Value Beyond Cost-Savings: Is it Real? How Do We find it? Vantage Partners Danny Ertel Partner sig.org/summit
Value Beyond Cost-Savings: Is It Real? Danny Ertel Vantage Partners LLC
Vantage s sourcing and supply chain management practice NEGOTIATION COLLABORATION INNOVATION TRANSFORMATION We partner with clients to help them achieve world-class procurement and supply chain management performance through strategic advice, organizational transformation, hands-on advisory support, and design and delivery of training and coaching programs. Spin-off of the Harvard Negotiation Project Faculty at Harvard University, the Tuck School of Business at Dartmouth, and the US Military Academy at West Point Leaders in international conflict resolution through CMG (now part of Mercy Corps) Copyright 2017 by Vantage Partners, LLC. All rights reserved. 2
Looking at the risk of focusing primarily on cost savings Objectives for today Exploring the principal sources and types of value beyond cost savings Recognizing the challenges in going after such value Useful techniques to help overcome those challenges Copyright 2017 by Vantage Partners, LLC. All rights reserved. 3
Procurement 101 Are we sure we got their best price? Reference Price - Final Price = Cost Savings Where does that come from? Can we do that again next year?
Focusing on savings often leads us to negotiate about discounts List price Just for you That s my bottom line Take it or leave it Split-the-difference compromise Walk Away No Deal Bargaining over discounts Rewards unrealistic starting points Destroys trust Focuses on the wrong thing Threat We ve got other options I couldn t possibly pay that much Special circumstances There s a lot more opportunity here for you Walk Out (Temporarily) Walk Away No Deal For us to win they have to lose And even if we are successful, we have to do it all over again next year Copyright 2017 by Vantage Partners, LLC. All rights reserved. 5
And the quest for Year-on-Year Savings can lead to silly games Suppliers learn to anticipate, and prepare for, regular demands for discounts : Artificially inflated list prices Regular price increases Changes in SKUs Bundling Sourcing professionals seek ways to get at best price Competitive tension and threats Should-cost models Asking for more, expecting to get a bit less Supplier pads price to allow for discounts Procurement demands discount Copyright 2017 by Vantage Partners, LLC. All rights reserved. 6
Suppliers Basic P&L Scale Automation Arbitrage Process improvement and they want innovation Revenues - Cost of Goods Sold - SG&A - R&D - Taxes = Net Profits They keep asking for discounts This is a limited resource!
So, where might we find value beyond cost savings? Leverage Opportunities Things suppliers can do for us that are worth substantially more to us than it costs them to deliver Market Intelligence Knowledge suppliers can provide, based on their interactions with many other customers Collateral Excellence SME services suppliers can provide based on their own ancillary expertise and capabilities Quality Enhancements Improvements beyond our spec, which are sometimes easier to deliver than a discount and more valuable Investments for Mutual Benefit Resources suppliers are expending anyway that are targeted in ways that help us e.g., reduced time to market, riskmitigation/dr e.g., business process improvements, sourcing insights e.g., logistics and transport, black belt support, IR e.g., enhanced throughput, reduced error rates, etc. e.g., technology investments, marketing spend, etc. Copyright 2017 by Vantage Partners, LLC. All rights reserved. 8
and how do we recognize what it s really worth? Leverage Opportunities Things Requires suppliers engaging can do with for the us business that are worth to understand substantially more (a) whether to us than the it costs supplier them can to really deliver help with it, and (b) what it s worth to us Market Intelligence Knowledge Requires suppliers can understanding provide, based the on their value interactions of the improved with many business other process customers usually it s about transactional efficiency or risk mitigation Collateral Excellence Two SME different services ways to suppliers look at these: can as avoided provide consulting based their costs, own or ancillary on the expertise basis of the and capabilities business improvement achieved Quality Enhancements Very Improvements dependent on beyond the nature our of spec, the improvement which are sometimes are no easier more to deliver than bragging than a discount and rights, others more are real valuable bottom-line improvements Investments for Mutual Benefit Resources Top line benefits suppliers are are relatively expending easy anyway to value, that as are are some targeted balance in ways of that trade help deals us Copyright 2017 by Vantage Partners, LLC. All rights reserved. 9
Benefiting from these other sources of potential value is not easy What makes these conversations difficult with: Suppliers? Internal clients in the business Other internal stakeholders in corporate functions (e.g., Finance, IT, etc.) What are the symptoms of these conversations that don t go well? What are the root causes of these symptoms? What can we do about them? Copyright 2017 by Vantage Partners, LLC. All rights reserved. 10
