Negotiation Styles: Learning the 5 Styles of Negotiation – 2023

No matter who we are, or how we express ourselves, communication is a central part of our personal and professional lives. The ways in which we communicate are partly shaped by our experiences and understanding, all of which affect the way we interact with others.

Our communication styles play an important role in how we negotiate. It can affect how we approach communications and handle conflicts with other parties. So understanding how we communicate and what impact that can have on how we negotiate can help us to be better negotiators with better outcomes. 

When it comes to negotiations, there are classically five distinct styles that people tend to use to communicate. In this article, we will look at each style and explore its strengths and weaknesses when it comes to negotiations.

What Are Negotiation Styles?

Negotiation styles, sometimes known as behaviours, are useful parts of negotiations – both in business settings and in your personal life. They refer to the ways in which we communicate, including sentiment, style, and the words we use, which are shaped by our personal traits, experiences, and background. But we are able to change our negotiation style through knowledge and recognition. 

Learning about how we communicate and how that compares to others can help us to identify aspects of each that work for us. The first step towards changing the way we communicate is to become aware of our style and other styles that are effective. We can then work on developing new skills and strategies to improve our current style, whether that is to be more effective at home or in a negotiation setting.

Why Are Negotiation Styles Important?

Whatever style we have naturally, our negotiation style can have a significant impact on the outcome of a negotiation. So part of being a good negotiator is learning which communication style to use for which situation.

The most successful negotiators can identify which style will be most effective while they are in a negotiation process and can adjust their approach. For example, a competing style may be appropriate when there is a clear winner and loser, while a collaborating style may be more effective when both parties’ interests are aligned around longer term interests.

What Are The Main Types Of Negotiation?

There are 5 common negotiation styles. These include:

  1. Collaborating
  2. Competing
  3. Compromising
  4. Accommodating
  5. Avoiding

By familiarising yourself with these 5 most common negotiation styles, you can become a better negotiator and achieve more favourable outcomes.

  1. Competitive Negotiator

Characterised by striving to win more for themselves than their counter-party, i.e. claiming value. Competitive negotiators prioritise their goals and focus on achieving them as quickly as possible. This means that they often disregard the needs or feelings of the other party – their only focus is to win.

These types of negotiators often rely on their positional power and influence to gain a competitive edge. This usually means that the outcome they strive to achieve is gained and they effectively ‘win’ the negotiation. 

However, depending on the situation, this can lead to negative outcomes. Negotiators who only communicate in a competitive style risk damaging business relationships and ultimately, a company’s reputation. It can be perceived as being aggressive and in extreme cases, bullying, in order to get their own way.

Having two competitive style negotiators on either side of the table is likely to lead to gridlock as neither will concede. 

  1. Collaborative Negotiator

Rather than focusing on the “I win, you lose” mentality of competitive negotiators, collaborative negotiators adopt an “I win, you win” mindset.

A collaborative negotiation style aims to find a balance between the needs of all parties. Usually, they achieve this by investing time in creating and proposing different solutions rather than settling for a quick agreement. They work to find a happy medium in the negotiation so that everyone’s needs are met, which allows for the creation of long-lasting partnerships.

This style is open to finding common ground. However, this style of negotiation may not be conducive to an agreement if they are up against competitive negotiators. So collaborative negotiators need to be aware of their position and not sacrifice their needs in the process to keep the other parties happy.

  1. Compromising Negotiator

The collaborative style of negotiation can sometimes be confused with the compromising style. But the key difference is that a compromising negotiator is more “I win/lose some, you win/lose some” than “you win, I win”.

A compromising negotiation style is when someone is willing to give up some of their interests to meet the other party’s needs, but not all. This can be useful when the parties involved in the process are of equal power. For example, an employee may compromise on the salary for other benefits like flexible working hours. This is the “I win/lose some, you win/lose some” outcome that a compromising negotiator seeks to achieve.

However, this can have its limitations. This style of negotiation can be taken advantage of by the competitive style who try to gain more of an advantage from the process.

  1. Accommodate

On the other end of the specturm, an accommodating negotiation style often results in an “I lose, you win” outcome. 

An accommodating negotiator yields their own needs and interests in favour of meeting the needs of the other parties involved. They often overshare information during the process in order to be liked and foster a positive relationship with others.

This style is good for situations when building a relationship with the other party is far more important than the actual outcome of the negotiation. For example, political negotiations that rely on creating long term allies.

However, in situations where a definitive outcome or agreement is needed, an accommodating negotiation style is not effective.

  1. Avoid

In a complete contrast, an avoiding negotiation style achieves a “lose-lose” model. These people avoid conflict and so avoid addressing issues completely, or uses ambiguous language so no agreement is achieved. 

This type of communicator can miss opportunities and put strain on relationships in both personal and business settings. It generally leads to no negotiation agreement happening, which negatively impacts all parties involved.

Which Negotiation Style Is Best?

When it comes to being a more effective negotiator, it is important to consider using different negotiation styles to suit the situation. The most experienced negotiators understand all of the different styles and know how and when to use them.

Each time you are about to begin a negotiation, you should consider which style or which combination of styles will best suit your aim. To do this you should think about:

  • Is it important to keep a relationship with all parties involved?
  • What style of negotiators are others using who are involved?
  • What is your natural style?
  • What are your desired outcomes?

For more negotiation tips, get advice from expert Mike Lander at Piscari.

Sources: ©ROY J. LEWICKI AND ALEXANDER HIAM, Thomas Kilmann Conflict Resolution Modes 

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Top Strategies To Make Concessions (or Trade Offs) In A Negotiation

While the thought of negotiating concessions may send salespeople into a tailspin, the principle of trade-offs is a core negotiation skill. Negotiation training and coaching is key to success, as it lays the foundation for tackling more advanced negotiation tactics later.

You have to prepare thoroughly in advance of any complex negotiation. You need to understand all the negotiation variables, then define your upper and lower limits. Then, you’ll understand what you can trade-off and when to introduce it.

This article will give you the tools you need to establish a solid foundation for negotiations involving concessions (trade-offs), allowing you to confidently tackle more complex discussions.

For the purposes of this article, we’ll use the term Trade-Off as it better articulates what you’re doing – it’s an exchange of value between two or more parties.

What Are Trade Offs in a Negotiation?

Put simply, a trade-off is when you are exchanging value with your counter-party. For example “We can reduce the price for X by 5%, if you can commit to a 24 month contract rather than 12 month with no termination for convenience”.

The Pros of Negotiation Trade-Offs

Trade-Offs in our experience are an essential part of negotiating a mutually beneficial deal. Firstly, they can help rescue a negotiation that is not going well, by addressing the points of disagreement or contention. Secondly, trade-offs can help to build relationship trust as it demonstrates flexibility as well as assertiveness.

