings pipeline' (similar to a sales pipeline). Build and maintain robust governance and reporting and share with your exec team.

• Step 5: Rinse and repeat: As savings start to be delivered, go back to step two and find more opportunities.

Conclusions

As markets tighten and client negotiations get tougher, you must look at your own non-headcount cost-base to maintain margins. There are ways to optimize your supplier spend without it resulting in a torched-earth scenario. You need data/insights, processes, negotiation skills, accountability and strong governance/reporting. If you want to take a deeper dive into this topic, drop me a line at mike@piscari.com

Mike Lander is the chief executive officer and founder of Piscari. We work with agency leaders to improve their negotiation skills and provide insights into how procurement professionals work.