SAMPLE TWO: USING THE BLUEPRINTING PROCESS IN A LARGE ANDCOMPLEX NEGOTIATION

It’s April 1 and you’ve just been told by a potential new global customer that after all your months of trying to sell some of your machines to them, it’s finally down to a choice between you and your closest competitor. The customer wants to see your “best foot forward” proposal in six weeks (by May 15) and has hinted that your competitor is aggressively pursuing them, is being quite creative on price, and has a pretty good product fit.

Establishing a Negotiation Goal (Five Minutes)

As always, the first thing you must do in beginning this negotiation is to remember that your goal is to “create joint value and divide it given concerns for fairness in the ongoing relationship.”

Estimating the Blueprint: The CNA Estimation (Two-and-a-Half to Three Hours)

Your side (30 minutes).  You complete a quick overview of your own CNA and determine that you will most likely lose the business if you don’t reach agreement with the customer in this negotiation. In this case, losing the business means that based on your short-term forecast for this customer, you will lose about $750,000 in global revenue in the first year. If, however, you take into consideration potential long-term revenues from this customer, total CNA costs could be as much as $2.5 million. In addition, by not closing this deal you will lose the costs associated with the four months you’ve spent selling to the customer—approximately $25,000 for staff time, product demonstrations, and so on.

You will also have some soft costs in the form of “political heat” from your vice president of global sales and the head of your product management group, both of whom have taken a personal interest in this sale as it affects their bonuses as well as yours. In addition, losing this sale will, in effect, fund a competitor by sending these revenues to them.

The only good news here is that the market is growing, albeit slowly compared to past years, the chances of replacing this customer are fairly good, and your list of other prospects for sales looks good at the moment. Also, while you have no other customers that are this large and ready to close, there are at least two or three smaller ones that you feel positive about. All of them together could replace this sale, but it’s always more profitable to close and service one customer than several.

Their side (two to three hours).  As always, attempting to analyze the customer’s CNA is a bit trickier. In this case, you know their CNA is to go to your major competitor and, or so they’ve hinted, for less money. What’s tricky, though, is the total analysis—that is, determining the positive and negative effects—of choosing the competitor over you. The first thing you do is pull together a team from your side. You invite one of your company’s account managers, who once worked for your competitor on this deal, a guy from engineering who just came to you from the customer’s organization, and some additional product experts. You give them an overview of the situation and ask them to help you brainstorm all the “elements” the customer should be considering when comparing your offer with their CNA.

After brainstorming the elements, you go back and ask the group whether, from the customer’s perspective, these elements are positives or negatives compared to choosing you. The team breaks down the analysis in terms of design of the solution, delivery and installation, ongoing maintenance, output, and long-term upkeep. The team members also suggest doing an evaluation of comparative terms and conditions. The results of their analysis suggest the questions that must be addressed are:

Design Elements Questions

• Is there an off-the-shelf solution that fits the customer’s needs?

• How much “ground up” design is needed to build and test custom aspects?

• How much time/commitment is needed from the customer for design?

Delivery and Installation Elements Questions

• How long will it take?

• How long will the customer’s operation be down while the machine is being installed?

• How labor intensive will it be for the customer?

Maintenance Elements Questions

• How often does the machine break down?

• What are the service hours and fees?

• How difficult would it be to train the customer’s team to run it?

Output Elements Questions

• How many units per hour will their machine put out?

• What is the defect rate of the customer’s machine?

• Can they run 24/7?

Upkeep Elements Questions

• What do maintenance costs look like in years two, three, and four?

• How easily upgradable is the machine?

• What is the machine’s expected life?

Terms and Conditions Elements Questions

• Is it better to lease or buy?

• How much flexibility is there in contracting?

• What are the payment terms?

• What is the short-term product price?

Now, you’ve determined in regard to design that your competitor does have a pretty good off-the-shelf machine, and yours would require some customization. Your customization, however, would be free and would require very little customer interface.

As for installation, your engineering department has just found some independent studies showing that machines that are easily customized— like yours—are also relatively easy to install, and therefore end up taking about as much time to put in as less flexible off-the-shelf machines.

As far as maintenance is concerned, the folks in your engineering department, especially the engineer that just came over from the customer, say that you have a huge advantage in terms of your machine’s reliability. Of course, customers aren’t likely to tell you that, but it’s one of your strengths.

In regard to output, you and your customer are pretty close. Their output may be a bit higher than yours, but your machines run a higher percentage of the time and thus probably make up for the difference.