When a salesperson is willing to make trades, it demonstrates a willingness to find solutions and can create a more positive atmosphere in the negotiation. This, in turn, can help to build trust and strengthen the overall deal.

Negotiation trade-offs can help:

1. Encourage parties to find common ground

By allowing parties to give up something in exchange for something else, negotiation trade-offs can help them to find common ground and come to an agreement that both sides can benefit from.

2. Increase flexibility

Negotiation trade-offs can provide a greater degree of flexibility in negotiations, allowing parties to explore different options and solutions. This can lead to creative solutions and better outcomes. Often deemed to create a win-win outcome, provided, it creates more value for both parties.

3. Build trust

Making trade-offs to reach an agreement can help to build trust between both parties by demonstrating a willingness to work together.

4. Resolve difficult disputes

Giving up something in exchange for something else in order to reach an agreement can help to resolve difficult disputes, as it shows that both parties are willing to make sacrifices to reach a beneficial outcome.

5. Encourage cooperation

By making trade-offs, both parties can demonstrate that they are willing to cooperate and work together to reach a mutually beneficial outcome.

The Cons of Negotiation Trade-Offs

Negotiation trade-offs can have potential downsides as well. If handled badly, they can put the salesperson in a weak position. The key thing is “an exchange of value”. If the salesperson simply yields to the customer, it’s likely to affect the profitability of the deal. Additionally, it can create tension in the negotiation and potentially damage the relationship between the parties.

Other potential issues with trade-offs include:

1. Potential to Create Unfair Outcomes

Trade-Offs can create an unfair outcome for one of the parties if not planned carefully. This can create resentment and distrust, impacting the relationship between both parties.

2. Inconsistency in Negotiation

Too many trade-offs can lead to inconsistency, confusion and miscommunication, which can lead to misunderstandings and a lack of trust.

3. Unproductive Negotiations

If a party is too quick to trade, without understanding the other party’s interests/motivations, they may miss out on potential opportunities to get better terms or a better deal. This leads to unproductive negotiations, certainly for one of the parties.

4. Loss of Leverage

Making too many trade-offs reduces the leverage of one party. This can lead to one-sided negotiations where one party has the upper hand and may take advantage of the situation.

The 4 Guidelines for Trade-Off Strategies

Follow these four trade-off guidelines to improve the quality and value of your negotiations.

1. Label and Signal Your Trade-Offs

Provide clear signposts when you’re making a trade-off “you say you need X, and on reflection, we can do Y, but we’ll need you to do Z”.

This ensures that the customer is clear that you’re not simply yielding, and that you’re ensuring the negotiations can continue in a spirit of cooperation.

2. Require Reciprocity

After clearly communicating the trade-offs that you’re prepared to make, you need to get a reciprocal commitment from the client.

The salesperson must be confident, well-prepared, and strategic in their approach to requiring reciprocation.

3. It’s a Trade-Off, not a Point Scoring Exercise

If the customer suspects you’re trying to score points, manipulate the negotiation, or overuse your leverage, it could be catastrophic. Both parties must have a clear understanding of each other’s concerns/issues, and needs, in order to reach a mutually beneficial outcome.

The important thing is that both parties agree to change something in their deal structure in order to maintain momentum.

4. Make Trade-Offs In Instalments

In other words, this isn’t a game of poker – don’t go “all-in” early. However, this can actually have the opposite effect and make it more difficult to reach an agreement. Break the trade-offs down into smaller pieces and consider when they need to be played.

Additionally, making trade-offs in instalments can make the negotiation feel more like a back-and-forth process, which is more typical and may be expected by the customer. It can also give the salesperson the opportunity to discover that they may not need to make as many trade-offs as they initially thought, and can help to build trust with the customer by demonstrating flexibility and a willingness to accommodate their needs.

Applying The 4 Trade-Off Guidelines To Your Negotiation

Making trade-offs in a negotiation is an important part of reaching an agreement. However, it is important to use them judiciously, as they can potentially lead to an unfair outcome or a one-sided negotiation. 

By following the four guidelines outlined in this article, salespeople can learn how to effectively use trade-offs in their negotiations, while still maintaining a strong position and achieving a mutually beneficial outcome.

For more support in achieving better outcomes from your negotiations, visit our training guides and information pages for more strategies and tactics. 

How to Create True Value in Your Negotiations – Top Tips Revealed

After investing time, effort and money into upskilling your salespeople, you should feel confident in their ability to negotiate and close better deals. However, being able to create value in negotiations requires more than the application of some tools and tactics. It requires tapping into the experience of seasoned commercial leaders to shape creative deals to get the best outcomes.

Negotiations are an essential part of the sales process. And understanding how to create value in the eyes of the buyer is a key factor in securing a successful outcome. But what does it mean to create value in a negotiation, and how can you do it effectively? In this article, we will reveal some top tips for creating value in your negotiations, helping you to close deals and achieve mutually beneficial agreements. Whether you are a seasoned sales professional or just starting out, these strategies will be valuable in your pursuit of successful negotiations.

What is Value Creation in Negotiation?

Value creation in negotiation is about finding a solution that meets the needs and interests of both parties. It allows both parties to walk away from the negotiation feeling satisfied, rather than one party winning at the expense of the other (i.e. win-lose distributive negotiations). To create more value for both parties (i.e. win-win integrative negotiations), a salesperson has to become a Consultant. They have to:

  • Integrate the interests and goals of participants through creative and collaborative problem-solving.
  • Focus on the relationship as well as the substance
  • Understand the inter-play between complex issues
  • Build a clear negotiation process and agree “standards” or “criteria” by mutual agreement.
  • Focus on how to increase the size of the pie, not simply carve-up the pie.
  • Ask questions, jointly problem-solve, build mutually beneficial solutions
  • Constantly build bridges with complex stakeholder groups.

Creating and claiming value are two crucial aspects of a negotiation strategy. In any negotiation, the parties may choose to adopt a co-operative, competitive, or mixed approach. 

Value is created through the process of interest-based negotiations. This involves finding ways to increase the elements of the negotiation that align with each party’s interests. This can be referred to as “joint gains” and leads to mutually beneficial outcomes, also known as a truly “win-win”, integrative solution. 

On the other hand, claiming value involves one party trying to “win” as much as possible, a process known as “distributive negotiations” or “getting a larger slice of the pie.” This leads to a “win-lose” situation, usually causes tension, and potentially causes the negotiation to break down. To claim value, one party will often try to:

  • Minimize, play-down, the value of the other party’s offering.
  • Exaggerate the value of their own offering or position.
  • Concede slowly/reluctantly
  • Out-wait the other party.

Be careful. If this is your natural negotiation style, these tactics may backfire badly. For example, if the other party feels that they are being manipulated, and they’ve thought through their BATNA, they’ll walk-away and spread the word about your aggressive tactics.

