Traditionally, buying companies seek to limit their risk exposure by diversifying their vendor pool. But if all vendors in an industry face the same challenge to keep costs in check, for example rising wages, it is time to do something differently.
The answers lay in the method the buying and selling company use to negotiate value. Most companies think that using a collaborative negotiation approach should be reserved for the service providers who are already performing well. That’s a huge mistake.
The problem lies in the bargaining process not with the attempt to control costs. Both the buying company and the service provider spoke only of claiming their value (each attempting to capture as much margin as possible), rather than about ways in which to create and then allocate newly created value. The book, Getting to We, outlines three ways business people negotiate value. Negotiators can claim value (literally take the largest share of a limited resource), create and then claim value (expand the pie and then take the largest share of that pie — a limited resource) or they can create and allocate value for mutual gain.
This third method for negotiating value is a literally a framework.
Unlike conversations centered around claiming value which are one off events, the two companies are in effect structuring an approach to work together to solve problems associated with rising costs, disruptive innovations and pressures to reduce costs.
Allocating value may seem too good to be true: it is not. Allocating value is real and companies have done it. The article “Unlock Value By Decreasing Vendor Risk” (http://www.ssonetwork.com/business-process-outsourcing/articles/unlock-value-by-decreasing-vendor-risk) describes how two companies successfully allocated value by decreasing risk. Establishing a financial framework instead of a one-time negotiation to fix the fee does require a significant shift in both companies’ mindsets.
Both parties have to have a What’s–In-It-for-We attitude. This attitude is the philosophical mantra for all highly collaborative relationships, and for allocating value.
To truly deliver savings without sacrificing one company at the expense of the other, both companies need a we mindset that is the opposite of the mindset used by negotiators when claiming value for their company.
If you accept the we mindset, then you accept the reality that wages are going to rise industry-wide at some point.
Rather than shifting the burden to the vendor in a fixed fee agreement, the parties would seek ways to absorb the rising wages and to reduce costs in other areas.
You may have at least one at risk vendor in your pool and that vendor is likely facing pressures that are industry-wide. Rather than take a more traditional value claiming approach to negotiating (or enforcing) the agreement, try establishing a value allocation framework instead.
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