Sanctions and Rewards

The possibility of imposing sanctions or distributing rewards on the negotiating partner is of great importance for the success of a negotiation. For the largest possible arsenal of sanctions and rewards, it is again important to have a good overview of the entire network of relationships and contacts between the negotiating parties. Do you have a veto position and are you able to block processes that are important to your negotiating partner elsewhere. In international negotiations between individual states or alliance blocs, there are always examples of such mechanisms. For example, Turkey’s temporary veto of the NATO admission of Finland and Sweden. However, it can also be a simple matter of financial sanctions and rewards, for example a guarantee for a loan. The positive variant would then be the renunciation of a monetary demand. 

Working on the lever of sanctions and rewards: 

In business, the sanctions and rewards lever have a lot to do with the payment flows between the companies involved. Those who can withhold money are at an advantage, those who wait for payments are at a disadvantage. The more extensive the payment flows, the greater the corresponding levers. Modules that limit collaboration with other suppliers provides additional levers for sanctions and rewards. Who is my partner in developing the next generation of products? 

The lever of sanctions and rewards in procurement: 

  • To what extent can I “punish” the negotiating partner monetarily? (Block payments) 
  • To what extent can I make the supplier worse in terms of his chances of winning further orders? (Simply not requesting projects, negative evaluations in supplier management or even blacklisting or delisting). 
  • To what extent can I provide monetary support? (Release payments, or ensure that payments are released in other departments of the company). 
  • To what extent can I support and reward the supplier in general? (Upgrading in supplier management to preferred supplier, giving preference in the next tender, “turning a blind eye” to complaints). 

The lever of sanctions and rewards in sales: 

  • To what extent can I punish the negotiating partner monetarily? (For example, blocking the credit line of the customer’s account because of open invoices). 
  • To what extent can I make the client less favorable with regard to his chances of delivery or collaboration in new projects (not participating in tenders, no support in development projects, latest models only for the competition)? 
  • To what extent can I provide monetary support? (Extend payment terms, increase the credit line on the customer’s account in my own company) 
  • To what extent can I reward the customer? (Exclusivity for new products, support in case of problems with other suppliers, waiving a subsequent claim) 

Influencing the Environment of the Negotiating Partner

Between most negotiating partners exists a dense network of relationships and dependencies beyond the current negotiation. This network of relationships and dependencies makes it possible to influence the environment of the negotiating partner reciprocally. A customer is at the same time a supplier for another part, in an export market one operates a joint venture, the communication partner is a member of the same digitalization working group, acquaintances from university days, connections via professional networks such as LinkedIn. What influence does your behavior have on the negotiation environment? Will others show solidarity with you? Can you forge a coalition?

What about your access to decision-makers at your negotiating partner? As a teacher, you could contact the parents. Keep in mind that your negotiating partners have similar plans. How good is your negotiating partner’s access to your environment? Are there connections through a previous joint employer, conferences or trade fairs? If you are a trendsetter, you can influence public opinion. Please think in segments, it doesn’t always have to be the whole industry, maybe it is enough to influence the mood in one department. Please also think of information channels for a certain industry, newsletters for certain products that are read by many decision-makers.

And what about the negotiation communication? Are you in the driver’s seat? How active are you at the process level of the negotiation? A forceful small customer with various special requests has quickly caused a multiple of his sales potential for the next few years in process costs.

Working on the lever of influence:

Coalitions play a major role in negotiations. If you succeed in forming a coalition, you will have increased your influence on the negotiation process. The first step to increasing your influence on the negotiation process is to get an overview of the network of relationships between you and your negotiating partner or the company you are negotiating with. Often you do not even have the numerous points of contact on your radar. Once you have an overview, you can plan how to use these connections to your advantage.

It is somewhat more time-consuming if you have to establish relationships first. It is helpful if you can fall back on the contacts of your colleagues or on contacts and experience from previous negotiations. Generally speaking, if you negotiate, you would do well to build and maintain a large network of relationships, even beyond the boundaries of your company or department.

