Negotiating

I’ve recently read two well-known negotiating books, “Getting to Yes” by Fisher and Ury, and “Negotiating Rationally” by Bazerman and Neale. Both were good at picking out key elements of negotiating but I’ll warn you ahead of time, they’re largely missing a clear structure for preparing and executing a negotiation.

That said, I think it’s worth discussing two key elements of negotiation: preparation and execution, and in the context of sales teams, ensuring that in particular, you and your salespeople take the time to prepare for a deal negotiation. Some of our opportunities are seven-figure deals, and you’ll be extraordinarily lucky if you find a customer who fails to prepare. Many of these negotiations see either procurement or special groups (software or hardware contract teams) that understand our business well and are trained in this fine art.

In preparation for any negotiation, there are several pieces of information that should be known:

  • Who are the physical participants on both sides and what are their roles?
  • What can you know about the objectives and the outcomes for each party?
  • Do you have a response framework agreed on with our party?
  • In multi-party negotiations, can you anticipate any alliances from aligned interests and what impact those alliances may have on your negotiating plan?
  • What are your worst (reservation), better, and best (aspirational) outcomes?
  • What are the best alternatives to a negotiated agreement (BATNA) for each party?
  • What is your anchoring data for the known issues?

Selection of the negotiating team is important. Are they experienced negotiators? Are they domain experts? Are they decision-makers? Which do we want at the table and which do we want to keep behind the scenes? Is it necessary to have them at the negotiating table or does it present a greater risk? Put your best negotiators at the table, not necessarily your most senior people.

Understanding your objectives clearly and having consensus from your decision team before beginning is essential to opening a negotiation. These objectives may change during the negotiation, and part of the response framework should be a process for considering changes to objectives as new information may present itself. Sales is not the only stakeholder in a negotiation – there are many other parties in your company that may need to be involved. The result of not including other stakeholders interests could be an embarrassing return to the negotiating table with a weakened position to obtain additional concessions.

Many salespeople fail to put a response framework in place. How would you discuss the tabled options and who would respond on behalf of your team? Without this simple step, they may appear disorganized and unaligned during the negotiation process. Nothing is more frustrating than having two or more people making commitments in the process. I’m sure you’ve had a boss or two do this in the midst of a negotiation. Make sure you both agree on who makes the commitments. Pick one.

In multi-party negotiations, anticipating alliances ahead of time can save tremendous time and provide great advantage. Are you a vendor with a reseller involved? Are your interests aligned? Where are they not aligned? Are there other vendors incumbent in the customer that can benefit from your solution? Have you contacted them for help and support? Will your competitors align better with incumbent vendors or the customer’s own internal stakeholders? How will you adapt and counter this threat?

Defining a reservation (worst) price/position below which you are prepared to walk away from the opportunity is crucial. This is something that I’ve used in the past, as well as having an aspirational (best) and a mid-range (better) target. I find that the addition of at least one mid-range target slows the descent to worst-case scenario, as the inclination after moving from the aspirational target is to then focus on the next target – the bottom. You have to know at what point good business will become bad business and get consensus on this within your organization.

The BATNA (best alternative to a negotiated agreement) ties back to your reservation position. What will allow you to walk away from the deal? The power to walk away from a deal provides tremendous strength to your position. No less important is an understanding of the other party’s BATNA: what is keeping them at the table? How do your BATNA’s compare in their value? Is your BATNA better than theirs and therefore you have a stronger negotiating position?

Anchoring data is data supporting your position – evidence to show why what you are asking for is reasonable to the other side. Are there precedents for your positions? Research data? Independent or third-party data is always best.

After preparing for and during an engagement, there are a number of considerations that I would include in a list:

  • A reminder to avoid positions and focus on interests
  • Understand whether the negotiation is likely to be distributive or integrative and how to move towards an integrative outcome. Create value by enlarging ‘the pool of resources’
  • Monitor my own non-verbal communications as well as those of the other party
  • Seek to eliminate time constraints wherever possible and beware of timing negotiations where externally imposed time constraints interfere with my BATNA
  • Rather than choose different postures which may send signals of confusion and inconsistency and impact trust levels, focus on rational negotiation

We often make the mistake of extracting our negotiating positions from our objectives, e.g., “I want X, Y and Z.” and then focusing on those positions. The downside to positional negotiations is you get a very transactional distributive negotiation where each side is looking for concessions rather than focusing on an integrative solution that best fits both sides’ needs. The book, “Getting to Yes” does a good job of discussing this issue. In technology sales, best practices have us understand the customer’s business and objectives before proposing a solution. This same approach could work well in framing the negotiation, e.g., “What are the objectives for your business this year?” Understanding the bigger picture for the other party will help uncover integrative opportunities that benefit both sides as opposed to distributive positions that benefit only one side.