In terms of upkeep, your machines break down much less frequently and as a result last longer because of how they’ve been engineered.

Finally, in regard to terms and conditions, you and your competitor both offer lease or buy options, your industry contracts are all pretty much the same, and payment terms are usually 25 percent at signing, 25 percent on delivery, and 50 percent when running. Your “price” is a bit higher, but you’ve determined that because of the reliability and flexibility of your machines, they have less downtime, easier long-term upgrades, and longer shelf life. As a result, not only does your return on investment (ROI) get better after year one but your product is less expensive to own in years two and three.

Power analysis.  In answering the questions about each group of elements, you’ve determined that there is a Gap between what you have to offer and the customer’s CNA (your competitor) in all but one of them (output). Based on that, you feel that you should have more power in this negotiation. The only problem is that either your customer doesn’t have all the data on their CNA that you do or they’re bluffing.

Estimating the Blueprint: The Wish List Estimation (Two Hours)

Your side (30 minutes).  You’ve pulled together your product manager, pricing manager, and someone from the legal department for this estimation and, after much wrangling, have prioritized your Wish List of trades as follows:

Wish List Estimation
Our Side
Rank	Item	Weight	Range (High to Low)
1.	Length of contract	30%	3 to 1 years
2.	Price	25%	$300 to $250,000 per machine
3.	Volume	15%	3 to 2 machines
4.	Upgrades	15%	50% discount to free
5.	Man hours provided by you to install	10%	100 to 150
6.	Ongoing service	5%	8/5 to 24/7

Their side (one-and-a-half hours).  With the help of the account manager who used to work for your competitor and your pricing manager, you’ve estimated the types of trades this customer has looked for in the past and come up with the following educated guesses for their Wish List:

Wish List estimation
The Other Side
Rank	Item	Weight	Range (High to Low)
1.	Price	40%	$200 to $300,000 per machine
2.	Ongoing service	25%	24/7 to 8/5
3.	Upgrades	15%	Free to 75% discount
4.	Length of contract	10%	1 year to ???
5.	Volume	5%	2 machines to ???
6.	Man hours provided by you to install	5%	200 to 100

Validating the Estimation (One Day)

Validating the CNA Estimation.  You know exactly what the customer’s CNA is, and you’ve done a pretty good job of analyzing its positive and negative elements. Now, in order to learn how your customer sees their CNA and to educate them about it, you prepare the following questions:

• Have you determined how much customization the two machines will need to install?

• How do you see the impact on your facility during installation?

• Do you have a certain amount of time budgeted for installation?

• What are your expectations in terms of machine downtime?

• When the machine breaks down, how quickly do you expect service?

• How much staff retraining do you expect you’ll need?

• Do you have a figure in mind for year-one maintenance costs?

• Do you have figures in mind for costs in years two through four?

• How would you like to handle future upgrades?

• Do you complete total cost of ownership analyses or just compare acquisition price?

Validating the Wish List Estimation.  Having developed questions to validate your customer’s CNA, you now develop questions to validate their Wish List items as follows:

• I understand you will be looking to negotiate price, service, upgrades, length of contract, volume, and man hours to install. Is that right? Is there anything missing? Is there anything that should be deleted?

• What would you rank as your lead priority? That is, what should we focus on most? How about second, third, fourth, and so on?

• Do you have any specific targets you’d like to hit for each item?

You now send out an e-mail to the head buyer, vice president of manufacturing, vice president of finance, and all the other people you’ve been selling to, and ask them if you can have 15 minutes of their time to better understand their needs for the upcoming negotiation. If they ask for them, you can send the questions in advance. When you get together with them, whether on the phone or in person, you ask the easy Wish List questions first to get the ball rolling and then go on to the CNA questions. You also bring someone else from your account team with you to record the customer’s answers.

Using the Blueprint to Create Value (One Hour)

Having had a validation meeting (or meetings) with influential managers on several levels, you now feel that even though you didn’t get answers to all your questions, you were still able to tighten up your estimations. You also feel that you succeeded in educating them on many aspects of their CNA as well as on many of the items to be agreed on in the negotiation. Now, taking into account your interest in length of contract, price, and volume and theirs in price, service, and upgrades, you devise three MEOs:

Item	Option 1: Short-Term Relationship and Lower Price	Option 2: Long-Term Strategic Relationship	Option 3: A Middle Ground
Length	One year	Three years	Two years
Price	$295,000	$250,000 per machine	$275,000 per machine
Volume	One machine	Three machines	Two machines
Service	8/5	24/7	24/5
Upgrades	50% discount	Free	75% discount
Installation support	100 hours	300 hours	200 hours

Using the Blueprint to Divide Value (One Hour)

Now it’s May 7 and you’re ready to make a presentation—a full week before the customer’s due date. You invite the customer’s head buyer, vice president of manufacturing, and vice president of finance, and bring along product and technical support people from your side.

