A Primer on Outsourcing Negotiation
The following article is an excerpt or derived from Selling Outsourcing Services by Grant Lange.
I am always asked if there is a “silver bullet” to being a successful negotiator. Unfortunately, there is no answer to this question. At a basic level, negotiation is a task of influence—trying to get someone to do or to stop doing something. Whether or not you realize it, you are in active negotiations with people around you throughout the day. Ultimately, your ability to be an effective negotiator in both your personal and professional lives depends on a number of variables, including your social style and how you deal with conflict.
Approaching the Negotiation Process
I will leave it to you to determine your social style, your personality type, and your style of approaching conflict. What I will say is that while your social style may be so heavily ingrained in who you are as a person that it cannot change, how you approach conflict can be successfully tempered at the negotiation table. I speak from experience as an extremely competitive individual who has learned to temper his approach to conflict by keeping his competitive arousal in check and focusing on collaboration to be more effective at the negotiation table. Regardless of your social style and conflict mode, to be a successful negotiator, you need three things:
- A strong mental and situational awareness that yields the ability to spot the “game” that unfolds during the negotiation process;
- A process utilized in each negotiation that you are engaged in and the skill to use that process in a disciplined manner;
- The ability and willingness to have difficult conversations.
Your situational awareness (No. 1) and your affinity for difficult conversations (No. 3) must be perfected over time. As I will discuss shortly, preparation for any negotiation is absolutely critical. Failure to do so is likely to yield failure. As it relates to preparation, I strictly adhere to the approach which New York Giants head coach Tom Coughlin shared during a press conference before Super Bowl XLVI—humble enough to prepare, confident enough to perform. As you prepare, be mindful of the fact that the actual negotiation may not flow as smoothly as it did when you role-played with your colleagues at the office. As long as you can spot the game and utilize the process suggested in No. 2, then you will be properly prepared for success. As it relates to utilizing a disciplined process, prepare for the negotiation as you might for a boxing match. In the words of the great philosopher and pugilist Mike Tyson, remember: “Everyone has a plan till they get punched in the mouth.”
Keeping Your Competitive Arousal in Check
The other key component you need to be a successful negotiator is the ability to keep your competitive arousal in check. As an attorney, I have no problem saying that most attorneys are extremely competitive and are trained to see conflicts in terms of right and wrong. So you can only imagine the level of intensity and competitiveness that results when two attorneys from opposing sides negotiate delivery terms and conditions for an #outsourcing agreement. Generally, if you let the attorneys run the show, it will be chaos. Even more so than their procurement colleagues, they are laser-focused on the allocation of blame and the consequences of any failure during service delivery. In their perceived role as the defenders of their respective clients, the attorneys very quickly take a position that they are unwilling to yield.
In almost every outsourcing negotiation in which I have been engaged, the client and the client’s counsel provide their standard terms and conditions for review and comment by the service provider. Given the likely unbalanced allocation of risk and reward in the standard terms, the service provider’s counsel reviews the terms and conditions, redlines them extensively, and sends them back to the client. Upon receipt, the client reviews the changes and deletes most of them using another color in the “Track Changes” function in Microsoft Word. The process usually continues for multiple iterations until a call or meeting is scheduled to formally negotiate any outstanding issues. If you have ever been a party to one of these calls or meetings, battle lines are drawn quickly. It is not too long before an impasse is reached, as neither party is willing to retrench from the party position. I do not want to indict all attorneys as members of the deal-prevention force. Some of them can find a reasonable middle ground that yields an acceptable level of risk and reward, given the nature of services being provided. But those attorneys are clearly the exception to the rule.
Make an effort to identify with the party with whom you will be negotiating beyond the terms and conditions in the agreement; it definitely makes a difference.
Attorneys who can see the vast gulf between right and wrong, and understand the commercial aspects of the pending transaction should be sought out for outsourcing negotiations. The Advanced Commercial Mediation Institute conducted a survey in which commercial mediators were asked if the disputing parties were more focused on winning or on obtaining a good deal. The responses revealed that the disputing parties were much more likely to focus on winning when their attorneys were heavily involved and influential at the beginning of the dispute. In a Harvard Business Review article from May 2008, Deepak Malhotra, Gillian Ku, and J. Keith Murnighan suggested that this win at all costs type of decision-making was driven by an “adrenaline fueled emotional state,” called competitive arousal.