Integrative opportunities not only expand the pie, but will also differentiate from competitors who may not seek the same. In any case, a larger pie provides more room for negotiation and can offer greater benefits for all. In my past negotiations I can see where I’ve adopted a reactive stance to negotiations that otherwise may have sought out a bigger-picture opportunity for both sides.

I saw during recent negotiations that non-verbal communications could be “cold” and distant. Beware of reverting to a more formal and cold style when you get into negotiations. This can cause the other party to mimic that style to your disadvantage. Tactics like cold, blunt ball-breaker negotiations are ego-driven and will not create long-term value nor succeed as often.

Time is often a contributing factor to failures in negotiations. Pay particular attention to removing time constraints or expanding the available time windows. This is not to say that more time be made available for negotiations, but rather the time constraints imposed by the business such as fiscal periods and contract dates that would affect your BATNA. For example, where deal timing would not allow enough time to find a replacement deal that meets your annual revenue targets that then limits the strength of your BATNA.

Changing adopted postures such as expressing empathy and alternatively playing ‘hardball’ can be confusing and may lead another party to distrust you based on perceived tactical gamesmanship. Rational negotiation discussed in the Bazerman-Neale book would avoid that risk and provides for a consistent approach capable of adapting to a wide range of scenarios that the other party may present.

This checklist by no means is a comprehensive list of all things that must be considered when preparing for and executing a negotiation. However, they are the key elements that I would look to emphasize with your salespeople and brush up on yourself.

 

 

Does Discounting Make A Bad Salesperson?

Featured

‘Common-sense’ says that discounting is bad for business or a necessary evil that we tolerate only when necessary. We create sales cultures that promote the idea that salespeople shouldn’t discount their wares. Testosterone-fuelled sales managers disdain sales reps who discount deals perceived as ‘too low’ and sales reps themselves play games of bravado sticking to price that put deals at unnecessary risk. We need to change this attitude, because compared with sales reps “leaving money on the table”, a rigid pricing culture is a bigger problem.

Let’s say you’re hell-bent on getting a specific price out of the market. The simplified diagram below shows you selling Q1 products at your P1 price with your average cost (AC) against a demand curve showing all demand for quantity Q at price P. Pretty simple – the more you charge P, the less quantity Q you will sell because there are fewer people with a willingness to pay the higher price.

The blue rectangle represents the total profit you can pull out of the market at that price. The small red triangle is the amount of money you’ve “left on the table”  because these people were willing to pay a higher price than you sold at. The people in the larger triangle to the right of the profit rectangle are the people who need your product but won’t pay your price.

Now there might be a couple of reasons why you would choose not to pursue the available market at lower prices:

1) You can’t produce or provide more than Q1 units of your product.

2) There are limited substitutes for your product or service. How often does Louis Vuitton have a “SALE!” sign in their store window? Why doesn’t Apple discount their products to the public more than 10%? The substitutes for either are limited. If you like OS X vs. Windows, you need a Mac from Apple. Apple has done a great job of making their experience unique vs. buying a Windows machine – whether it be the experience of buying in their store or using the Apple products.

3) You have a very small number of customers making very large and public deals and price integrity will affect your profit on your next deal. If you’re Boeing and selling a bunch of planes, your customers will know generally who paid how much for what.

In the vast majority of cases selling technology, I expect you can sell as much as you want and you’re in a competitive business with (from a customer’s perspective) nominal differentiation between you and your competition.

Discounting at the field sales level can have strategic importance for your business. By distributing the discounting down to the field rep level, the company gains the ability to capture buyers with a willingness to pay at different price points. The diagram below shows how a lot of individually-negotiated deals can conceptually capture more profit available in your market:

There is a lot of opportunity to use discounting to strategically capture more profit. Rather than derided as an incompetence, it should be integrated into the sales strategy.

