Strategic Relationship Negotiation Methodology

Strategic Relationship Negotiation

Methodology

Strategic Relationships Sourcing Inc.

Strategic Relationship Negotiation Methodology – Version 4.2 Page 2 of 18

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Table of Contents

BACKGROUND ............................................................................................................................................ 3

What is a Strategic Relationship? ............................................................................................................... 3

NEGOTIATIONS GAP – DEFINITION ....................................................................................................... 6

SRS STRATEGIC RELATIONSHIP NEGOTIATIONS PROCESS (SRNP) .............................................. 7

STEP I – GETTING READY ........................................................................................................................ 8

STEP II – GROUNDING ..............................................................................................................................11

Negotiation Strategy ..................................................................................................................................12

STEP III – NEGOTIATIONS .......................................................................................................................14

Negotiating Gap Elements .........................................................................................................................15

GUIDING PRINCIPLES ...............................................................................................................................17



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Background

The SRS Negotiations Process (SRNP) is a step-by-step methodology to

negotiating significant and mutually beneficial business relationships. It is

intended for use with the SRS Strategic Relationship Model (SRM). The

SRM defines a framework for the sourcing, management and operational

alignment of strategic relationships.

What is a Strategic Relationship?

SRS defines a strategic relationship as “any close, collaborative

commercial relationship between two or more parties in which the partners

seek to achieve measurable benefits by leveraging their complementary

skills, assets and competencies for the mutual benefit of the parties.” This

may include the creation of strategic marketing or operational synergies,

joint development and exploitation of complementary strengths, products

and services, lower costs, enhanced operational performance, new market

penetration or other competitive advantages.

Traditionally, business arrangements embodied in the form of contracts,

were created to represent the roles, responsibilities, services, products,

levels of performance and the incentives or penalties associated with

over/under achievement. The accelerated rate of change in technology,

business cycles and operating conditions, and changes in the parties’

strategic directions in response to ever increasing competitive challenges,

strained these business relationships to the point where success was, and is,

limited to the very few. Further, and generally speaking, the structure of the



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traditional arrangements revolved around “what is to be done” and “how it

will be done”, defining the specifics of each of these in great detail and

structuring the complete procurement process around managing risks

associated with their achievement.

A “strategic relationship”, as we see it, is one that focuses on achieving a

set of value-driven results and therefore cannot be structured around the

“what” and the “how”. The SRS Strategic Relationship Model attempts to

free the parties from the uncertainty inherent in such arrangements. Aside

from the initial objectives the relationship is targeted to achieve, all other

aspects of the relationship are dynamic, continuously influenced and shaped

by forces of change, including business conditions, enabling processes and

technologies. The SRS Strategic Relationship Model (“SRM”) is a process-

centric framework that enables the structuring and management of strategic

relationships where continuous alignment with business and best practices

may be required on a continuous basis.

In other words, the SRM is a process-centric model that enables the

management and alignment of deliverables (projects, products, services,

etc.) with relationship objectives, while continuously measuring and

analyzing the benefits derived by deploying a specific set of enabling

technologies. Even the stated objectives or the desired benefits articulated

at the start are still subject to the forces of change and to the requirements of

continuous alignment throughout the engagement.

The SRS Negotiation Process (SRNP) begins with the assumption that an

Arrangement In Principle (AIP) has been arrived at by the parties involved.

Generally, the AIP is the result of a Sourcing initiative in the form of:

Direct Engagements – An organization has engaged another to investigate

potential benefits resulting from the supply of products and services. In



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these types of engagements a value proposition has been articulated and a

draft outline of the business arrangement including expected benefits has

been developed and agreed to by both parties.

J.V./Alliance – Parties have engaged in discussions, agreed on a go-forward

strategy, developed the alliance business case and business plan and have

signed a Memorandum Of Understanding.

Common Procurement – This type of an open competitive process is

usually centered on the construction of a Request for Strategic Relationship

Proposal (RSRP), receiving and evaluating vendors’ responses, creating a

short list of qualified vendors, and deciding to negotiate with the best

respondent(s). The RSRP content (including requirements, anticipated

results and Terms & Conditions) coupled with the vendor’s response

(written and oral) to the RSRP, is in effect an Arrangement In Principle.