The lever of influence in procurement:

  • How big is my influence on the behavior of other market participants? Is my behavior of relevance to other customers of this supplier? Is our company a trendsetter? Can we form a purchasing alliance with other customers?
  • How good is the access to higher hierarchical levels in the supplier company?
  • How good is our ability to control the supplier’s contacts within our own company?
  • How much influence does our company have on public opinion?
  • How active are we in negotiating at the process level? Can we influence the behavior of the supplier’s representative with our powers of persuasion and our rhetorical skills?

The lever of influence in sales:

  • How big is the influence of our company on the behavior of other market participants? Is our company’s behavior relevant to other suppliers of the customer? Is our company a trendsetter? (Example: Aldi increases prices)
  • How good is the access to the higher hierarchical levels in the client company and relevant specialist departments?
  • How good is our knowledge of the customer’s activities in our own company (quality assurance activities, cooperation in research and development)?
  • How big is the influence of our company on public opinion?
  • How active are we in the negotiation at the process level? Can we influence the buyer’s behavior with our powers of persuasion and our rhetorical skills?

Links beyond the current negotiation

In most negotiations, there are intense connections between the negotiating partners beyond the negotiation. Think of the relationship between a customer and his long-standing supplier, the relationship of a boss with his employees, colleagues working together at an interface in the same company, neighbors who want to solve a problem together because of party noise. Negotiations where there is no relationship beyond the negotiation are rather the exception. The sale of a second-hand car from private to private via an internet portal might be an example.

What increases the effect of this lever? Generally, the more intense and the longer lasting the relationship, the more effective this lever is. To avoid arguments in the neighborhood, one is prepared to accept many things. However, even selective relationships, if it is a very important activity, can be a great lever. A lawyer representing a client in an important case probably has only sporadic contact with the client. However, if it is an important matter, they will return calls immediately and provide requested material quickly. Relationships that intensify are also interesting.

A new contact on LinkedIn typically gets more attention than a contact that has been around for a while. Useful leverage can also be found in more loose relationships. Does my partner elsewhere benefit from my knowledge and expertise? For example, did a colleague in the company need me to proofread documents in a foreign language? Does my negotiating partner elsewhere benefit from contact with me? Yesterday I was in the canteen with someone from the works council.

Interdependence is also important in negotiations because other important levers of negotiating power depend on it. Many negotiating tricks or ploys are based on influencing the negotiating partner’s environment, a phone call to the boss, an inconspicuous search for important information on the trainee. It is similar with sanctions or incentives/rewards. Only if there is an appropriate environment and network of relationships, sanctions or rewards have their effect. More details on this in the sections “Influence on the environment” and “Sanctions” below.

Working on the lever of links:

To establish intensive connections between companies usually takes time. Intensive connections usually strengthen mutual trust. Mutual trust simplifies interaction in negotiations. The exchange of information is easier. If you want to strengthen connections between companies, you must invest time in contacts: Plant visits, meetings at trade fairs, joint appearances at industry forums. When intensifying relations, think not only of the decision-making level, but also of the specialists at the operational level.

The lever of links in procurement:

  1. Do I have a high turnover share regarding the supplier company?
  2. Do I have a high turnover share regarding my sales representative?
  3. Is my turnover/turnover share growing regarding this Supplier/Sales Representative?
  4. Does my company offer the supplier a gateway to strategic goals? For example, for market entry into new higher value products?
  5. Does my supplier advertise that I am his customer?
  6. Are there supply relationships beyond the products covered by the current negotiation? (A joint venture? Spare parts and service contracts?)

The lever of links in sales:

  1. Does our customer purchase strategic components from us? (Products with high value and high risk for the customer’s production facilities or products if there is a disruption in supply).
  2. Does our customer buy shortage components from us? (Low value, but high risk for the customer’s production facilities or products if there is a disruption in supply).
  3. Is the collaboration with this customer intensifying? Is the turnover growing? Does the range of products grow? Does the integration into the customer’s processes increase? (For example, EDI)
  4. Does the customer need our technical or other know-how for his customer orders or his production facilities?