What Is A Negotiable Value?

A negotiable value is something that can be used in a negotiation to help both parties reach an agreement. It is important to understand whether the negotiable element you are offering has value to the other party. If the other party genuinely needs or wants what you are offering, it can be used as a trading tool. For example, if a salesperson knows that a customer requires customer support through an app that their company already has in place, they can use this as a value-add in the negotiation.

In simple terms, find something that costs you very little but means a lot to your counterparty.

How To Add Value in a Negotiation and become an Integrative Negotiator

1. Build Trust

Trust is a crucial element in any negotiation, and customers are more likely to engage in meaningful conversations with salespeople they believe have their best interests at heart. Building genuine relationships with customers helps to establish trust and reduce risks.

Sharing information and being vulnerable, while still maintaining appropriate boundaries, can help to build confidence and trust with customers. Be authentic and genuine in your interactions and relationship-building efforts, as customers can easily sense fakes and phonies.

Asking open-ended questions and showing a genuine interest in understanding and solving the customer’s problems helps build trust.

2. Find Uncommon Ground

To create value in a negotiation, it is important to focus on areas where the salesperson and customer have different interests and goals. Instead of addressing each issue individually, it can be more effective to consider multiple differences or issues collectively. This allows the salesperson to find ways to benefit both parties by addressing the uncommon ground between them. Focusing on individual differences or issues can cause the customer to become overly focused on finding a solution for each one, rather than considering the broader context of the negotiation. To avoid this, it is important to keep the bigger picture in mind and not get too caught up in individual issues.

3. Be Agile

Being a successful negotiator requires the ability to think on your feet and handle tricky situations. While preparation is essential, it is also important to be able to adapt to changing circumstances during negotiations. To do this, salespeople should have a clear understanding of their end goal and be able to utilize their negotiation skills and tactics effectively. Listening to the customer’s needs and being open to finding creative solutions to issues that arise is essential in successful negotiations.

4. Focus on a “Win-Win” Agreement

While it may be tempting to focus on claiming value as much as possible in negotiations, it’s ultimately more beneficial for both parties to seek a “win-win” solution. Here are some tips for salespeople looking to strengthen their chances of repeat customers through mutually beneficial negotiations:

  1. Be open and honest with the customer and communicate your desire to work towards a mutually beneficial agreement. This can help to build trust and foster a positive relationship.
  2. Develop strong interpersonal skills and take the time to build relationships within your industry. These connections can be valuable in providing informal character references and recommendations to customers.
  3. You have to help the customer understand the ROI from the solution you’re proposing. This can help to differentiate you from competitors and increase the likelihood of a successful negotiation.

Negotiation Pitfalls to Avoid

Focusing solely on your own interests

You’ve got to consciously find out about and consider your customer’s interests. What are their motivations for doing this deal? What’s in it for them personally? Once you understand their real motivations/interests, you’ll find ways to create value for both parties.

Neglecting to build trust

Don’t slip into the habit of being a highly competitive negotiator (i.e. focused only on the substance of the deal and ignoring the relationships). Building trust with the customer is crucial for successful negotiations and long term benefits for everyone. Being open, honest, and slightly vulnerable can often have surprising results. You’ll need strong interpersonal skills, high EQ, and the ability to show a genuine interest in solving the customer’s problems. To learn more about building trust, watch this excellent 6 minute video https://trustedadvisor.com/why-trust-matters/understanding-trust/understanding-the-trust-equation 

Rushing

Rushing into a negotiation and trying to secure a “win” too quickly often ends badly. It signals to the customer that you aren’t interested in understanding their real needs/issues/interests. If your counterparty is an experienced commercial negotiator, it will also back-fire on you as the complexities reveal themselves. To avoid this, simply slow down, ask open-ended questions, understand the customer’s context, and take the time to think of appropriate solutions/options. 

Lacking Confidence

On the other hand, lacking confidence and becoming overly accommodating can also be detrimental to a negotiation. It can cause customers to lack trust in the salesperson and the process and seek solutions elsewhere. Confidence is a complex topic and there are lots of books on the topic. This article is a good starting point https://hbr.org/2021/08/how-to-build-confidence-at-work 

Personalities getting in the way

In summary, this is the inability to separate the people from the problem. Avoid this by, taking emotions out of the negotiation

Summary

Successful negotiations require careful and thorough preparation, strong interpersonal skills, and the ability to see things from the other person’s perspective. By focusing on creating value for both parties and building trust, you can establish long-term relationships with customers and increase your chances of repeat business. With practice and experience, you can hone your negotiation skills and become an expert in the art of creating value and finding mutually beneficial solutions.

For more training and tips on becoming a more successful negotiator, visit our resources at Piscari.com.

Anchoring in Negotiation – 3 Proven Tactics For Better Deals

Negotiations are an integral part of business. Negotiating successfully means learning critical foundation techniques to optimise the outcome. One of these foundation techniques is anchoring, which involves setting the initial offer, or target price, to influence the outcome of the negotiation. Anchoring is a powerful tool in your negotiation toolbox, however, used badly, it can destroy a negotiation before you even get started.

Anchoring techniques are vital for sales people during the whole sales cycle, not just at the contract negotiation stage. In this guide to anchoring, we look at what the technique is and how it can be used to achieve better deals.

What are Anchor Points, Target Points and Reservation Values

Let’s get some terminology straight before we start. Here are our definitions:

  • Anchor Point: The starting point for your negotiations
  • Target Point: Where you’d ideally like to end up
  • Reservation Value: Your “least acceptable outcome”

An Anchor Point is typically the starting point of a negotiation. From the Anchor, there is then a negotiation process to land at the end-point for a commercial structure that works for both parties.

A Target Point, also known as the “most desirable outcome”, is not revealed to your counterparty. It’s your ideal outcome if everything went your way. For example, a salesperson may have an ideal price in mind (for a given scope) that they would like to obtain for their products or services.

Your Reservation Value is your end-stop, your line-in-the-sand. You also don’t reveal your reservation value until the end of the negotiation cycle, when it will naturally reveal itself. For example,  “this is my best and final offer, we can’t go beyond this point”. If your counterparty tries to push beyond this point, you should exercise your BATNA.

How is an Anchor Point used in a Negotiation?

Anchoring is an attempt to establish the main reference points that negotiations will revolve around. This anchor point can, and often is, used as a point to make negotiation adjustments – this can be things such as price points, timescales, the output provided, scope, payment terms, contract length, etc. An Anchor point is usually presented early in the sales cycle/negotiations.

There’s been a lot of research into anchoring, and not just in the context of negotiations. All the findings point towards the fact that human beings are psychologically influenced by first anchors.

Therefore, the initial price presented in a negotiation can significantly impact the decision-making process of the customer. This initial figure, or anchor point, serves as your reference point for the customer to consider when determining the value of the deal. 