Willingness-to-pay (WTP) is going to depend on customer size, value and importance of the business problem being solved, geography, competition, and a number of other factors too numerous to control. One could say that it is unrealistic to expect that your list price is anywhere close to finding the right number of customers willing to pay that amount and therefore discounting is essential.

Some companies that understand this concept set their list price near the maximum WTP and know that the discounts will slide along the demand curve until it meets their average cost + minimum profit, at which point they have a ‘floor’ set for their sales teams. You can see examples of this approach where you see discounting in markets that typically lands between 30-40% or more.

The challenge is one of ensuring your salespeople accurately identify the willingness-to-pay for each of their customers. This is an issue of sales and negotiating skill, and perhaps where sales managers should spend more resources developing in their sales teams and manage via a profitability KPI. Explain to your salespeople that discounting is a strategic tool used to identify the WTP for each of their customers, and that their job is to carefully negotiate to accurately identify that WTP on each deal.

As a manager, you should see some variance on a salesperson’s deals based on each customer’s different WTP. If you see abnormally low priced deals from one sales rep, you need to find out why. You may have a sales rep who is taking the easy way out and selling cheap and fast to turn volume. That’s the one to worry about. You might legitimately see ‘clumping’ between geographies and vertical markets as they will have specific common attributes – New York City’s corporate mix and WTP is likely different than the mix in Wichita, Kansas. But it shouldn’t be in the basement for only one rep for a sustained period.

Sales reps ARE going to leave some money on the table here and there due to variance in negotiating skill, but it will be insignificant compared with the larger market share you’ll obtain.

We need to strategically embrace discounting as a business tool, make it strategic, and capture more profit for our business. We don’t need to blame weak salespeople when in fact they might be doing exactly what they’re designed to do.

Change and context:

Why is everyone else crazy?

As a sales leader, I’ve been a part of many inter-departmental and cross-organizational discussions where new ideas for changes seem perfectly logical, yet are met with significant resistance by employees, customers and peers. Maybe it’s not that everyone else is crazy. In my professor’s Organizational Theory class taught by Dr. Mark Wexler, I may have found some explanation in his organizational archetypes we informally call the “Wexler Wheel”.

Organizations change for several reasons. It might be planned change because the management team is either dissatisfied with performance or have set new objectives. It might come from evolution within the business lifecycle such as moving from a growth to a maturity model. It might be driven by conflict: sometimes change comes from challenges between organizational units that have developed conflicting organizational cultures and change is required to move past the conflict. Change may also come from evolutionary changes such as scarcity of resources, changes to markets, or competition.

Organizational cultures are a product of their history, their people, the management team  (very much driven by the CEO’s own vision), and their operating environment. I’ve been thinking lately about the method Wexler classifies organizations. In his book, Leadership in Context: The Four Faces of Capitalism, Wexler discusses four world-views that although are largely discussed at the organizational level, I believe explain many of the reasons why there is so much conflict and resistance to change inside the organization at the departmental level.

Wexler’s four archetypes are:

  • Regulatory – the organization as a bureaucracy typified by mature organizations that seek to maintain their market position. The degree to which you are successful is the degree to which you successfully manage politics, hierarchy, tradition, rules, stability, long-term planning and loyalty. You know you’re visiting one when you see a picture of “Our Founder” in sepia tone in the lobby and it’s as quiet as a library.
  • Entrepreneurial – the organization as “buccaneer” typified by start-ups and other high-growth firms seeking to maximize growth, market share, revenue and profit – the dollar above all else. It is a world of intense competition, the cream rises to the top, ends justify the means, and they operate with open market libertarian ideals. Paradoxically, they operate with fewer explicit rules and are process-light, but with a high degree of control from the leadership.
  • Network – the organization as a source of new knowledge and innovation, typified by  creative, competitive R&D oriented organizations seeking to revolutionize how we live. Value comes from intellect, overcoming challenges, constant change and innovation, and new intellectual property. They typically operate with fewer rules and less formal structure.
  • Communitarian – the organization as collaborative workplace that is designed to benefit all stakeholders from shareholders to customers to employees and the community. Value comes from your contribution to the success of the firm and others around you – and you share in the success of everyone else. These firms tend to be more mature and measured in their growth but with more flexibility and less hierarchy than bureaucratic organizations.