The Lever of Alternatives

Quantity and Quality of Alternatives

Those who do not have to conclude a certain negotiation with a certain partner are at a huge advantage. Those who rent out a flat in Berlin have an easier time than those who are looking for a flat. Whoever offers something that many would like to have has an advantage when negotiating – the law of supply and demand. A boss who has to accommodate an unpopular extra job in his team of employees will get the job done faster if several employees are qualified for the task.

If the boss changes the structure of his offer, he expands the field of possible negotiating partners. If the boss splits the task into different sub-projects, more employees will be eligible for a sub-task. Perhaps he can also approach the topic in a completely different way instead of having a full report prepared, but only a short presentation with a few key points. Then he might not need a specialist any more, but someone from the assistance area could do it.

Or the whole project is completely outsourced to a specialized agency. For example, a marketing agency develops the new packaging, the appropriate slogans and all the corresponding marketing activities. Or the boss simply takes on the task completely himself.

Work on the “alternatives” lever:

With a certain vision of the bigger picture, an alternative that is available more or less quickly (compare the section Lever Time) can be found in almost every situation. In contrast to improving the information base, the issue of improving alternatives requires much more time and often other resources. Regarding the involvement of the marketing agency, this can increase the quality, but it takes time to select and brief the agency. And the agency will incur additional costs.

The lever of alternatives in procurement:

  • Do I have alternative suppliers for the same product?
  • How flexible am I about the product? (Apple pie instead of cherry pie for dessert?)
  • How flexible am I regarding a different solution approach or technology? (Ice cream instead of cake for dessert? – A plastic part instead of a metal part?)
  • What about when I think in larger units? (The whole menu is delivered by the catering service? – A whole module is contracted out to the supplier not just individual parts?)
  • What if our company positions itself differently in the supply chain? Is there more competition in the market for input products (standardized mass product?)? Under what conditions could we manufacture the product ourselves from the intermediate products? Could I outsource the intermediate products to contract manufacturers for further processing stages? (Buy a whole cherry orchard and cultivate it or lease it out).

The lever of alternatives in sales:

  • How stable is the inflow of new customers?
  • What products for other sales markets or customers can be manufactured on the lines?
  • To what extent can we shut down production capacities without major costs? (No longer use temporary workers? – Bring outsourcing back into the company? – Sell machines?)

Where do we position ourselves differently in the supply chain? How costly is it to map the customer’s value chain stage ourselves and compete with the customer? Should we withdraw from one stage of the value chain and rather produce highly efficient, low-value parts and sell them to other markets (high volume of standard parts instead of small quantities of highly customised products)?

The Lever of Information

The less your negotiating partner knows about you and your constraints and needs, the better for you. The issue of information has different aspects. It is about the needs of the party on the other side, and the individual needs and constraints of your direct interlocutor. Are there performance indicators that that must be met? What does his current compliance with these performance indicators look like? For example, are turnaround times measured in financial accounting? Do complaints about invoices have to be closed as quickly as possible? If this is the case, it may well be that your counterpart on the other side simply gives in so that a complaint case that has been festering for a long time is finally off the table. Are there incentives/bonus arrangements that particularly motivate your negotiating partner?

A very exciting aspect of the information lever is that it usually allows a more differentiated view of the structure of the various levers of negotiating power with relatively little expenditure of time and other resources. One’s own alternatives may not be as good as originally assumed, but at the same time the timeline on the negotiating partner’s side is much tighter than one originally assumed. One gets a deeper insight into the constraints and needs of the negotiating partner.