However, be careful. When planning your initial offer, in order to effectively utilise anchoring bias in the negotiation, it must be realistic. So, what constitutes a realistic anchor? This is a complex topic, but here’s some principles we think you should adhere to:

  • As a seller, you should anchor-high, but be realistic. What this means is, buyers aren’t fools. They can easily research the market for value points, and may have bought something similar before.
  • Have a justification for when the buyer says “wow, that’s a lot more than I expected”. You need to be able to explain, logically, why your products/services attract a premium.
  • Be prepared for the buyer to counter-anchor – see below! You need to be flexible, and ensure that the buyer is in the right psychological mindset to negotiate around your anchor.

Challenges of Anchoring in Negotiation

There are a number of challenges with anchoring which you need to understand before using this powerful technique:

  • In a sales situation, you can’t simply throw down a random high-ball number. You’ll get found out really quickly, which will damage your credibility.
  • Buyers are savvy, you have to do more research than them to deliver a realistic high-anchor. There has to be a Zone of Possible Agreement (ZOPA).
  • Negotiation around the anchor point in order to reach agreement needs to be carefully planned. As you start to negotiate, you’re signalling psychologically with every counter-offer.
  • Experienced buyers are trained in counter-anchoring techniques.
  • If the buyer is experienced with a seller’s offerings, they’ll immediately start negotiations with their anchor.

If the two parties have wildly different expectations from the beginning, it can lead to breakdowns in communication and early aborted deals. If the customer makes the first offer (anchor) with a much lower price than the seller has in mind, it can be extremely difficult to persuade them to accept a higher price.

How to Make an Effective First Anchor as a Seller

Here’s our 3 step process to making an effective, credible, opening anchor as a seller:

  1. Do your research and get your positioning right

Talk to your sales manager/director. Make sure that your proposition pricing strategy has option-trade-offs embedded into it. Check your proposition’s positioning against your close competitors. Make sure you have an ROI argument. Scan the web for recent news articles about your prospect that could impact this deal.

  1. Design your Anchor and ZOPA

Based on your research, design your anchor(s) at the top of the market. Make sure there’s room for negotiations and trade-offs. Understand the ZOPA (as far as you can). Work out the negotiation trade-off rounds. Each round of negotiations (ideally a max of 2-3) should signal to your counterparty, psychologically, that you’re getting closer to your best and final offer for those sets of negotiation variables. This is a more advanced technique.

  1. Deliver the anchor and defences

Confidence plays a significant part in any negotiation. And confidence, for most of us, is aided significantly by preparation. Take all your preparation, meet with your counterparty, set the scene, then lay out your anchor(s) with the rationale. Note: this doesn’t mean “justifying your anchor” which can be seen as defensive and weakens your position. Again, this is a more advanced technique.

How to Counter-Anchor your Prospect’s Initial Offer

So what happens if your prospect makes the first offer (anchor)? There are proven techniques for overcoming initial anchors from your prospects. Here’s our top 3 tips:

  1. Do Your Research in anticipation of their anchor

Effective preparation is crucial for any negotiation. Conducting thorough research on the customer’s background, needs, and budget helps ensure that a selling price can be proposed that is high, yet realistic. Prepare various solutions that address the customer’s needs with different commercial models/price-points. Research the prices and services offered by competitors in order to anticipate and address any references the customer may make during the negotiation.

  1. Defuse/refute the anchor point

It’s tempting to go straight to a counter-anchor when faced with an “outrageous” starting anchor from your counterparty – don’t! First, gather your thoughts, calm the mind, and then point out, logically, why their initial anchor isn’t acceptable. Use market data/research to refute the anchor, explain why it’s absolutely not acceptable, and dis-arm your counterparty.

  1. Propose A Counter-Anchor

Once you’ve refuted their anchor, provide your own counter-anchor (with a justification). For example:

  • A prospect indicates a budget of $35,000 with a poorly defined scope and target outcomes.
  • Your minimum price (reservation value) is $40,000 for your well defined scope/value proposition. You know the comparable market price range is $40,000 to $50,000.
  • You refute the $35,000 initial anchor as unacceptable,you point to some independent market data/research validating why, you explain the value created by your product/service
  • You counter-anchor at $49,000, explaining your offer and illustrating the ROI.

Be prepared to exercise your BATNA if the prospect won’t respond to your counter-anchor. Avoid bad-deals by preparing well, knowing how to counter-anchor, and knowing your value.

Conclusions

What appears at first sight to be a simple technique is in fact far more complex. Use the techniques above to:

  • Understand the foundations, and the differences between anchoring, targets and reservation values.
  • Plan for making an effective, credible anchor(s), with confidence.
  • Know what to do when your prospect makes the first offer instead, in order to get yourself back on track.

For more negotiation tips and training, visit our advice section at Piscari.com

How To Use The Reservation Point In Negotiations For Better Deals

For Better Deals

The art of negotiation is an important skill in any business setting, and the use of a reservation point is one of the keys to success. A reservation point is the lowest point you are willing to accept for selling your product/service – we often call it your “least acceptable outcome”. Knowing how to use it effectively will help you get what you need in your next negotiation. It will also enable you to walk away from bad deals and exercise your BATNA.

This article will provide an overview of what a reservation point is and how to use it to get the best deals in any situation.

What Is The Reservation Point In A Negotiation?

The reservation point in a negotiation is the point at which a negotiator is no longer willing to make any further concessions and is prepared to walk away from the deal. It is the point at which the negotiator feels they have traded as much as they can, and any further concessions would be too costly.

This usually happens when there is an established highest price at which a customer is willing to purchase a product/service and the lowest price that a salesperson is willing to sell the product or service.

Why Is Reservation Point Important?

Having the confidence to walk away from a deal that doesn’t work for you is essential. Part of knowing when to walk away is understanding your reservation point.

Setting clear expectations about reservation points, specifically in relation to price/service offerings, is important for successful sales teams. Sales people need clear guidelines about how much leeway they’ve got when negotiating a deal.

How To Calculate A Reservation Price

In nearly every negotiation, a Best Alternative to a Negotiated Agreement (BATNA) is directly tied to a Reservation Price. Thinking through your BATNA and the trigger points is essential to knowing when it’s time to walk away from a deal and pursue your best alternative.

What Is A BATNA?

A Best Alternative to a Negotiated Agreement (BATNA) is the most favourable alternative course of action a negotiator can take if no agreement is reached or viable. It’s the minimum outcome you are willing to accept from a negotiation before you’ll walk away.

According to HBR/PoN, BATNA , there are four steps to developing your BATNA:

Step 1: List your alternatives. Think about all the alternatives available to you if the current negotiation ends in an impasse. What are your no-deal options?

Step 2: Evaluate your alternatives. Examine each option and calculate the value (financial and non-financial) of pursuing each one.