The ‘Wexler Wheel’, source: Wexler, M. N. (2005). Leadership in Context: The Four Faces of Capitalism. Northampton, MA: Edward Elgar Publishing

In the diagram above, the x-axis describes the motivation moving left to right from a mature ‘maintain-the-status-quo’ attitude towards one that is very focused on competition and ‘winning’. The y-axis describes the operating environment moving top to bottom from a structured and controlled operating environment to a looser and more flexible organizational structure. Organizations will move along the axes according to maturity, changing competitive landscapes, the vision of their leadership, regulatory frameworks, etc. However, my experience is that inter-departmentally there are biases for one quadrant over another and the differing attitudes and structures carry with them inherent conflict that must be managed.

Imagine for a moment that you run a sales organization and as with most sales organizations, you live under continuous pressure to increase revenue and/or profit and/or market share. Sales leaders are often chosen for their dynamism and their track-record of performance in past roles. They’re rarely hired to “maintain the status quo”, or “hold hands and sing “kumbayah”, or “foster innovation”. They’re more often there to remove barriers to growth and motivate people to create a high performance culture. “Bring me the money” might be an apt catch-phrase. Classic Entrepreneurial world-view.

Now imagine you’re the R&D team in this same organization. I’m pretty sure no-one is paying their designers and developers on commission. It’s a different mind-set. Creating a culture of innovation, creativity, passion, intellectual property, flexible work hours… it’s a classic Network world-view.

Now imagine your Finance department. For them it’s not about making you feel warm and fuzzy inside, but rather about appropriate procedures and controls that protect the firm. They themselves are directed by regulatory frameworks defined by bureaucracies (government, standards organizations). Necessarily they have to operate in a Bureaucratic context – you can’t expect run a Finance department on the same terms as a Network or Entrepreneurial context, nor would you want to.

I can only hope you have an HR department that is concerned about personal and professional growth, talent acquisition and retention, and how all people feel about working for the organization – they need to operate and make decisions for what is best for the group. A classic communitarian context.

So when we move to create change that affects other departments within our organizations, it should be no surprise that we find it difficult to communicate. What appears to be a no-brainer in one context may not transfer easily to other contexts. Presuming you want to achieve consensus, it’s your responsibility as the change-agent to socialize your plans and orient your communications to fit each context.

Knowing where to find the common ground is key to successful consensus. For example, Entrepreneurial organizations and Networks will collaborate well to overcome competitive threats. Explaining how your changes will accomplish this will find an eager listener. Networks and Communitarian organizations will appreciate flexibility in your plan that enables them to accomplish the goal without being micro-managed in the process. A willingness to look for benefits for all contexts will help you gain the support you need. I can’t tell you how many times in Sales I’ve heard the expectation that everyone should simply line up under the Sales organization’s context (“We’re a Sales-driven organization!”). This simply is impossible. Finance and HR will NOT take a Machiavellian “ends-justifies-the-means” worldview – they can’t, and they shouldn’t.

Understanding the different cultures and operating contexts of both departments and other organizations you work with will make it much easier to communicate and action change for your organization. And a lot less frustrating when you understand and accept the reasons why this is.

December 2012

Motivating Your Teams – What Do They Care About?

In technology sales, so much of the focus is on money, whether it be salary, commissions, bonuses from the salesperson’s perspective, or revenue, profit, cash-flow and market-share from the business perspective. I’ve been in situations where sales managers think that this is really the only task at hand – “Bring in the money!” is the familiar refrain.

However, revenue and pay are lagging indicators. Let’s assume you’ve hired good talent for the job. Motivating that talent is a primary responsibility for you as a manager: meeting their needs better than their next best employment alternative and generating maximum productivity from them.

Why care about motivation? It’s extremely costly to lose even adequate salespeople, let alone your star rainmakers. It’s 1.5-3 months of search before the new person’s start-date. It’s often 3-12 months before they reach peak productivity depending on your sales cycles. Customer relationships are disrupted. Internal relationships must be rebuilt. Competitive knowledge is lost. In a technology sales organization, this is likely measured in hundreds of thousands of dollars in profits per employee turnover. What was your turnover during the last 12 months? Why?

