Friday, January 14, 2011

It's Not Fair!

Verdi’s face was bright red as he walked into Tyler Gitou’s office.

Tyler suppressed a smile and calmly said, “You look a little upset.”

“Ahhh,” Verdi exhaled loudly. “I am so frustrated by the other party’s demands! I don’t know how to respond.”

“Demands?” Tyler said. “Sounds like you’re in a very positional negotiation environment. What’s going on?”

“Well, we have worked for the last three weeks on the specs for some materials the client needs. They are a high-quality manufacturer of consumer goods and they take great care in choosing suppliers.”

“That's a good business practice,” Tyler said.

“They are good business people and have been very successful. But now that we are close to signing the deal, they have suddenly raised issues around delivery. They are requiring that for every day we are late on delivery we pay a penalty of 25% of the value of the purchase order. That means a one-day delay could wipe out all the profits for the deal. And the challenge is the client controls some parts of the supply chain so we can’t manage all the risk. The delay may not be our fault but we pay the penalty! It feels like what they’re asking for is not… fair!”

“That’s the sign of a legitimacy problem,” Tyler said. “When your instincts say, ‘something in what they’ve asked for is not fair’ it means you are struggling to understand what makes the request legitimate.”

“What do you mean by ‘legitimate’?” Verdi asked.

“Legitimate as in where else has this been done before? Who else has agreed to this term?” Tyler said. “Is this an industry practice? Have we done it with this client on other deals? Are we getting something of equal value in exchange? Ask the client to help you understand the legitimacy of the request. Try something like, ‘I understand your interest in making sure we deliver on time. But I am struggling with a model that has us bearing so much of the risk. Our practice, and what I’ve seen in the industry, is to accept risk where we have control.’”

Verdi laughed. “I was thinking of something like, ‘Are you guys nuts?’. Yours is definitely a better response!”

“A Deal Whisperer knows that the other party is always entitled to ask for anything. The challenge is in saying ‘no’ in a way that maintains a constructive atmosphere and builds collaboration. Just as you need to first understand why they believe this is legitimate, you then need to share your point of view as to why it’s not. Don’t be afraid to explain how unbalanced risk will hurt your business and the outcome of the deal. To maximize the potential value of a deal, both parties should understand what the path to mutual success looks like and be ready to help the other down that path.”

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