Step 3: Establish your BATNA. Choose a course of action that would have the highest expected value for you. This is your BATNA—the course you should pursue if the current negotiation fails.

Step 4: Calculate your reservation value. Now that you know your BATNA, calculate your reservation value (i.e. the lowest-valued deal you are willing to accept). If the value of the deal proposed to you is lower than your reservation value, you’ll be better off rejecting the offer and pursuing your BATNA. If the final offer is higher than your reservation value, you should accept it.

Note: The above 4 steps are a direct quote from the source material.

How To Calculate A Reservation Point

Clarity on your reservation point is essential for a salesperson to avoid two mistakes.

  • Firstly, it ensures a salesperson avoids accepting a deal that is worse than the established least-acceptable-outcome for this deal.
  • Secondly, with the right preparation, it ensures the sales person is mentally prepared to start signalling to the client that you’re reaching the end of the line.

Once a salesperson has identified their BATNA, they’re in a strong position to calculate a Reservation Point – this is a “walk-away” point in the upcoming negotiation. In a negotiation where multiple issues are at stake, a reservation point will include several variables, e.g. price, scope, contract duration, termination rights, etc.

The skill here is building reservation points that enable you to trade off variables with your counterparty. This enables them to get a win, and for you to achieve a deal that is much better than your reservation points.

Should You Reveal Your Reservation Point In Negotiation?

In short, no, never – you should not reveal your reservation point in negotiation.

As much as it can be tempting to be fully open and honest with a customer, salespeople really do need to be aware of the amount of information that is being shared with a potential prospect. 

Revealing a Reservation Point within a negotiation is one of the biggest mistakes that a salesperson can make, as it leaves them wide open to having a weakened proposition exploited. It’s important for a salesperson to play their hand wisely. Under no circumstance should they give up this information when speaking with a customer.

What will become obvious to your customer, is that you’ve reached the limit of the negotiation, beyond which, you’ll walk away and exercise your BATNA. The skilled negotiator knows how to construct an effective deal that is nowhere near their reservation point, yet is still valuable to the customer.

Apply Your Reservation Technique To Your Negotiations

From Anchoring (insert link to Anchoring blog) to Concessions (link to Concessions blog) , there are many tactics which can be included in discussions in order to achieve the desired outcome. 

The Reservation Point within negotiations is another element which can help you to achieve what you want out of your future negotiations. However, as we have seen in this article, you will need to have a clear understanding of your reservation point and BATNA before entering into any negotiation.

For more negotiation techniques and tips, read our advice section at Piscari.

7 Negotiation Strategies Suppliers Can Use To Win More Deals With Procurement

When trying to win new business, it’s frustrating not being able to set yourself apart from your competition who are vying for the same contract. Having a range of supplier negotiation strategies in your arsenal, along with a solid grasp of negotiation skills (https://piscari.com/negotiation-

training/) can mean the difference between winning and losing deals when negotiating with tough procurement professionals. 

7 Negotiation Strategies For Suppliers

  1. Build Rapport

Building rapport is an integral part of being able to get a deal over the finish line. Maintaining open communication channels with clients while having a solid negotiation strategy helps build rapport and strengthen the quality of the deal. Being responsive, attentive, and approachable is absolutely key when it comes to forming crucial relationships with decision-makers, and can often be the deal breaker if there are multiple suppliers trying to win the same contract.

  1. Reach Out to Procurement More

Build a relationship with Procurement 12-18 months in advance of negotiating a deal with them. Here’s some tactics to engage busy procurement professionals:

  • Send them your latest thought leadership, not your sales pitch
  • Follow them on LinkedIn and make meaningful comments on their posts
  • Invite them to breakfast roundtables with their (non-competing) peers
  1. Know Your Customers and Build Credibility

You can’t pitch if you’ve not done your discovery call effectively. Have a predefined list of questions that help you understand the client’s context in a lot more detail – before selling them anything.

Get reviews and feedback from your previous customers and publish on LinkedIn and other marketing channels. It’s one of the 11 touch-points for a prospect about how you provide excellent service to customers with similar requirements.

  1. Anchor Early and Demonstrate Value

Negotiation 101 is about anchoring. Your first commercial offer to your prospects has to be realistic, at the top-end of market expectations, and be linked to the value/ROI you create. Without this, you’re open to trained negotiators taking you apart.

  1. Flex Your Finance

If you need a helping hand when trying to get a deal over the line, be flexible with the payment terms that you can offer. Many suppliers request that payments be made within 14 days on invoice. However, knowing how far you go, in exchange for something else in the negotiations that are valuable to you is critical.

  1. Be Empathetic

You have to understand the customer’s negotiation context. You have to be able to empathise with them, and build a bridge towards them.

Empathy doesn’t mean weakness or yielding in the negotiation. It shows that you understand them and want the best deal for them and you.

  1. Demonstrate Your Credibility

Don’t be afraid to showcase what you’ve done for other clients (anonymised if need be). It’s important to make customers aware of your credibility and how well your company has delivered consistently over time.

Start Winning More Procurement Deals

Have a solid negotiation strategy in place to deliver more balanced deals with procurement. Follow these principles and tactics to negotiate better deals, every time, especially when you meet tough procurement negotiators.

RFP Win Rates And How To Improve Them

Every business wants to maximise its Request For Proposal (RFP) win rate – and there’s an easy way to start – Work on fewer, better-qualified RFPs.

Then, assuming you measure Win-Rate as:

(Number of pre-qualified RFPs Won)/(Number of pre-qualified RFPs worked on)

by working on fewer, higher-quality RFPs, win rates will increase. You also need to consider Average Order Values (no point in winning a lot of deals that are too small!) – have a look at one of our other blogs on increasing AoV here.

What Is An RFP Response?

On a very basic level, a request for proposal (RFP) response is a supplier’s answers to the specific set of questions that a company’s procurement team has included within their RFP. 

During a complex purchasing process with many suppliers competing for business, businesses will often demand succinct answers to the questions they’ve posed. Due to this, suppliers must recognise the importance of providing considered and realistic answers to these questions.

How to qualify RFPs and improve your win-rate

The best and quickest way of improving your RFP win rate is to refrain from bidding on opportunities that your business can’t realistically win. Companies can often assume that they have an increased chance of winning business, by responding to every single RFP they receive. It might seem obvious, but suppliers can waste countless days/weeks every year writing proposals which never pay off, and were never going to.

As a starting point, you need to use an RFP Qualification tool to objectively score yourself about “is this one we can realistically win”? Try using our FREE CALCULATOR: The RFP Qualification Scorecard 

The scorecard questionnaire will take you about 2 minutes, and will enable you to objectively answer questions like:

  • Can you meet the budget holder as part of the process?
  • Who’s the competition?
  • Do you have deep domain expertise in solving this kind of problem?
  • Is there a budget you can work within?
  • Do you have a sales coach inside the client?