Apparently, most supervisors don’t know what their employees really care about and spend what little time they do spend on motivation (~10%) on the wrong things.

I’ve been looking at an article by Kenneth Kovach from 1995, Employee Motivation: Addressing a Crucial Factor in Your Organization’s Performance, that looks at the gap between what a private-sector employee cares about, and what their supervisors *think* they care about. Kovach looks at both blue-collar and white-collar employees, compares results from 1946, 1981 and 1995 and in and of itself, the comparisons are interesting: they don’t change much across the years except that there is a significant emphasis on interesting work and a deemphasis on wanting help with personal problems.

 

What employees want (1946 results in parentheses):

1. Interesting work (6)

2. Full appreciation of work done (1)

3. Feeling of being in on things (2)

4. Job security (4)

5. Good wages (5)

6. Promotion and job growth in the organization (7)

7. Good working conditions (9)

8. Personal loyalty to employees (8)

9. Tactful discipline (10)

10. Sympathetic help with personal problems (3)

 

What is REALLY interesting is what supervisors of these people THINK the people want. The measures of supervisors were nearly identical for 1946, 1981 and 1995 (actual employee ‘wants’ from 1995 in parentheses):

1. Good wages (5)

2. Job security (4)

3. Promotion and job growth in the organization (6)

4. Good working conditions (7)

5. Interesting work (1)

6. Personal loyalty to employees (8)

7. Tactful discipline (9)

8. Full appreciation of work done (2)

9. Sympathetic help with personal problems (10)

10. Feeling of being in on things (3)

 

I believe there are a few things going on to cause this disconnect.

As Kovach suggests, I think there is some self-reference going on – the manager may think that what interests them is what also interests their employees.

I also think that managers may choose the least-path of resistance: in sales, it may be relatively easier to change a compensation plan than to make a job more interesting or spend the time on motivation – dismissive comments like “They’re paid to sell…they should be motivated!” are unhelpful. The idea that there are “self-motivated” individuals out there is ridiculous – motivation is a collaborative effort.

Under-30 age groups place more emphasis on pay and job security. When you look at this from the perspective of Maslow’s Hierarchy of Needs, it makes sense: Under-30s will be more focused on the more tangible basic lower levels of needs such as sustenance-based needs until they reach a level of comfort with them, after which they will begin to focus on somewhat less tangible and higher levels of needs that include appreciation of work, interesting work, and being in on things.

We spend a tremendous amount of money (upwards of 90+% of our sales budget spend) on compensation planning. Data suggests we spend 10% or less of our time on motivating employees. This seems perversely inverse to what we should be doing. Some of the ways we can make that happen include:

  • Providing more flexibility for an employee to achieve their goals
  • Involve people in goal-setting and strategy for their area of responsibility
  • Recognizing good work on an individual and group basis
  • Communicating inter-departmental and company goals and achievements clearly
  • Reassign under-performing employees to more appropriate roles where possible
  • Creating a positive work environment with the right management style for your team
  • Create a good compensation plan

For example, making a job more interesting may mean you have to coach and guide, and be less directive. Involve your people in sub-strategies related to their responsibilities. Instead of telling them exactly what to do, you may be better off describing the goals and some of the things that have worked and not worked, and asking them to develop their own plan, timelines and targets that meet your organizational objectives. Give them opportunities to solve more complex problems and you’ll not only make the job more interesting, but you may be surprised at the hidden talents that your people have.

More closely align your management with what your employees care about, and they’ll be far more likely to stay and be productive. You’ll also gain in the total value perceived by your employees without necessarily spending more money, and decrease the amount of hard cash you’ll have contribute to your compensation plan and other costly benefits. You can’t buy loyalty and passion.

Think of it this way: how much do you think an employee would accept in a compensation plan from Apple or Google vs. a job with you? 20% less? That’s one way you can measuring the value of organizational culture in hard dollars. Spend more management time on motivating the right factors for your team and you’ll benefit your bottom line this fiscal, guaranteed.