The SRS SRNP can still be deployed even when the Sourcing process is

carried out by means of a traditional competitive RFP. This is true

particularly in the case where the RFP documentation and procurement

process allowed for flexibility of the final business arrangement. Such

flexibility may potentially impact business arrangement initial scope,

solution requirements, and business & governance models of the business

arrangement.



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Negotiations Gap – Definition

A ”negotiations gap” is the difference between the positions of the various

parties involved in the business arrangement. The goal of the negotiation

process is to bridge or eliminate this difference in a manner where all

parties can achieve their respective objectives.

At any instant in time during the negotiation process, “gaps” can be

attributed to any number of factors, including different goals and objectives,

failure of the parties to clarify their respective understanding of terms and

how they are used in particular industries or business segments, or

perceptions stemming from communications gaps and a lack of agreement

or understanding (or one-sided understanding) of the fundamental

conditions that would make the proposed business arrangement a great

success for all. It is through the open good faith exploration of these issues

by the parties seeking to learn about each others’ motives, objectives,

expected benefits and risk mitigation factors, that the negotiations’ gap is

narrowed and the desired benefits of value-driven strategic relationship are

achieved.



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SRS Strategic Relationship Negotiations Process (SRNP)

The SRNP is a three-step process designed to provide a workflow template

for negotiation activities:

Getting Ready – preparing for negotiations

Grounding – verifications of various negotiation positions

Negotiations – process for reaching agreement on gap elements

The chart below outlines an overview of the SRS SRNP. The remainder of

this document will delve into the process, issues and guiding principles of

the SRS SRNP.



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Step I – Getting Ready

This is by far the most important step of the negotiation process. Each party

must fully understand its own objectives before entering into the negotiation

process and must be able to document its view of the arrangement that

would be most suitable to achieve the desired results.

Gap Identification – Depending on the procurement process used, and the

market testing completed, evaluation and selection, the party is required to

identify, understand and document the “base gap” as the difference between

the following two items:

Desired business arrangement – base business arrangement at the

lowest level of detail possible; and

Perceived business arrangement – what is perceived to date to be the

other position based on written and verbal communications, RSRP

response, evaluation and selection processes.

The gap should be documented in the form of a table showing areas of

difference as well as areas of perceived agreement. This will be used to

keep a picture of the complete deal in mind at all times as well as for

verification purposes described later in the process. Business arrangement

(deal) and gap elements should be categorized as follows:



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Requirements/actions

Base service levels/metrics

Roles & responsibilities/division of responsibility

Operations management

Financial

Relationship management/governance

Terms & Conditions

The areas above are interdependent and will in the end form an integrated

business arrangement. However, and most likely, this interdependence will

be used as a leveraging factor to resolve complex issues at negotiation time.

Management Expectations – In a strategic sourcing engagement, the

requirements and evaluation criteria are the means to identify the other

party with whom a business arrangement is then negotiated to realize the

desired business benefits. As well, and in common procurements where

vendors are asked to come forward with creative solutions to a particular

problem, it is understood that different types of solutions may require

different business arrangement structures. In such cases, the negotiating

team may have the ability to alter the scope or rollout of the solution so that

overall risk of not achieving the desired results is contained.

For this reason it is essential to capture management expectations in terms

of the expected results and risk tolerance levels. Risk tolerance levels need

to be identified and clearly understood for each element of the business

arrangement and gap analysis. Interviews with senior functional managers

is one way of understanding management expectations and how far they are

willing to go on the risk scale.

Negotiation Team – The next step is to identify and secure the skills and

management roles required. The following guidelines should be carefully

considered:

Negotiation teams require decisions to be made fairly quickly, and as

such, the presence of decision-makers with functional responsibility for

the business arrangement is ideal. Alternatively, a decision making

process is defined, approved and communicated to the other party. At a

minimum, the team should be composed of:

– Team Leader – the role of the team leader is to lead the negotiation

process. A team leader has a good vision of what the overall deal

will look like, understands the gap in all areas, possesses the

leadership, technical know how, and excellent communication

skills

– PE & PM

– Legal Counsel

– Financial Architect

– Functional Management or Decision making process or both

Ensure that the Program Executive (management & P/L responsibility)

and the Program Manager (operational responsibility) are present. This

is very crucial to the success of the project. Significant numbers of

arrangements, and particularly during the first 18 months, suffer due to



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lack of understanding of what the “deal” is and how each party is able

to achieve its objectives under the structure of the arrangement.

