I Lost $78,000 To Learn This Valuable Lesson About Negotiation
Discover the problems of blindly following the advice of others and how to take a savvier approach to dealing with procurement teams.
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How An $80k Deal Fell Apart
Six Years Later I’m Still Haunted By This
Back in 2017, I agreed to a $80k deal with a major car brand for a community project.
It was a big win and I remember feeling tremendously happy about it.
Then out of the blue, their procurement team contacted me and invited me to participate in the negotiation.
Huh? What? I thought we had already had the negotiation?
They asked me to send them my best offer.
I had learned from authors of consulting books (and blogs) to never reduce your fee without reducing the scope of work. So I asked them what their budget was, and they simply replied they were only looking for my ‘best offer'. I replied asking them what was wrong with the current quote I sent through, they said they needed a ‘best offer to work with’.
I offered to reduce the scope of work if the budget was a concern, and they replied again insisting that the scope of work must remain the same and that I must send my ‘best offer’ immediately.
I knew my relationship with the primary contact was strong and there was no way procurement would kill the project we had already both invested a huge amount of time developing.
So I replied:
‘The current price is the best offer’.
Turns out procurement could and did kill the deal.
Six months later they found another firm to do the project with.
I later learned if I had just reduced the fee by $2k, the deal would have gone sailing through. My pride (along with dodgy advice) cost me precisely $78k.
Ouch!
Two Valuable Lessons
Beware of blindly following advice
Unless someone has genuinely undertaken a study to assess which practices can be generalised across an entire profession (which is rare), their advice reflects their personal experiences at best or their need to attract attention at worst.
The latter is often achieved by saying stuff which sounds like it should work but doesn’t.
I’ve written about this before:
I include myself in this bracket too. I can write and share advice based on my observational and personal experiences, but you should always let your context and common sense overrule any advice I share here.
Understand The Incentives Of Other Parties
I know now that some procurement teams are measured by the difference between the initial price and the final price.
The procurement team had pretty much zero interest in selecting the best vendor (or even whether the project was a success). The only thing that mattered to them was getting a discount. If you offer them a discount, the deal goes through.
You can argue that this is more of a shakedown than a negotiation. And that’s true. You can also take an honourable stand against it by refusing to lower your fee.
But who really wins in that situation?
You get a reputation as someone who doesn’t know how big organisations operate and is difficult to work with.
The client has to hire someone who isn’t as good as you and the project is less likely to succeed (aside: in this case, the project failed to gain any traction).
Sure, if every consultant refused to negotiate then you might make all organisations change their ways. And if you want to spend your time doing that, go ahead. But the harsh reality is you have to adopt a flexible mindset to work with larger organisations and learn how to navigate their processes if you want to succeed.
In almost any proposal process you need to make concessions to please different stakeholders and it’s best to simply treat procurement teams as another stakeholder you need to ensure is happy.
How I Tackle Procurement Processes Today
These days I check with my primary contact what the approval process looks like.
If they mention the project goes to a procurement team, I factor this into my calculations. If I feel they are going to negotiate me down on price, I can ensure this is reflected in my initial estimate so my profit margins aren’t harmed.
Likewise, if I’m randomly surprised by a procurement person, I’m more savvy about playing the game to get a project through. Here’s an example…
An Example Of A Successful Negotiation
Around six months ago, a procurement person called me regarding the cost of an $18k project.
From memory, his pitch was:
We’ve compared your quote to those of competitors and we need you to lower your fee by $6k to secure the project.
I knew this was an outright fib (a surprisingly common fib told by procurement teams). My niche is small, I know nearly all my competitors, and we have worked with the same client repeatedly over the years. If my contact was sourcing other options, we would have heard about it (and it would’ve taken more time to source alternatives).
I embraced the fib and replied:
[Contact] already mentioned the budget was really tight so we’ve kept the figure as lean as possible. If we go any lower, this project will become unprofitable for us. If competitors can do it for $6k less, I don’t know how they’re doing that. But if you think the quality is the same you should go with them. We can’t go that low.
My goal at this point is to avoid $6k becoming the ‘anchor’ discount in the negotiation and have him concede (even implicitly) that he was fibbing about competitors).
His response (again from memory) was.
We might have some wiggle room here, how flexible can you be?
Notice he’s now abandoning the ‘you must match the competitors’ line and is looking for a new anchor point. Whatever figure I give at this point, he’s going to ask for double.
I replied along the lines of:
Not very flexible, unfortunately, what would it take to get this project through?
At this point, I’m asking him directly what would be an acceptable figure. We’re both looking for a new anchor price in the negotiation.
His response:
We don’t have the budget for an $18k project, so you’re going to have to give some ground. What’s the best you can do?"
Notice how the reasons for asking for a discount have shifted from ‘matching competitors’ to ‘not having the budget’. It’s apparent at this point that both reasons are a cover for simply wanting to show a cost saving.
I replied:
We still need to make a profit on this, so the best I can do is about $500 less. Does that work for you?
I’m trying to set the lowest possible anchor price for this discount without removing it from the table altogether.
His response was
It will need to be at least $1500 I think
That’s quite a dramatic shift from the initial $6k. At least now he’s stopped pretending his excuses are valid. We both seem to be on the same page about the game we’re playing here.
I replied:
I’ll go up to $1k but that’s as far as I’ll go.
He replied
Can you do $1200? I can approve that today.
I replied
I’ll go up to $1050 - but that’s it.
And that’s where we landed.
I suspected that there might be a limit procurement must save (probably $1k) to approve a project.
We both probably left the call feeling satisfied. He saved his company $1050 in a 15-minute call. That’s not a bad outcome. I can see why doing this with every vendor makes sense. I only gave up $1050 to get a project through a procurement team.
There are some lessons from this.
Terms like ‘at least’, ‘best offer’, ‘as high/low as we can go’ sound like absolute, inflexible, positions. Most of the time, however, they’re just tactics. As we’ve seen above, we both compromised repeatedly on our previous best position to find something that works for us.
Even if you know someone is lying in a negotiation, don’t call them out on it. That will only put them in a defensive posture and less likely to compromise. Besides, if you know one side is lying, you have knowledge they don’t. This gives you an advantage in a more combative negotiation. You can embrace the lie to your advantage.
Don’t get angry or aggressive. Both of us on the call were generally chipper. We both knew early on we were playing a game and it didn’t become aggressive or competitive. It wasn’t about either of us winning, but generally finding the limits of what we were each willing to accept. Once the figure was agreed, we chatted happily about the next steps. If you get angry, the other party gets defensive. Again, this means less willingness to compromise. You need to negotiate with a smile.
Anchor prices matter. Don’t embrace the initial anchor price in a negotiation. That $6k was exactly 33% of the project. My guess is they use this as a standard tactic in all negotiations. If you begin with their anchor price, you will end up far closer to their side of the equation at the end than at the beginning. You need to take the initial anchor price off the table and set a new one.
Give a justification. For some reason, you need to justify each figure you give. Even if the justification is paper thin it still needs to be there. People need a rationale to accept a figure presented to them.
Know your real limit. You might wonder why I was happy about losing $1050 in a 15-minute call. The answer is I knew my personal limit was $3k. Given I suspect $1k is the minimum acceptable discount, I feel this was a pretty good result for me.