This differentiated overview of the strengths and weaknesses of one’s own and the other party makes it possible to focus attention during the negotiation on the weaknesses of the other side or one’s own strengths. Due to the great importance of anxiety for human decisions and behaviours, it is usually more effective for one’s own cause to draw attention to the weaknesses of the other side than to one’s own strengths

Working on the lever of information:

In times of the Internet, you can considerably increase your level of information about the other party and your direct interlocutors even with a manageable investment of time. In addition to the internet, common sources of information are the mail traffic that has accumulated so far, the negotiating partner’s administrators who are not aware of the significance of the information they are passing on, high-ranking executives who send signals about the negotiating strength and the current needs of their own company in a completely different context. Industry and professional networks such as Xing or LinkedIn can also be worth their weight in gold when it comes to gathering information.

How well is the information on business partners and special interlocutors prepared in your companies? Well-structured and generally accessible information increases the success of negotiations. Are there well-structured project files where everyone can quickly find their way through? Could it help if you have additional reading permissions?

The lever of information in procurement:

  • What is my supplier’s cost breakdown?
  • Can I estimate my supplier’s cost breakdown using public sources?
  • How much information do I have about my supplier’s sales targets and the status of achievement?
  • How well do I know the remuneration system in my supplier’s sales department and about the status of achievement? Are there bonus systems? When are the accounts settled, monthly, quarterly, half-yearly, yearly?
  • How well or how inadequately is your supplier’s sales pipeline filled?
  • How good or how inadequate is the general economic situation of your supplier? A supplier who is not doing so well economically is certainly prepared to make more concessions in negotiations. A supplier who is in serious economic difficulties could be a risk for your supply chain.

The lever of information in sales:

  • How well do I know my client’s margins and the underlying cost structures of my client?
  • What do I know about my client’s purchasing goals? Is there information about the status of target achievement?
  • Are there bonus systems for my customer’s purchasing department? For which commodities   does the bonus system apply?
  • What is the current capacity of the customer’s purchasing department? What capacities are available for the preparation and implementation of the negotiation?
  • How well or how bad is the general economic situation of my customer? A client who generates a high return on investment should be more willing to compromise in negotiations. Generally, if the customer’s order book is full the focus will be more on delivery reliability and service quality. A client who is struggling may not have the capacity to negotiate tough. Perhaps he is no longer being supplied by competitors, or only against advance payment. Maybe you must take similar actions.
  • What are the client’s current goals and strategies? What are the successes or failures in implementing these goals and strategies?

The Lever Of Time

Available Time Part 2

We recall that available or unavailable time not only directly affects negotiating power, but also indirectly affects all other levers.

Let’s look at how we can work on these levers and what the impact is in procurement and sales. 

Working on the “time” lever:

  • How good is the overview of the upcoming negotiations? Is there a “negotiation schedule”? 
  • Start earlier!
  • Devote more resources to the negotiation project.
  • Can the deadline be postponed? Who set it?
  • Can the time limit for the other party be abbreviated? Who can influence this?
  • Can time be taken away from the other party? (Assign large-scale tasks that are not really necessary, but tie up the resources of the other party.)

The lever of time in procurement:

  • Does the supplier have free capacity and therefore has pressure to get an order? 
  • Is the supplier’s sales representative in a hurry to get an order to meet his monthly or quarterly targets? 
  • As a buyer, do I have adequate time to place the order? 
  • Do I have time for the current negotiation session, or are back-to-back meetings, scheduled or simple stuff like is the meeting room available longer than originally planned? 
  • Does the sales representative have to catch a certain train connection, leave on time because he has a long trip back ahead? 

Hence, beware on the customer side, if your own purchasing department does not have enough time for negotiation, considerable negotiating power is lost.

The lever of time in sales:

  • Does the customer have pressure to place the order, is there a fixed date for a production start, or is there a penalized due date? Note: Long delivery times increase the pressure on the customer’s side! 
  • Is the responsible buyer in a hurry to place the order? Are there other urgent procurement projects on his desk? 
  • Are our order books full and don’t we have free capacity in the short term at all? 
  • Am I flexible in my timing for the current negotiation session? I can stay overnight, if necessary or postpone my follow-up appointments? 
  • The buyer urgently needs to leave for another meeting. Another person who has booked the meeting room is waiting outside. 