Once you’ve got your score, you can then decide on next steps BEFORE committing days/weeks to fill it in.

So now you’ve decided to bid – how do you maximise your win rate?

Understand The Prospect’s Priorities

Steer your proposal in the direction of your customer’s specific needs. Instead of trying to sell the features and benefits of your products or services, use the available time you have to zero in on the problems that your customer has. Providing details of how you can solve the priority problems that customers are facing, and drive benefits, is the starting point.

Whenever I’ve been on the receiving end of an RFP response, I’ve looked for 3 key things:

  • Have they answered the exam question?
  • Have they provided evidence to support their answer?
  • Have they added value that I didn’t ask for on top of their response?

Be Persuasive With Your Proposal 

  • Summarise the potential customer’s specific needs. Tell them where you’ve seen this problem before and what you did about it.
  • Focus on what they’ve asked for. Make your response succinct.
  • Outline the outcomes that could be possible if your potential customer decides to choose your services. Show them how their life would be made easier if they were to choose your products or services. 
  • Providing clear evidence and reference points that your business is the best choice.

Differentiate Your Offer And Your Company

No one wins on the “lowest price” alone. Anyone can buy it cheap! Make it clear how you’re able to add value that your competitors can’t. As there’ll be intense competition most of the time, it’s crucial to highlight how your business’ approach is not just different, but adds significantly more value to them and reduces their risks.

Provide case studies

Show your potential client that companies (and people), like them, buy your services and get great results. You need client logos and quotes from senior people. Keep them short, and make sure they illustrate the point that you solved similar problems for other great brands.

Make Your Proposal Easy To Understand

Getting bogged down with complex corporate purchasing decisions can already be a stressful and time-consuming task. ensuring that your potential customer’s buying journey remains smooth and unproblematic will help to make your proposal seem much more attractive. Don’t overcomplicate your proposals by using terms or sentences which are unnecessary or too complex. Removing jargon and unnecessary acronyms will ensure that your potential customers will be able to clearly understand your proposition without having to spend time interpreting your answers.

A really useful tip is to make sure that your proposal is easy to skim read, which will allow potential customers to gain insight into your offering, without taking too much time out of their day. Make sure that you highlight the most important elements of your proposal and try to avoid drawing attention to every single element of your proposal. be succinct, add bullet points and draw attention to necessary elements.

Get an independent reviewer

For bigger opportunities, get someone independent to “mark your homework” before you submit it. We do this a lot for clients, and it makes a material difference to their win rates.

Proofread

It’s vital to ensure that your proposal is free from mistakes. Remember, it doesn’t matter how impressive or persuasive your proposal is if it has multiple spelling and grammar errors. 

Ensure that your proposal is proofread by other employees within your business so that a fresh pair of eyes can spot any potential errors. Remember, these proposals are an incredibly important way of showcasing your brand. Submitting this to potential customers with errors, or in an unprofessional way, is harmful to your business. Take time and care to ensure that this is the best representation of what your company can provide.

Conclusion

Did you know that RFPs can represent 33% of revenues? They are an essential part of many businesses’ sales growth plans, but they often take days/weeks to complete. So knowing how to streamline your RFP process is instrumental in driving growth. 
This article contains 7 tips on improving your RFP win rate. But if you aren’t sure where to start in writing your RFP, you can begin by using our FREE CALCULATOR: The RFP Qualification Scorecard.

How do Procurement Score RFPs, Why as a Vendor do you need an RFP Scorecard & How to Create One

Introduction

There are three parts to this article:

  • When procurement writes an RFP, how do they build a scoring mechanism so that they can work out who the best supplier is?
  • As a vendor, how do you sort out the “wheat from the chaff”?
  • As a vendor, how do you build an RFP scorecard?

This guide is a one-stop shop to understand the RFP scoring process and how you as a vendor can maximise your win rate and average order value. Once you have finished reading this guide, you can also use our RFP Qualification Calculator to have as your own RFP scorecard template.

The procurement perspective

How does an RFP process work?

There are typically 7 steps to building and running an RFP process:

  • Business requirements definition, volumes, targets, constraints, etc.
  • Establish the right sourcing strategy (e.g. in-source, out-source, supplier consolidation, Joint-Venture, re-negotiation, etc)
  • Supplier/market research and supplier short-lists
  • Develop RFI/RFP, decide on the scoring criteria and relative weightings
  • Run the RFP process, select preferred suppliers & negotiate terms, contracts and SLAs
  • Implementation planning and transitioning
  • Ongoing performance management

What Is RFP Scoring?

“RFP” is an acronym for “Request For Proposal”. It simply refers to a document which announces a project, describes the finer details/scope/objectives, and invites bids from qualified vendors to complete it. 

RFP scoring is the process whereby a numerical value is added to each element of the vendor responses within an RFP response (proposal), to establish who should be short-listed. RFP Scoring is used so that a relatively fair and unbiased decision can be made about which vendor to put through to the next round.

Ultimately, as a buyer, what you’re trying to achieve is:

  • Finding a way of comparing all vendors on a like-for-like basis.
  • Enabling the budget holder and other key stakeholders to have influence over how criteria should be weighted.
  • Enabling the scores of multiple stakeholders to be aggregated/compared once the responses are in

Types Of RFP Scoring

There are at least 6 different ways procurement set up the scoring for an RFP. You often won’t know as a vendor which they are using, unfortunately. However, a good quality RFP should make it clear what the criteria are for scoring responses.

Here are six ways RFP scoring is setup:

1. Basic scoring

To complete basic scoring during RFP scoring, there needs to be a set score given to each criterion (usually 1 to 10). Each criterion is given the same weight, as they are equally important within this type of scoring. 

While this is the easiest and most basic scoring method, it’s not always the best method, as not all elements typically have the same value.

2. Combination

The combination method is a method whereby each criterion is given a weight by having its own score. One criterion may have a higher score than the other, due to the importance that they have within business requirements. 

3. Distinct weightings

The distinct weighting method is often a great middle ground between basic and combination scoring. This method allows each criterion to be measured on the same scale, regardless of their importance. The main difference with distinct weightings is that criterion has a weight, which is then scored and multiplied to give it a total weighted score. 

This method makes overall RFP scoring incredibly easy and is a great way of ensuring that the most important elements within a business’ requirements are represented fairly. 

4. Hierarchical structures

While businesses may want an incredibly detailed evaluation method in place, it’s often the case that the more complex an RFP is designed to be, the more in-depth the evaluation method needs to be. 

The benefit of a hierarchical structure is that it makes it possible to group criteria together, so that each group can be weighted, rather than each individual criterion.