You open the presentation by thanking the group for taking the time to answer your questions a few weeks earlier and let them know that their doing so went a long way toward helping you customize three different potential relationships. You also tell them you realize that if they don’t choose you, they will choose your nearest competitor, and you admit that your competitor has a pretty good off-the-shelf solution as well as pretty good output. You also note that during your earlier conversations the buyer and the vice president of finance put a lot of emphasis on price, and that the vice president of manufacturing talked a lot about uptime—the reliability of machines. This is the point at which you present the Gap you found in your CNA analysis, specifically:

• Your machines are higher in short-term price (year one).

• Your machines are X percent more reliable than your competitor’s, resulting in:

  • Higher output (which manufacturing was concerned with).

  • Less maintenance cost (which the buyer and finance department wanted).

• The combination of higher output and lower maintenance makes your machines cost less starting late in year one and going down by X percent in years two and three.

You tell them that based on their needs and the value proposition of your competitor, you’ve put together three different relationships, and highlight them on a flipchart or PowerPoint presentation. You briefly overview some key elements of each, then offer everyone a handout containing the details and go through them. You now ask them to rank the three offers in terms of their preference. They quickly agree the short-term option as the least preferable, but there’s a lot of internal negotiation among them over which of the remaining options is most preferable. It’s obvious that neither is quite right, so at this point you begin the trading. They keep telling you that you’re more expensive, but you keep going back to total costs. They try to push you for concessions, but you continue to trade. A couple of times they surprise you with demands. You quickly determine which are anchors and ignore them by asking questions or presenting more rational data, and determine which are misdiagnosed CNAs and go back to the facts of the CNA. In the end, you settle on this deal:

FINAL AGREEMENT

Length: Three years

Price: $255,000 per machine

Volume: Three machines

Service: Five days x 24 hours

Upgrades: 25% discount

Installation support: 300 hours

As you can see, both case studies—and, for that matter, virtually all negotiations—involve the basic elements of the blueprint: CNAs for both sides, Wish Lists for both sides, and a final Agreement Zone. In addition, both negotiations followed the same process for acquiring and using the data although in different time frames and by different means— phone/e-mail rather than in person. And, most important, both negotiations ended with both sides coming away with more than they had anticipated getting when they went into the negotiation.

In the Appendix, you will find two copies of a worksheet that can be used to guide the process of blueprinting business deals. The first has been completed using data from the second case study in this chapter. The second is a blank one to which you can transfer all the data you’ve gathered for your own negotiation so that you’ll have a complete blueprint of it. The Appendix also contains some simple instructions for completing the worksheets.

As I said in the beginning of this chapter, the Strategic Negotiation Process doesn’t only work for negotiating sales. In fact, it works—and can be applied—in literally any type of negotiation you might be involved in, even something as unlike a sales negotiation as negotiating with a child about going to bed. Look at it this way. When you’re trying to get a child to bed, your immediate aim is to get him or her to go to sleep, but your ultimate goal is to do it in a way that will benefit both of you and not do any damage to your relationship. Does that sound familiar?

There are also, of course, Consequences of No Agreement for both sides. If you can’t get your child to bed early (i.e., you don’t reach agreement), you’re going to have less time for yourself than you’d like—your CNA. The child’s CNA will be that Mom and/or Dad will be annoyed with them, they won’t get enough sleep, and they’ll be cranky in the morning. Now, when I was a kid, my CNA was serious enough that there was no negotiation. I knew very well who had the power in any negotiation with my parents. These days, though, there’s a bit more give and take.

If, however, all you do is ask them to go to bed early, it’s a zero-sum concession, because for every five minutes you gain, they lose, and vice versa. So what do you do? You look for things you can trade, something of value to them that doesn’t cost you very much. “Okay, son,” you say, “you go to bed and I’ll read you a story.” As a result, your child gets something that he values highly and that costs you very little. In fact, you like it. Of course, in this case, you didn’t have to do a formal estimation or validation because you already knew what was important to both of you as well as what your CNAs were. Now, if only business negotiations could be that easy. . . .