Tony Hughes: negotiation.

Poor negotiation leads to declining profitability so the most successful companies are improving their bottom line by changing from a reliance on individuals’ negotiating competence to an organisational capability. That’s according to findings of a unique benchmark study released this month.

Joint research by behaviour change consultancy Huthwaite International and the International Association for Contract and Commercial Management (IACCM) found that companies with no negotiation processes in place suffered an average net income (bottom-line profitability) decline of 63.3% between 2007 and 2008. In stark contrast, over the same period, the top 25% of companies on a ‘negotiation maturity’ benchmarking scale recorded an average net income increase of 42.5%.

Corporate performance

Called Improving corporate negotiation performance, the survey explores how the world’s largest organisations, including international corporates like Microsoft, BP, General Motors and TNT, are trying to improve their corporate negotiating performance.

‘In a tough economic climate, it is perhaps not surprising that the Global 2000 in particular have seen their net income drop by nearly one third,’ Huthwaite chief executive officer Tony Hughes told ModernSelling.com. ‘Yet, over the same period, companies with world-class negotiation capabilities have posted dramatic improvements in net income performance.’

Neglected

He added: ‘Worryingly, our global benchmarking study – involving 124 leading buy- and sell-side practitioners – found that negotiation performance improvement is being ignored, neglected or ineffectively addressed in many companies.’

One senior director in a Fortune 500 firm stated: ‘If only we could pick up all the money we are spilling in negotiation. It’s a huge number, definitely in the tens if not hundreds of millions.’

He went on to attribute the negotiation issue to a lack of a formal process, a situation which the study found was common to 80% of the world's largest organisations.

Organisation-wide approach

Some organisations have started to recognise a significant risk: ‘Our failure to develop the skill of our negotiators across the company will not be evident until it's too late,’ said one director.

‘Critically, the report shows that all the best-performing companies have re-engineered their organisational negotiation capabilities,’ stresses Hughes.

‘As a result, they have significantly improved their bottom-line performance – by transforming negotiation from an individual competency into an organisational capability.’

The results have been dramatic, according to Huthwaite. One respondent pointed to a saving of $37 million on a single deal following the introduction of a more structured approach to negotiation.

Another global head of contract management confirmed: ‘Before the new process was put in place, the average negotiation cycle time on complex projects over $5million was 12-18 months. Today 75% of those deals are done in less than eight weeks.’

Negotiation and training maturity

In benchmarking the current stage of development of each organisation, researchers adopted a five-phase negotiation maturity model. This encompassed companies which had no formal negotiating processes through to those identified as world-class. These best practice organisations have a formalised negotiation process which is incorporated into the overall buying or selling process of the organisation.

’The research has identified disappointing levels of maturity in global negotiation standards,’ confirms Hughes.

’Fewer than one in five global corporates have any formalised structured planning tools for the negotiation. The end result is badly-prepared negotiators who feel that success will be based solely on individual merit.’

In addition, the survey found a parallel lack of maturity in the area of negotiation training. Just 31% of participating companies have a formalised approach to training, with only 5% reflecting a world-class level of maturity.

‘The good news, however, is that such organisations can readily access cost-effective behavioural skills training solutions which can have a substantial and immediate impact on negotiation performance,’ Hughes said.

First steps to effective change

In helping businesses improve performance, the research identifies ten critical areas throughout the negotiation process which must be addressed if any transformation initiative is to succeed.

At the same time, the study recognises that changing the behaviour of an organisation is difficult. ’Yet when companies with no process are demonstrably losing millions of dollars in negotiation, the status quo is not an option,’ the authors believe.

In suggesting how to improve the bottom line, the study highlights the key importance of process. In particular it recommends, ‘at the very least, the implementation of strategic cross-organisational negotiation planning from the start of the sales or acquisition process, in order to have consistently successful outcomes’.

For Hughes however, the key to success is to be pragmatic about the speed and degree of change that can be achieved.

’We would suggest that companies reading the report review the benchmarking data, identify the biggest gaps in current performance and take action,’ he recommended. ’Ideally, they should start small, generate some positive success stories, and use these to increase buy-in across the business.

‘It may be unrealistic to believe that there will ever be a single functional owner of the negotiation process or expertise sitting at the corporate top table. Yet by recognising that negotiation is as important to the business as sales or marketing, for example – and moving towards a structured best practice approach – companies can rapidly achieve measurable gains in bottom-line profitability.’

Copies of the study, ‘Improving corporate negotiation performance’ are available from the Huthwaite International website. 
       
Improving corporate negotiation performance is a global benchmark study, involving in-depth face-to-face and telephone interviews undertaken by Huthwaite International and the IACCM (International Association for Contract and Commercial Management) with 124 buy- and sell-side practitioners, across a wide range of manufacturing, technology, utilities, construction, healthcare, financial and services/consulting sectors around the globe. 74% of participating organisations are in the Forbes’ Global 2000 (a ranking of the world’s 2000 largest companies compiled by ’Forbes’ magazine) and 42% in the Global 500 (a ranking of the 500 largest corporations worldwide measured by revenue, published by ’Fortune’ magazine). 62% of participants are director level or above, with an even split between buy-side and sell-side perspectives.

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