5. Lowest cost compliant

Using the Low-Cost Compliant method is a two-stage process:

Firstly, a review of the technical/functional criteria using a minimum pass mark based on the sum of the weighted technical scores. Secondly, proposals which progress past this initial stage will be considered based on the cost, with the lowest-cost vendor being awarded a contract.

6. Best value

To carry out the Best Value method (often called Most Economically Advantageous Tender in Public Sector Procurement or MEAT), the cost and technical criteria are each given an individual weight. For instance, the cost might be worth 20% and the technical worth 80%. Using this percentage weighting for example, means that the technical elements are given much higher importance than the cost. 

How Do Procurement Work out the Scoring and Weighting Allocation?

1. Develop your supplier evaluation criteria

These types of criteria can typically be divided into 3 main categories:

  • Managerial Capability
  • Technical Capability
  • Price

To decide on the criteria and weightings, you need input from all stakeholders to ensure that nothing is missed. Asking each stakeholder to list the things which are most important to them will allow procurement to whittle down the list to form a comprehensive set of evaluation criteria.

The next stage is to use these answers to prioritise the business needs when evaluating vendors, for example:

  • Functionality and Features: businesses can determine which features are essential and which move much down the priority list 
  • Implementation: How quickly can a solution be implemented, what are the risks, etc?
  • Customer Service: How will the vendor support the service?
  • Price: Is the lowest comparable price the most important thing, or is it worth investing more in order to gain the desired outcomes over the long term?
  • Innovative or proven solution: Is there a requirement to become market leaders and use innovative products, or is it more important for the business to rely on tried and tested methods?

2. Determine the importance of each evaluation criteria

Next, assign each category a set of questions. Then, assign weightings and score range for each question/set of questions.

3. Scoring proposals

Let’s say a question has up to 10 points. The way a buyer typically scores it is as follows:

  • Up to 5 points: understood the question and answered it fully
  • 5-8 points: understood the question and answered it fully and, provided strong evidence to support their answer
  • 8-10 points: understood the question and answered it fully, provided strong evidence to support their answer, and, provided additional insights/ideas that we hadn’t considered that will be valuable to our business

The Vendor Perspective

You’ve now understood how procurement creates these RFP scoring systems. Now, you need to decide if you should bid, and, how to maximise your win rate.

What is a Vendor RFP scorecard?

It’s a way of you deciding whether you should bid, no bid, or ask for more clarification. Responding to an RFP is an expensive business. It can take up weeks of people’s time and end in frustration if you don’t win.

The Vendor RFP Scorecard enables you to objectively score an RFP to see what you should do next.

How do you build an RFP scorecard?

You need to build a set of questions into a spreadsheet and allocate a score and weighting to each question. You then answer all the questions for this specific RFP and depending on the score you get, you bid, no bid or seek clarification.

Example questions to put into your RFP Scorecard include:

  • Are we already on the Preferred Suppliers’ List?
  • Can we meet the Economic buyer and/or Procurement for a meaningful discussion before submission?
  • Do we know why they are tendering and do we have a compelling story that addresses their needs?

There are a lot more questions, typically 9-12 in total, that you should be asking yourself in order to qualify for any RFP.

Rather than build your own, you can simply use Piscari’s RFP Scorecard that we’ve put online for you, it’s free to use.

How do you maximise your win rate if you decide to bid?

There are some simple things you can do, which, if applied consistently, can have a big impact on your win rate:

  • Use the RFP open window for written questions wisely
  • Always answer the exam question fully and provide evidence
  • You’ve got to provide additional value and insights to get full marks
  • Know your competition and how they pitch
  • Propose alternative commercial models in addition to the one they’ve asked you to complete.
  • Big bids always have multiple stakeholders with different perspectives and unique needs, e.g. Marketing, Procurement, Technology, HR, etc. Ensure your bid response covers these different perspectives.
  • Get someone independent to score your draft response

Conclusions

As a vendor, before you rush into bidding for an RFP, stop and think about the following:

  • Has it been well thought through by the buyer? Is the spec clear, are the objectives clear, are the scoring criteria clear?
  • Is this more focused on Cost than Capability, and if so, is that a route you want to go down?
  • Have you scored the RFP, should you bid, no-bid or ask for more clarification?

How To Manage A Contract Variation

What’s the problem?

For both the client and sales teams, tackling contract/Statement-of-Work (SoW) variations can be challenging. Often, SoW variations aren’t formally raised, the dreaded scope-creep starts, and both parties get frustrated.

The real problem here is three-fold:

  • Both the client and supplier need to fully understand the contracted obligations in the SoW and associated Service Level Agreements (SLAs)
  • The supplier needs a way of formally capturing variations to present to the client for discussion
  • Both parties are trying to maintain the quality of the relationship as well as the focus on deliverables and targets

As you can see, it’s not only complex, but it can also be very stressful, particularly for the supplier PM/AM.

Creating a contract variation template, and associated governance, that the client (including procurement) and sales can use, will keep everyone on the same page and errors will be significantly reduced.

This guide will help you to create and implement your own contract variation template and process that you can use right away.

What does good look like for variation control?

In Shangri-La, everything is perfect. The client is clear about the need for a change, the service provider writes a clear variation and price, and the client agrees and signs. The reality is very different as we know.

So, a great target to aim for as a supplier, in our experience, is this:

  • When you start delivery, or you’re newly appointed to an account, set-up a meeting with your client counterparty lead. In the session, review the SoW, any variations to the Ts&Cs, SLAs/targets and any unresolved issues. This ensures that there is a clear understanding about what is expected, what’s in-scope, and what’s out-of-scope. This will also flush-out what was intended, but nor contracted!
  • Then, work with your client to ensure you have a clear, mutually agreed, template for variation control (you can download ours free here) and an associated governance model. For clarity, governance simply means the way something works overall (process) and the way it’s controlled.
  • Then, set-up Quarterly Business Reviews (QBRs) if you haven’t already, to keep track of progress, variations, and targets. This would include reviewing Variations raised, approved and rejected in the quarter.

How Can I Vary A Contract (Ts&Cs) and/or the SoW?

Generally, in order to be able to vary a contract, there would need to be an agreement made by both parties to make these changes. Such changes should always be made in writing and this is where the use of a contract variation template would come into play, to ensure that all amendments are recorded accurately.

Imposing a unilateral variation (a change which can be made by just one of the parties) is usually only valid in very specific situations. When you’re negotiating contracts/SoWs, you need to ensure there are no unilateral variations allowed by the client – this can lead to significant problems in our experience.

Methods Of Varying A Contract 

  1. Written Variation

A written variation is the most commonly accepted way of changing the terms and conditions of a contract. The original contract should include phrasing which states that the only accepted way of making changes to the contract is in writing. This is often known as a “no oral modification” clause, which plainly states that agreements or amendments to the contract cannot be made verbally once signed.

