In the 1998 movie Sliding Doors, there are two plots that play out between the leads Gwyneth Paltrow and John Hannah, depending on whether or not the former caught a London Underground train.
Imagine, for a minute, that you are negotiating a huge contract, worth millions of dollars, with a customer. You’re inches away from the biggest deal your company has ever signed.
But then something unexpected happens. The head of Procurement at the company you’re negotiating with enters the room and tells you they need another 10% cost saving from you, or the deal is off.
Just like the plots in Sliding Doors, what happens next could go one of two ways. The Head of Procurement could play the Pitbull, which looks a bit like this:
Ø She starts shouting and bullying, part of her sledgehammer approach to an adversarial negotiation to this single transaction;
Ø She want to “screw you into the ground” and take all of that 10% cost saving and rob you of any profit you might make on this deal;
Ø To her, profit isn’t good: its dysfunctional behavior;
Ø She insist on ‘Open Book Costing’ to mercilessly drive down your costs;
Ø Your pricing, according to her, is cost-plus or ‘time and materials’ (Labour + Materials + Overheads + Margin), and she doesn’t want to bear any unnecessary overhead costs, probing you on what your overhead allocation methodology is so she can get a cheaper price.
Faced with this approach, what do you do? Three things are probably certain: you’re going to try and hide more costs, you’re not going to put your best people on this project and you’re certainly going to lose interest in the customer who is looking for further cost savings.
But image what might happen if, like in Sliding Doors, the Procurement Pitball wasn’t let off the leash, but rather the Pricing Peacekeeper took control. The scene might play out like this:
Ø A collaborative workshop is proposed…
Ø …the objective of which is to find and share a 10% cost saving, which allows you to continue making a profit;
Ø Both parties agree to put their best people on the project;
Ø The profit incentive remains and margins will remain healthy, resulting in predictable behavior by both parties;
Ø The relationship is open and transparent, and as both parties work through the Open Book Costing exercise, cost reduction opportunities that can be shared are identified;
Ø This relationship-based approach focuses on total cost of ownership and lifetime customer value, and;
Ø The teams recognise that there are alternatives to Cost-Plus and Time & Materials pricing, such as Guaranteed Maximum Pricing.
Without a doubt, the movie has a better ending for all concerned with the latter, rather than the former, plot.