Because these sources of value are harder to evaluate, conversations about them are challenging Common tendencies to ignore, or over-weight, information can lead to poor decision making Our assumptions are often unconscious and deeply ingrained Cognitive biases result from core beliefs, experience, how we process information, and sometimes from motivation Our organizational role, training, job history, and more, lead us to focus more on some things than others, and recognize (and fail to recognize) some patterns and perspectives Copyright 2017 by Vantage Partners, LLC. All rights reserved. 11
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How we look at things matters A Jesuit priest and a Franciscan priest were seeking permission from their superiors to be allowed to smoke while they prayed The Franciscan asked whether it was acceptable for him to smoke while he prayed. His request was denied. The Jesuit asked the question a different way: "In moments of human weakness when I smoke, may I also pray? And the answer was? Copyright 2017 by Vantage Partners, LLC. All rights reserved. 13
When people differ, get curious Each of us tells a story about what happened based on: Different information Different interpretations of ambiguous information Different assumptions about missing information Different conclusions are inevitable Debating conclusions is unpersuasive, escalates conflict, and hurts the relationship Seeking to understand (and combine) different stories generates new insight, resolves conflict, and strengthens the relationship Copyright 2017 by Vantage Partners, LLC. All rights reserved. And accurately captures this complexity; but denies it 14
How we tend to think Your Story Based on that conclusion, we screen out disconfirming information We reinforce our existing beliefs, and our conclusions harden into untested facts We Draw Conclusions We Interpret That Information We Focus on Certain Information Information Available Copyright 2017 by Vantage Partners, LLC. All rights reserved. The Ladder of Inference is based on the work of Argyris and Schön. See C. Argyris, R. Putnam, and D. Smith. Action Science: Concepts, Methods, and Skills for Research and Intervention. San Francisco: Jossey-Bass, 1985. 15
But they have a Ladder, too Your Story They Draw Conclusions We Draw Conclusions They Interpret That Information They Focus on Certain Information We Interpret That Information We Focus on Certain Information Information Available Copyright 2017 by Vantage Partners, LLC. All rights reserved. The Ladder of Inference is based on the work of Argyris and Schön. See C. Argyris, R. Putnam, and D. Smith. Action Science: Concepts, Methods, and Skills for Research and Intervention. San Francisco: Jossey-Bass, 1985. 16
We argue about these conclusions without testing Their Story Your Story Their Conclusions Your Conclusions Information Available Copyright 2017 by Vantage Partners, LLC. All rights reserved. The Ladder of Inference is based on the work of Argyris and Schön. See C. Argyris, R. Putnam, and D. Smith. Action Science: Concepts, Methods, and Skills for Research and Intervention. San Francisco: Jossey-Bass, 1985. 17
Best practice: Use the Ladder to explore each other s reasoning Explore Their Story Their Story My Story Explain My Story Their Conclusions My Conclusions Their Interpretations My Interpretations Data They Focus On Data I Focus On To Them Information Information Available To You The Ladder of Inference is based on the work of Argyris and Schön. See C. Argyris, R. Putnam, and D. Smith. Action Science: Concepts, Methods, and Skills for Research and Intervention. San Francisco: Jossey-Bass, 1985. Copyright 2017 by Vantage Partners, LLC. All rights reserved. 18
Engaging suppliers (and internal stakeholders) in an effort to find value beyond cost savings requires a commitment of resources Focus need to prioritize, and be able to followthrough Stakeholders internal and external Exploration of ideas Buy-in/decision making Implementation Forum need a structure within which to have these conversations Purpose Product Process Mindset there has to be something in it for our supplier too Communications give the process its best chance Framing Inquiry Location/Timing Copyright 2017 by Vantage Partners, LLC. All rights reserved.
Take-aways When we focus entirely on cost savings, we leave value on the table Value conversations are inherently difficult, because: We see value differently We account for it differently We make different assumptions about how others see things With some planning, and better dialogue, we can enable suppliers to provide value well in excess of what they might be willing to do to cut their own margins: Leverage opportunities Market Intelligence Collateral expertise Quality improvements Investment for mutual benefit When you meet resistance, get curious! Copyright 2017 by Vantage Partners, LLC. All rights reserved.
Contact us 10 Guest Street Boston, MA 02135 USA T +1 617 904 7800 F +1 617 904 7850 www.vantagepartners.com Danny Ertel A spin-off of the Harvard Negotiation Project, Vantage Partners helps companies achieve breakthrough business results by transforming the way they negotiate with, and manage relationships with, their suppliers, customers, and alliance partners and enhancing collaboration across internal organizational boundaries. dertel@vantagepartners.com This publication may not be reproduced, stored in a retrieval system, or transmitted in whole or in part, or in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission. Copyright 2017 by Vantage Partners, LLC. All rights reserved. All rights reserved.
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Workshop # 3 Value Beyond Cost-Savings: Is it Real? How Do We find it? Download the App: sig.org/app Tweet: #SIGfall17