Inclusion of Subject Matter Experts. Outside of the core team, experts

in the areas of industry norms, and technical support should be readily

available to explore a particular technical issue in greater detail.

Preliminary Schedule – A preliminary schedule should be developed based

on the current understanding of what the gap elements are and how critical

or deep the issues may be. The final date for reaching an agreement should

be flexible. “Drop dead” dates are not recommended, since they could

potentially cause the process to take over completely and negatively

influence the team’s sense of objectivity.

Other Party PE & PM – Ensure the other party’s Program Manager and

Program Executive are present at all negotiation sessions. We estimate that

in 90% of the cases the relationship will suffer beyond repair should the PE

& PM be absent from the negotiating table. Their role is to continuously

apply the capability test and ensure all discussed changes are technically

feasible, manageable and fall within their P&L guidelines or corporate

policies.

Communication – Communicate Team Members and schedule.



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Step II – Grounding

The purpose of this step of the SRS Strategic Relationships Negotiation

Process (SRNP) is to establish a common understanding of what the ”gap”

really is. The analysis and preparations of the “gap” performed in Step I is

merely The best available estimate of what the difference in positions is

and, in most cases, does not reflect the real agreement or disagreement of

the parties in relation to specific elements of the gap.

This step is conducted via the first face-to-face meeting between the teams.

The following is a draft agenda for the first negotiation session lead by the

negotiations Team Leader:

An overview of the negotiations process. Ensure that all members of

both sides are in agreement with it.

An overview of the Schedule

Describe the desired arrangement at very high level focusing on the

objectives and expected benefits

The next step is for the Team leader to walk through the documented Base

Business Arrangement and for each element:

Obtain common understanding of the element

Obtain acknowledgement of no issue if no perceived gap exists

Obtain acknowledgement of the existence of an issue if gap is

perceived to exist



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Do not engage in solving any issues at this time. It is too early to

put a cohesive strategy together that combines multiple issues at

this time. The objective is to obtain a clear understanding of what

the issues are.

Once the verification scan is completed, go back and jointly rank the issues

agreed to (to be issues) into: deal breakers, majors, and minors. In some

cases one may choose to conduct this process in parallel with the

verification scan exercise. In complex situations, we recommend the

negotiating parties to perform the ranking in a separate step as it will give

negotiation teams a chance to come back and revisit the areas of concern.

We believe you would receive a different, more reliable reaction or

assessment if done separately rather than in one single step.

It is recommended that a soft copy of the Business Arrangement be updated

in real-time and distributed at the end of each session.

The first session of negotiations is most likely where members of the joint

teams have met for the very first time. Scheduling a social function is a way

for members to get to know each other a little bit better. This will definitely

have a positive impact on the overall negotiation process.

Negotiation Strategy

Now that we know what the real gap is, the team (our team) will begin

putting together the Negotiations Strategy. For each gap element identify

what we will call the minimum and maximum tolerance or impact levels.

Gap elements could either be positive or negative. Positive if the other

party has already offered in their communications a level that is higher than

that expected at some level of additional effort or cost. Negative is clearly

when they fall short on the requirement.

Minimum – The furthest the team will go before the issue at hand would

begin to negatively impact the objectives or the results desired (unless

persuaded otherwise by the other party).

Maximum – The point where additional gains would add little or no value

to reaching the objectives or the desired results (unless persuaded otherwise

by the other party).



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For each gap element document the driving factors or rationale used to

arrive at the minimum and maximum tolerance levels. These will prove to

be instrumental during the face-to-face negotiation discussions.

Armed with this analysis the team can now build a real strategy. The team

will now develop an Enhanced Business Arrangement based on what the

tolerance levels are and keeping in mind what the real issues are.

This Enhanced Business Arrangement, developed in this phase is the deal

we really want. Now let’s go and negotiate it.



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Step III – Negotiations

This step of the process is carried out during face-to-face sessions and

individual team breakout sessions. At the first session an agreement among

joint team members would need to be reached as to what type of issues the

team will begin to address. There are two strategies that can be

implemented here.

