The point of procurement negotiation is to reach beneficial agreements with suppliers to secure goods and services. Doing it well requires a number of skills, including communication, research, organization, creativity, empathy, and strategic expertise.
By applying these skills and following best practices, you can negotiate great deals and drive value for your organization. Let's dive in!
What is the procurement negotiation process?
Procurement negotiation is the process of engaging with suppliers to establish agreeable terms for contracts. This includes pricing, payment terms, delivery dates, and other relevant factors.
The goal of procurement negotiation is to create mutually beneficial agreements that strengthen relationships and drive long-term business success.
What is the role of contract negotiation in the procurement process?
The point of contract negotiation is to define the terms and conditions of the agreement between buyer and supplier. Effective negotiation ensures that both parties are clear on their obligations, expectations, and rights, reducing the risk of misunderstandings or disputes in the future.
Ideally, the negotiation process identifies additional benefits for both parties, resulting in a contract that both sides value.
The importance of negotiation styles for procurement professionals
Negotiators tend to have different philosophies and approaches when it comes to negotiation tactics. A "hard-hitting" negotiator who's focused only on forcing concessions is unlikely to work creatively to find a better deal for everyone.
If you prefer innovative problem-solving and building long-term relationships, you might want to look for suppliers that share the same philosophy. However, if you feel energized by more combative negotiations, that may be the best approach for you.
Just remember that the style you use (or encounter) can make the difference between leaving you thrilled or exhausted. Choose wisely.
7 stages of procurement negotiations
Navigating the procurement negotiation process involves a series of stages including: preparation, opening, testing, proposing, bargaining, agreement, and closure.
1. Preparation
During this stage of the negotiation process, have your procurement teams gather as much information as they can about the product or service being negotiated. Research your existing supplier (if you have one), the market and competitors, set clear objectives and priorities, and understand the requirements of both parties—including your key performance indicators (KPIs).
Try to anticipate potential challenges before you begin negotiations and come up with effective strategies to overcome them, ultimately increasing the chance of reaching a mutually beneficial agreement. Taking a strategic approach from the get-go can help you negotiate better prices, reduce costs, and build stronger relationships.
2. Opening
The opening stage of procurement negotiation can set the tone for the entire process. The two parties will introduce themselves, state their objectives and expectations, and discuss any initial offers or proposals. Clear, transparent communication helps establish trust and understanding from the beginning.
This stage can also help identify any potential issues or areas of concern that may need to be addressed. By effectively navigating the opening stage, both parties can set a solid foundation for the entire process.
3. Testing
The third stage involves testing proposed solutions or products to ensure they meet the required specifications and standards.
In the testing phase, be sure to identify any potential issues or inconsistencies between what's being promised and what might be delivered. Testing can include performance evaluations, quality controls, product demonstrations, or even facility inspections to validate the supplier's capabilities and make sure they can deliver.
By conducting thorough testing during this stage, both parties can ensure that the final agreement will result in successful outcomes for all involved.
4. Proposing
This is an opportunity for each party to demonstrate the value they bring to the partnership and negotiate terms that are beneficial for both sides.
Proposing involves laying out the details of the deal, including pricing, delivery schedules, payment terms, and any additional conditions that may be relevant to the agreement.
Both parties need to communicate their expectations clearly and consider the offers presented carefully before moving on to the final stages of a successful negotiation.
5. Bargaining
Bargaining is key to reaching a mutually beneficial agreement. This stage moves fluidly between offers and counteroffers while discussing concessions, compromises, and potential innovations to finalize the terms of the deal.
During this stage, negotiations progress toward a final resolution that meets the needs and objectives of both parties.
6. Agreement
In the agreement phase, the parties finalize the terms and conditions of the agreement. Negotiators work together to ensure that both sides are satisfied and that the agreement is fair and beneficial for everyone. Make sure all the details are clear and agreed upon before moving forward with the procurement process.
7. Closure
Closure is when you formalize the contract paperwork, sign off on the agreement, and set the expectations for the implementation of the deal. A well-defined closure stage ensures that the procurement process ends on a positive, successful note.
Common contract negotiation points
At a bare minimum, every contract should include specific terms for each of the items in the list below. Additional negotiation points such as place of manufacture, delivery methods, or options for renewal may also be considered.
- Pricing: Negotiating a fair price that meets both parties' expectations
- Payment terms: Agreeing on payment schedules, methods, and terms such as early payment discounts or late fees
- Delivery dates: Establishing realistic timelines for product or service delivery
- Quality standards: Ensuring that the quality of goods or services meets specified requirements
- Legal terms: Clarifying legal obligations, liabilities, and dispute resolution mechanisms
How to successfully navigate procurement negotiation
As in any negotiation, it's important to keep your goals and priorities in mind at all times. Soft skills like understanding different negotiation styles can also help you adapt your approach to better communicate and reach agreements.
Don't skip that research, and remember that active listening carefully is often more important than speaking. By being strategic and empathetic in your negotiations, your procurement team can increase your chance of successful negotiations while building strong relationships.
Leveraging automation in the procurement process
If your company depends on procurement contracts for success, you'll need to oversee the implementation of those contracts too—as well as day-to-day operations. But managing purchase orders, invoices, approvals, and payments can be a real hassle, especially as your operations scale.
That's why so many companies are turning to financial automation software to help them handle the process.
Managing approvals for procurement invoices
For every pair of socks Bombas sells, they donate another item to help people who are experiencing homelessness. Melissa Harris joined the company as Director of Accounting Operations in January 2022. Back then, the team was using a clunky AP approval workflow that forced her to specify an approver manually for each vendor.
“In BILL Accounts Payable, I can just check all the boxes next to the vendors an approver is responsible for,” Harris says. “I thought that was just so smooth and so seamless compared to what I had experienced with other AP systems.”
Once she assigns an approver to a vendor, BILL’s AI assigns the same approver to each bill from that vendor and lets her double-check the approver and vendor information before sending it on.
Streamlining invoice processing and payments
Similarly, Marine Layer is a California casual retail apparel brand that processes between 200 and 300 invoices in an average week.
“If I had to process invoices manually, just trying to cut checks or trying to send out wires every day would probably take up my entire day at least,” says Financial Accountant Kelly Ransom. “And BILL also really cuts down on any sort of manual errors that might happen if we had to cut checks or do wires every day.”
Three-way matching and more
To cut down on errors even more, BILL offers three-way matching—checking invoices against purchase orders and delivery receipts automatically. It's an extra measure of assurance that the terms you negotiated for are being honored in practice.
Ready to leverage automation in your procurement process?
If you like the idea of automating the time-consuming tasks that come with purchase orders, invoices, approvals, and payments, consider a risk-free trial of BILL Accounts Payable.