We can probably all think of a time when we were victims of our competitive arousal and made a decision in the heat of battle that, in retrospect, looked foolish. Sometimes, we want to win at all costs, even if the decision-making process lacks any sound judgment and is solely based on competitive arousal. To mitigate this win at all cost dynamic, it is critical that the business leadership understand the legal issues, so they can stay in control of the negotiation and bring the attorneys to the table only when absolutely necessary. Similarly, once they have been invited to the party, the attorneys need to understand the nature of the services being contemplated in the transaction and the amount of risk inherent in delivery. By taking this approach, the level of competitive arousal can be kept in check, and reaching agreement on key terms and conditions can be achieved.
Let us assume that we have reined in our competitive arousal, our attorneys are in the bullpen, and we are now about to begin the negotiation process. The key question is: How do we reach an agreement that yields an acceptable level of risk and reward for both parties to the transaction? My answer has been the same for many years and has served me well in the marketplace. Frankly, it is not overly complex and has four key principles and seven elements. If you can master the “4×7,” then you are well on your path to becoming a very successful negotiator. The four principles are as follows:
- Temper your approach based upon the amount of risk inherent in delivery.
- Temper your approach based upon the geographic region in which you are engaged.
- Temper your approach based upon the person sitting across from you at the negotiation table.
- Conflicts are created, conducted, and sustained by human beings and can be resolved by human beings.
Principle 4 is a recent addition to the list (a list that I had not changed in 15 years, so this was a big deal). The addition came from a 2010 speech by former Senate Majority Leader George Mitchell, who was named as a special envoy to the Middle East. After being introduced into this most critical and challenging role, Mitchell stated that “conflicts are created, conducted, and sustained by human beings and can be resolved by human beings.” This statement, while obvious, made me pause and think about some of the most challenging negotiations I have ever experienced in my professional career and how I could have resolved them much more effectively by knowing this simple rule. I have, therefore, adopted this exact quote as my fourth key negotiation principle. I am in no way comparing negotiating outsourcing terms and conditions to negotiating peace in the Middle East, but keeping the scope of the negotiation in which you are engaged in perspective is something you should think about when drawing the battle lines around potential “deal-breaker” provisions.
In addition to these four core principles, it is important to remember that every negotiation has seven elements. The seven element approach to a principled negotiation stems from the book “Getting to Yes” written by Roger Fisher and William Ury of the Harvard Negotiation Project. The seven elements are interests, options, legitimacy, alternatives, commitment, communication, and relationship. The key to success is your ability to identify these elements and their connectivity, and, most important, to understand how they evolve during a negotiation. In addition, as we discussed above, it is absolutely critical that you take the requisite time to prepare for any negotiation and carefully consider how the seven elements can impact the negotiation. If you have not prepared properly, you might as well cancel the meeting because the result will not be optimal. On this issue, I will restate New York Giants coach Tom Coughlin’s approach: humble enough to prepare, confident enough to perform. With respect to this approach, I simply say: Learn it, know it, and live it.
Ultimately, these seven elements dictate your likelihood of success in any competitive procurement for outsourcing services as well as the ultimate words within the four corners of the agreement. The interconnectivity between the elements is demonstrated in the basic negotiation equation, a desired output of which is to reach an agreement that satisfies the mutual interests of the parties. If an option is identified that fulfills those interests, then a clear path forward exists; if not, then the parties may have to pursue their alternatives, more commonly known as their best alternative to a negotiated agreement (BATNA). As I like to say, negotiation it is that simple and that complex.
Those seven elements are as follows:
- Interests: What are the needs, concerns, goals, hopes, and fears that are motivating the other party to negotiate?
- Options: What approaches can be identified that meet the mutual interests of the parties?
- Legitimacy: What criteria exist—industry practices, expert opinions, laws, rules or regulations, or precedent—to measure if the options being considered or agreement reached is fair and sensible?
- Alternatives: What unilateral steps can either party take—how can their interests be satisfied elsewhere—if the parties are unable to reach an agreement?
- Commitment: Is the other party prepared to reach an agreement and is the party empowered to do so?
- Communication: Are the parties listening to each other, engaging in collaborative dialogue, and remaining unconditionally constructive?
- Relationship: Do I care about maintaining an ongoing relationship with the party across the table?