Begin with minors, majors, then deal breakers

This approach is typically used where small measurable steps have

great positive impact on the politics of the negotiations. It can be used

where the parties are negotiating an arrangement in which “trade offs”

are expected to be necessary to reach agreement, or where the parties

do not know each other and it is important to build relationships of trust

and confidence during the negotiation process. This is a “soft”

approach where the main purpose is building a collaborative strategic

relationship early.

Begin with deal breakers, majors and trade off the minors

This approach is generally used when a party does have other options

or potential alternatives and where the prospect of not having a deal has

a greater impact on the other party. It is true that this team’s intent and

spirit is channeled towards a win-win result, particularly via this

process, however, the other party may still be adhering to old

negotiating practices. Removing the deal breakers early in this case

will provide:

– speed of negotiations

– signify required commitment

– a no-deal scenario is determined very early in the process

The risk with this approach is that it may strain relationships early

which may require greater relationship building attention later in the

negotiation process.



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Negotiating Gap Elements

For each element, attempt to understand the underlying reasons causing the

issue to appear as it is. Further attempts should be made to understand the

conditions driving the underlying reasons, which are in turn manifesting

themselves in the form of an issue. The superficial answer is always given

first either because people just simply don’t know (un-communicated

Corporate Policy), or do know but avoid the answer. One can’t resolve an

issue if this step is not undertaken. It is an attempt to open up and

understand the motives behind the issue.

Just as important, is “who” the issue is important to. For example: Is it a

technical or delivery issue? Is it a company deal approving body guideline

breaker? Or does it lie outside the risk envelope defined by management?

All these are possible reasons, but one will need to understand which part of

the organization is concerned with the issue at hand. This holds true for

both sides of the negotiating team.

The team now begins to develop mitigation strategies for the drivers of the

issue in the form of “what if we implemented an operational process to....”

or “what if we refrained from performing this particular function”. The idea

is to test the “what ifs” with the other team and gauge their level of support

for the mitigation strategy. This process continues until an agreement in

principle is reached, but decision is not yet made. If the issue is a stand-

alone issue then a decision can be made and the issue is then removed from

the gap list. Otherwise a formal decision may be delayed until other

relating issues are also agreed to.

Joint negotiation sessions are very intense and can be strenuous on the

people involved. It is recommended that more than half the time be allotted

for each team to re-group separately and engage in discussions with

respective management outside the core group. They may find many



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answers to a lot of questions at hand. The reason being, and in particular

large corporations, the policies and guidelines are numerous and executives

outside the core team can reflect on their experiences to assist the team in

reaching resolution to issues at hand.



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Guiding principles

Open communications – team members on both sides need to be open to

answering any questions, particularly those that attempt to go behind the

scene in order to understand the driving factors of a particular issue.

Positive orientation – team members on both sides need to keep in mind the

concept of “Sustained Mutual benefit”. Not every issue may be resolved

into a mutual benefit, but the complete arrangement must be seen and

understood to be mutually beneficial tactically and strategically for both

parties. If at the end of the exercise one party believes to have had the

better deal and cannot clearly articulate the benefits received or will be

received by the other party, then something went wrong along the way.

Understanding – “Seek first to understand then to be understood” from

“The 7 Habits of Highly Effective People” is key. Listening leads to

understanding, which will lead to resolution.

Apply the Capability Test – do not accept the resolution of an issue in your

favor until you fully understand that the other party has the capacity and

ability to deliver on it. Failing to do so is a sure path to failure. The other

party might be pressured by the political environment (the deal will help

their stock price, or improve their market image) to accept the resolution of

an issue knowing that they will have difficulty delivering it. The burden is

on the recipient of the service, product or solution to investigate and feel

comfortable with the ability of the other party to deliver.

Emotions – always deal with the issues, not the personalities

communicating the issues.

Social discussions – end every negotiation session with a social discussion

or event.



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Appendix A – Negotiation Process Presentation

Strategic Relationship Negotiation Methodology

Business

relationship objectives

parties strategic directions

srs negotiation process

srs negotiations process

srs confidential background

business arrangements

processcentric model

business conditions