Future-proofing your way to a robust financial position in an uncertain economy
Neil Clothier, senior negotiator at Huthwaite International, discusses two strategies businesses can use to future proof their finances.
Better negotiation can and should pay dividends
Many business owners are understandably feeling nervous about the future. However, an area many often fail to consider when it comes to increasing margin, and re-establishing stability, is negotiation; both internally and externally. At times of uncertainty, better negotiation can and should pay dividends.
- Companies with significant reserves will benefit from greater returns, a potential increase in consumer spending and - depending on the sector - the ability to charge more for products and services.
- There is a huge number of businesses relying on loans and third-party finance and the increase in borrowing costs can seriously impact their bottom line.
What strategies and tactics can organisations use to negotiate beneficial deals?
So, how can businesses better utilise negotiation tactics to help strengthen business growth, profit and general financial stability? Effective negotiation is not a dark art. It’s a well-researched science that can be used by all businesses with the right training, and there are some initial strategies that can be implemented to help stabilise the bottom line:
- Renegotiate existing supplier contracts
- Buy more effectively and negotiate on price
Renegotiate existing supplier contracts
Firstly, reviewing supplier contracts can be a straightforward and effective way to increase margin and lower operating costs. A common misconception is that contracts aren’t open for renegotiation once terms are agreed. This simply isn’t true. In most cases negotiation is always an option.
I say in most cases. it’s important to apply a strategic approach to any cost conversations you start. You don’t want to alienate a contractor or supplier that your business is critically dependent on.
For the purpose of increasing profit through contract renegotiation, most companies have suppliers that fall into one or more of three main categories:
Non-differentiated – when the supplier has an undifferentiated commodity product that’s easy to source elsewhere.
With non-differentiated suppliers, you can renegotiate contract terms quite easily. There are a bountiful number of suppliers offering the same, or similar service, so your business is, therefore, crucial to them. The balance of power is firmly with you.
An example of a non-differentiated supplier is an office stationary provider – this relationship can be treated purely on a transactional/commercial basis, in other words, you can be firm on cost, and have plenty of competitor quotes to play with. This provides plenty of room for negotiation, without opening your business to risk, should your supplier walk away.
Semi-strategic – when the supplier is important and harder to replace but not critically so.
Semi-strategic suppliers represent the ‘broad band’ in the middle where you’ll likely find the most pay off with regards renegotiation success. Neither party wants to leave the other, the relationship is important to both sides but not critically so. The key to an effective renegotiation here is to reaffirm your common ground. That is, that you’re both in the relationship to make money. You both want to continue working together. By them allowing you to adjust your financial agreement means you’ll be better able to continue the relationship for the good of you both. A renegotiation in this case is a win-win.
Strategic and critical – when the supplier is critical to your business and would be very hard to replace.
This would include supplier contracts that are strategically critical to your business, such as with a specialist manufacturer. These negotiations need to be handled with great care and undertaken in the context of the negotiation agreements you have in place. Any attempt to revisit these mid-term could risk a negative impact on the relationship and should be avoided.
When categorising suppliers it comes down to scarcity. How unique is the supplier’s solution? In other words, how many competitors does the supplier have? A supplier with few or no competitors will constitute high supplier risk than one with many. The specialist manufacturer supplier, for example, would be very difficult to substitute and so constitutes a high supplier risk. On the other hand, and referencing my previous point, the supplier of office stationery will have many competitors and will be categorised as low supplier risk.
Meanwhile, profit impact is about the financial impact of the good or service. How dependent is the company on the particular supplier for its financial success? In the case of the specialist manufacturer, its products are likely to be at the heart of a company’s product offering, meaning it has high-profit impact, whereas the supplier of office stationery has insignificant profit impact.
However, no matter how intimidating the prospect of a negotiation may seem, remember, vendors and suppliers have a business to run too and are keen on expanding them just as much as you are. One of the best ways to ensure you have an equal say in re-negotiations is by putting forward the value you bring to the table, not just financial, but non-financial services in lieu of cash, such as strong connections in the business community, which could lead to new business for the supplier.
Buy more effectively and negotiate on price
A second point to consider is how you purchase and negotiate on price. Big businesses utilise the services of procurement companies for a reason – they can save significant amounts of money by negotiating on price and quantities. Applying, the ‘I can and will negotiate on this deal’ attitude to your own business strategy can reap real rewards. If you ensure maximum margin is extracted from all new supplier contracts from the offset, it will pay big in the long run.
Most people have a good understanding of what they need to do to secure a quality deal, however, in practice, buyers are making frequent errors that unwittingly see them lose profit. Price negotiations with suppliers can depend heavily on the skill of the individual in question. However, for those getting it right, smart purchasing has the power to accelerate market development and boost profitability.
But shopping around doesn’t just mean opting for the cheapest deal – it’s also important to consider the service you are set to receive in return. Find a comfortable middle ground. A mistake made by many businesses is to buy the cheapest goods and as a result this can seriously impact on productivity. Think carefully about the areas in which you can afford to compromise and the areas which require a little extra investment. Striking this balance is crucial to maintaining quality service for your customers.
Of course, negotiations don’t always fall into an easy three step rule, and can quickly become a complex and time intensive strand of your business strategy if not effectively managed. Despite this, businesses really can’t afford to feel intimidated by the prospect of negotiating with existing or new suppliers, not least in a climate where interest rates are rising and deals are being rocked by an uncertain political climate.
Whether you invest in training designed to up-skill your team and improve their negotiation skills, or you take baby steps and start by looking at smaller contracts that can be re-negotiated to ease cash flow, the important thing to do is to consider negotiation as an essential tool within your business strategy, and ensure you develop an effective and systematic approach to negotiations.