  1. Unilateral Variation

As a general rule, variations to contracts cannot be made unless both parties agree to this. However, an exception to this rule can occur if both parties agree in advance (contained within the original contract agreement) that either one or both sides can make a change to the contract unilaterally. Having clear guidelines within the original contract in regards to specifically which terms can be amended unilaterally, is critical. Our advice, hold firm on refuting these clauses be included.

  1. Variation By Conduct

This type of variation normally only applies to contracts where a contractor may have specific deadlines to meet. If one of the agreed parties either does, or doesn’t do something, which has an impact on the other party meeting that deadline, then a term can be created to extend this deadline by a reasonable period.

4. Variation by Oral Agreement

Most contracts include a No Oral Modification clause (NOM) to ensure that any variation has to be agreed in writing vai a formal variation.

Why is Formal Variation Control Essential?

Why has formal variation control become so important? Anecdotally, and based on lots of research (and court cases) because it prevents arguments, mis-interpretation and costs. It also makes good commercial sense.

Specifically, these are just some of the benefits:

  1. Improve Efficiency

Having a standard template for variations, an agreed process, and a document repository, makes life faster and less ambiguous.

  1. Mitigate Risk

Having a standardized approach to variations allows for better oversight across all agreements. Standardisation, checklists and risk assessments enable more robust variations to be put in place.

  1. Minimise Costs

A comprehensive template and process will minimise the impact of hidden/unexpected costs.

  1. Maintain and Grow Better Relationships

Although often counter-intuitive, formalising variations actually improves relationships. Done in the right way, they are a great way of opening a dialogue between both parties to reach a negotiated agreement.

  1. Maximise Value

Variations can be a way of creating value for both client and supplier. When opportunities arise to grow sales and/or increase profits, variations are a great way of refining the scope and associated costs/benefits. This can then be circulated around key stakeholders for comment prior to agreement.

Practical Points When Managing Variations

While it’s important to show clients and suppliers that your business is open to contract negotiations and amendments, there are some practical points that need to be considered when creating a future-proof contract variation template and process

  1. Standardise And Centralise Your Agreements

Having contracts, SoWs and variations stored in a central system is essential to strong governance. Making sure that key contractual documents are easily located and searchable ensures that accurate records are being kept, especially if the agreed contracts happen to come under scrutiny.

  1. Keep Track Of Obligations

While most of us will sign a contract and then forget about it until there may be an issue, service providers need to ensure they’re delivering what was contracted. As a supplier, you must keep track of the obligations that you’ve agreed to, both within the original contract and any contract variation that may have happened.

Solely relying on a team or individual employees to track obligations is both risky and too much of a burden to place on staff members. Human errors are inevitable when dealing with many different contract variations.

  1. Work out the thresholds for when a variation is required

Clearly, if the client has requested a minor change to a piece of copy you’ve written, it’s not a variation! You’ll need an experienced PM/AM to work out when it’s appropriate/essential to raise a variation – it requires commercial judgement.

  1. Is every variation chargeable?

The answer is no! When a variation is required, it doesn’t always mean you’re going to get paid for it. Sometimes, you’ll take a commercial view that the variation is agreed, but there won’t be an associated fee to the client. In our experience, the act of going through a formal review of the variation is often sufficient to make all parties realise the variation isn’t essential. Or, it is essential but in the interests of developing long term relationships and value, no fee will be charged. It’s also an excellent way of reviewing changes at the QBRs.

Conclusion

Having a robust, mutually agreed variation template and associated governance process is essential. It delivers better outcomes, builds longer term/stronger relationships and is simply better business.

See our free downloadable resource:

Contract Variation Template

Download a contract variation template by Piscari here.

What Is The Difference Between Procurement, Purchasing And Sourcing? 

Regardless of where you are on your sales journey, understanding how “purchasing” works is always an important foundation skill. There’s nothing worse than winning a deal with a client, only to find out that they say “you’ll just need to talk to procurement and you’re all set”.

So, in this article, we’ll set out to explain:

  • The differences between these similar named terms
  • Why they’re important functions
  • What it means for you as a sales person

How do these terms inter-relate?

The best way to describe it is with a diagram:

At a high level:

  • Strategic Sourcing defines needs and identifies the right kinds of suppliers
  • Procurement runs a process to secure the right supplier for a particular need and negotiates terms/contracts
  • Purchasing is the transactional part of the process and includes raising purchase orders, checking contracts are in place and loading details onto systems

Note: depending on the size of the organisation, all three roles may be performed by the same person, or they may be entirely separate.

What Is Strategic Sourcing?

Strategic Sourcing (or simply Sourcing) is the term used to refer to people concerned with sourcing where materials and products may come from.

This role is more aligned with trying to find the “where” and “who” rather than the “what” or “how”. For example, sourcing is finding a supplier who manufactures a certain product for your business.

Key roles within the Sourcing department include:

  • Building a Category Strategy
  • Working with internal stakeholders to define aggregate, current and future needs
  • Evaluating suppliers within a category to assess value and performance
  • Seeking out and evaluating potential vendor information
  • Carrying out a supplier risk analysis before negotiating contracts

What Is Procurement?

With so many slightly different descriptions being used to describe this job role, you may find yourself unable to explain “what exactly is procurement?”. 

As sales people, these are the people you’ll meet (mainly) when negotiating a contract.

Responsibilities include typically:

  • Defining a specific need with internal stakeholders and writing the tender/RFP documents
  • Create supplier short-lists (working with Strategic Sourcing)
  • Evaluate supplier quotes
  • Build and manage supplier relationships
  • Analyse performance against SLAs/KPIs/objectives
  • Negotiate supplier contracts

Often, the term Procurement can be used incorrectly to refer to Purchasing and vice versa, however, they are technically different. 

What Is Purchasing?

Purchasing is the acquisition (or placing the order) of products/services on behalf of a business.

The primary roles of a Purchasing team are to:

  • Receive purchase requisitions
  • Create purchase orders
  • Approve supplier payments in line with contractual terms
  • Carry out quality assurance of products/services

Why Sourcing, Procurement And Purchasing Are So Important In Business And What It Means To You As A Sales Person

We asked a lot of our procurement friends, sales leaders and searched our own knowledge base. We’ve combined this thinking into something we call the Procurement Success Equation.

Ultimately, the combination of Strategic Sourcing, Procurement and Purchasing is designed to ensure a business (and its shareholders/external-stakeholders) benefits from :

  • Savings and ROI
  • Innovation in the supply chain
  • Quality and reliable delivery from its suppliers
  • Sustainability (ESG) and DE&I in its supply base
  • The assessment and management of supplier risk
  • Strong governance around the supply base

For you as a sales person, understanding how these functions work, and their objectives, could give you a competitive advantage. When you meet procurement, you need to take off your sales-hat and put on your risk-management and negotiation-hat.