Many legal professionals are unable to follow the four core principles and to spot the seven elements. These professionals are too focused on adhering to some predefined standard template and the template’s positions, or they are unable to consider other options that still meet their client’s underlying interests. The focus on and the benchmark for success should be an agreement that does the following:
- Satisfies the interests of the parties
- Minimizes waste and reflects the best of many options
- Under which neither party feels taken advantage of
- Is better than your best alternative, or BATNA
- Embodies a commitment among the parties
- Is grounded in open communication
- Reinforces the underlying relationship between the parties
Your ability to spot the seven elements will greatly assist in executing an agreement that meets these objectives. A macro-level view of the seven elements is as follows:
Many large IT service providers also strive to achieve a corporate standard in the negotiation process and fail to temper their quality assurance, risk management, and approval thresholds based upon the amount of risk inherent in delivery. In essence, they treat all transactions the same, which results in a very inefficient risk management process. You can read lots of books and attend plenty of trainings on successful negotiation techniques and tactics. However, I assure you that if you accept the fact that no two outsourcing services transactions are the same and do everything you can to strictly adhere to the four core principles and maintain a laser-focus on the seven elements, you will make great strides in the art of negotiation.
Now let us review some of the core negotiation principles in practice. What exactly does it mean to temper your negotiation stance based upon the amount of risk inherent in delivery? As we previously discussed, a number of factors should be considered in determining the amount of such risk. A thorough understanding of these risk criteria helps clarify the risk profile associated with an opportunity, and that, in turn, drives the stance to be taken in the negotiation process. A sampling of the risk criteria are as follows:
Client Relationship and Background
- Strategic importance of the client within the service provider portfolio
- Historical relationship with the client and current delivery footprint
- Size of the client entity and industry
- Competitive landscape
- Strength of relationships
- Client buyer values and selection criteria
- Experience delivering similarly situated solutions in a timely, quality, and cost-effective manner
- Geographic scope of the solution
- Complexity of the underlying solution
- Organizational readiness for the amount of change required for success
- Complexity of the IT architecture and the state of the service or process to be outsourced
- Client’s outsourcing experience and maturity
- Staffing capabilities required for delivery
Client Commitment to Program
- Client commitment to the project and governance process
- Hierarchical level of the client executive sponsor
- Technical expertise of the client team and ability to meet delivery dependencies
- Client decision-making ability
- Depth of the client third party ecosystem
Contract / Price / Timeline
- Project timeline
- Contract type
- Terms and conditions
- Narrowly tailored statement of work with clear roles and responsibilities
- Price sensitivity
- Client financial strength
According to the second principle, it is important to temper your approach based upon the geographic region in which you are engaged. What works well in New York or San Francisco does not necessarily work well in the United Kingdom, Germany, Japan, or the Middle East. Before jumping into the negotiation process in a foreign country, it is important to understand not only the local laws but also the impact that culture may have on the negotiation process. Is the style quiet and less flamboyant, requiring some level of deference, as you might find in Japan, or louder and more aggressive, as you might find in France or the United Kingdom? I am not a cultural expert, but I have negotiated terms and conditions in a number of countries and can absolutely tell you to conduct adequate cultural due diligence and to seek the advice of local colleagues before jumping into the process. Once you are there in the country, remember to temper your approach accordingly, both in terms of style and prevailing law.
Finally, remember to temper your style and approach based upon the person sitting across from you at the negotiation table. While you can study countless books on negotiation tactics, I urge you to make every attempt to understand the style, personality, motivation, and interests of the person with whom you will be negotiating; ultimately, your success hinges upon your ability to work with him or her to reach an agreement with an acceptable level of risk and reward for both parties to the transaction. To that end, I would like to introduce you to the “Harley Principle.” I have been riding Harley-Davidson motorcycles for the past 15 years, and it is a great passion of mine. I have a VROD and a Screaming Eagle Springer, and love the feeling of rolling down the road with the wind in my face on a beautiful summer day. If I enter the office of a procurement executive or attorney with whom I will be negotiating and see anything Harley-Davidson or motorcycle related, I always ask about it, and the conversation quickly shifts to a passion we both share.
Finding this common interest lets us to identify with each other in a manner beyond the pricing, terms and conditions, and adversarial negotiation process that we are about to undertake. While I am not suggesting that a common passion for Harley-Davidson motorcycles results in an easy negotiation process, it allows me to identify with the person with whom I am engaged. Though I have no scientific evidence, I can absolutely tell you that my negotiations with motorcycle enthusiasts over the years have been very successful. So make an effort to identify with the party with whom you will be negotiating beyond the terms and conditions in the agreement; it definitely makes a difference.
Liked this article? Read the full book: Selling Outsourcing Services by Grant Lange.
About the Author
Grant S. Lange is an IT services sales and delivery executive with global experience negotiating large and complex application, infrastructure, and business process outsourcing agreements within the public and private sectors.
During his career, he has negotiated outsourcing agreements that have generated in excess of $2 billion in new sales. He is a partner at a leading IT services company and has served in a variety of leadership roles at some of the world’s largest IT services, advisory, and software firms.