Another great illustration by Jan Myszkowski captures the levers of time very well. His book 50 Shades of Leadership: The Decisive Moments of Genius Leadership is a combination of experience, diverse education and creativity in which he puts current business challenges into a different, inspiring perspective.

The Lever Of Time

Available Time Part 1

Time does not only heal all wounds but is also the mother of (almost) all negotiating power. Is your negotiating partner in a hurry to conclude the negotiation because, for example, he urgently needs money for other projects? Then this is a great advantage for you. For example, you can trade acceleration in closing for a lower price. It is enough if your negotiating partner’s representative has little or no time to negotiate. A desk full of other pressing projects at your negotiating partner’s plays into your hands. How does it look on your side? If you can wait to close the deal, this exacerbates the problems for the one who is pressed for time. The time factor here refers not only to the entire negotiation, but also to the time available for a particular round of negotiations. Those who have an urgent follow-up appointment are at a disadvantage. And again, the more time you have, the more problematic time constraints will become for the other side.

Available or unavailable time not only has a direct effect on negotiating power, but also has an indirect effect on all other levers.

  • The basis of information can also usually be improved considerably if time is available.
  • Those who want to or must work on the alternatives lever should have a lot of time!
  • If the relationship or connection is still weak, time helps to intensify it and strengthen the connection.
  • Exerting influence through the environment or forging coalitions require time. Usually, the more time the better.
  • For sanctions to work, it usually takes some time.

The development of negotiating power close to „deadlines” is tricky:

The closer a deadline approaches, the greater the negotiating power for the negotiating partner on the other side. When the deadline has passed and the damage, e.g., a penalty, has been incurred, the negotiating power of the other side is abruptly reduced. Deadlines are a classic closing technique in sales to bring negotiations to a conclusion: E.g., offers that are only valid until a certain date.

To successfully manage the issue of time in negotiations, a negotiation calendar has proven its worth: Which important negotiations are coming up for us in the next 24 months. If you want to optimise all the levers of negotiating power in your favour, you should think in terms of a multi-year rhythm. Think of money and other resources that are only budgeted on an annual basis.

With his hourglasses, Jan Myszkowski captures the levers of time very well. His book 50 Shades of Leadership: The Decisive Moments of Genius Leadership is a combination of experience, diverse education and creativity in which he puts current business challenges into a different, inspiring perspective.

The Levers of Negotiating Power

The levers of negotiating power 

The most important levers of negotiating power are: 

  • How much time do you and your negotiation partner have for the negotiation? 
  • How much do you know about your negotiation partner and how much does your negotiation partner know about you? 
  • Who else is available as a negotiating partner for your project?
  • How good is your Plan B? How good is your negotiation partner’s Plan B? 
  • Are there links with the negotiation partner beyond the current negotiation? 
  • If there are links beyond the current negotiation, how big is your influence on your negotiation partner’s environment? How great is the influence of your negotiating partner on your environment? 
  • Can you or your negotiation partner impose sanctions on the other or grant incentives/rewards? 

Basically, all the levers of negotiating power are present in every negotiation. A closer look at the different levers of negotiating power in a specific negotiation will reveal that negotiating power is distributed differently on the different levers. For example, a supplier might be very dependent on a particular customer and find it difficult to do without sales to that customer (no plan B or a very weak plan B), while at the same time the customer’s purchaser is under severe time pressure. 

If negotiating power is distributed very differently among the negotiating parties, depending on which lever one is looking at, the extent to which the different levers are the focus of attention is crucial. Human judgement is usually not very nuanced but tends towards crude black-and-white assessments. Attention focuses on a particular lever and derives from it the assessment of the respective negotiating power for the whole negotiation. If the discussion revolves around the fact that the supplier “needs” the turnover, it is felt that purchasing is in the driver’s seat. If the discussion revolves around the fact that the customer does not have time to qualify another supplier, for example, the supplier feels he has the longer leverage. 

In turn, this means that if a negotiator manages to shift the attention of the negotiating parties from one lever to the other, the perception of negotiating power can shift significantly.

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