SYSTEM OF NEGOTIATIONS : game theory and behavioral economics in procurement - the guide for... professionals

This book presents criteria and recommendations for successful negotiations. The System of Negotiations, which was developed on a scientific basis for this purpose, clearly illustrates the most important steps, tools and applications. By using game theory and behavioral economics, the success of negotiations in purchasing can be systematically maximized. At the same time, transparency and fairness offer a high level of acceptance among negotiating partners. To this end, numerous practical examples are used to show how contracts can be awarded in the event of competition between suppliers, and how various auction formats and differentiated communication can be used to achieve optimal savings potential. Also for situations where the supplier is a monopolist, ways are described to avoid being at the mercy of pricing power. Foreword 5 Contents 7 1: The Journey to Our System of Negotiations 9 1.1 What Is the Focus of the Procurement Negotiation: Process or Person? 10 1.2 Why Stress in Negotiations Does Lead to Suboptimal Results 12 1.3 Abstracting from the Persons Involved in Negotiations 13 1.4 What Game Theory Can Contribute to Successful Negotiations 14 1.5 Our “System of Negotiations”: A Combination of Game Theory, Behavioral Economics, Data Science and Practical Experience 15 1.6 The Structure of the Book 17 References 18 2: Negotiations in Procurement with Competition 19 2.1 Serious and Common Mistakes in Conventional Procurement Negotiations 19 The Most Important Success Factor for Negotiations in Procurement: Competition 20 Self-Inflicted Restrictions Regarding Competition 21 Lack of Comparability of Offers 23 What Happens, If the Procurement Department Does Not Have the Full Commitment for the Negotiation 24 Crucial: The Right Preparation for the Negotiation 25 Common Mistakes when Using Auctions 25 Conclusion 26 2.2 Case Study: The Benefits of a Well-Structured Competitive Negotiation Process 27 The Problem: The Former in-House Supplier Used its Privileged Position to Enforce Excessive Prices 27 Our Task: Preparation of the Negotiation and Elaboration of a Case-Specific Negotiation Design 28 Our Negotiation Design: Two-Stage Procedure with Stop-Now Button 28 The Negotiation: Strong Competitive Pressure 30 Conclusion 31 2.3 BATNA: The Best Alternative If the Negotiation Fails 31 What If We Do Not Reach an Agreement? 31 What Is a Satisfactory Outcome of the Negotiation? 32 Who Has the Bargaining Power in the Negotiation? 32 ZOPA: Zone of Potential Agreement 33 Conclusion 33 2.4 The Game-Theoretically Optimized Negotiation Process 34 Analysis of the Market Situation 34 Comparability of Offers Through Monetary Evaluation 36 Negotiation Design 36 Sign-off 37 Supplier Communication 38 Final Awarding 38 Conclusion 38 2.5 Analysis of the Market Situation 38 Competition Matrix and Shiftability Analysis 39 Analysis of Individual Suppliers 41 Conclusion 42 2.6 Bundling Products and Services to Increase Competition 42 Barriers to Competition in Practice 42 Competition-Optimizing Bundling of Packages for Different Product Portfolios 43 Dealing with Uncertainty Via Forward Bundling 44 Linking Existing and New Business by Means of a Discount Factor 45 Conclusion 46 2.7 Establishing Comparability 47 Disadvantages of Conventional Concepts for Qualitative Supplier Evaluation 47 For Comparability, Qualitatively Different Suppliers Must Be Evaluated in Monetary Terms 49 The Monetary Evaluation Method 49 Fixed Bonus/Penalty 50 Variable Bonus/Penalty 50 Absolute Bonus/Penalty 52 Examples of Bonus-Penalty Evaluations 53 Conclusion 54 2.8 Entrepreneurial Assessment of Cost Components 55 Consideration of All Cost Components 55 Consideration of Internal Costs 56 Consideration of Uncertainty and Risks 56 Consideration of Time Preferences and Impatience 57 Conclusion 57 2.9 Hedging against Price Renegotiations 57 Conclusion 60 2.10 Negotiation Design 60 When to Choose Which Format? 65 Conclusion 68 2.11 Commitment, Supplier Communication and Awarding of Contracts 68 A Few More Words About Fairness 74 Conclusion 75 2.12 Case Study: Extortionate Pricing of Suppliers 76 Establishing Comparability Between Different Concepts 76 The Problem: Extortionate Pricing from Suppliers 76 Our Task: Development of a Counter Strategy Based on Game Theory 77 The Result: High Savings Already in Phase One 78 Conclusion 79 2.13 Lessons Learned 79 Details of the Awarding 79 Information from the Market Analysis and Bonus-Penalty Assessment 79 Awarding Design 80 Result 81 Conclusion 81 References 81 3: Negotiations with Monopolists 83 3.1 First Check Whether the Supplier Really Has a Monopoly 83 Analyze the Competitive Landscape, Broaden the Field of Vision 84 Objectively Evaluate the Costs of a Possible Change of Supplier 86 Conclusion 87 3.2 Identification of Consequences 88 The Threat of Consequences Creates Pressure on Prices 89 Example: Creative Consequences in Negotiations with a Monopolist 90 Conclusion 91 3.3 Negotiation Options and Their Monetarization 91 Distinguish Between Demands and Tradables 92 Consider the Interests of the Other Side 94 Conclusion 95 3.4 Need for a Negotiation Mandate 95 The Threatened Consequences Must be Credible 96 “Cheap Talk” Is Not Effective 96 Without a Negotiation Mandate, the Supplier Has an Outside Option 97 External and Internal Negotiation Mandate 98 Conclusion 99 3.5 Essential: The Incentive-Optimized Storyline 99 Understanding the Main Incentives of the Counterpart 100 Excursus: Using the Effects of Behavioral Economics 101 Conclusion 103 3.6 Storytelling and Negotiation Roadmap 103 Dosing the Flow of Information Correctly 104 Building up a Tension Arc for the Negotiation 104 The Six-Phase Model of a Negotiation Roadmap 105 Phase 1: Commitment and Negotiation Mandate 106 Phase 2: Communication of the Anchors and Consequences 106 Phase 3: Communication of the Demands 107 Phase 4: Strategy Change 107 Phase 5: Exchange 108 Phase 6: Agreement 108 Conclusion 108 3.7 Allocation of Roles in the Negotiation Process 109 Conclusion 111 3.8 Special Case: Bilateral Negotiations with Alternatives 111 Market Analysis, Consequences and Differentiation of Claims and Tradables 112 Negotiation Mandate and Communication 112 Disadvantages 113 Conclusion 113 3.9 Case Study: Negotiation with a Monopolist in the Transport Sector 114 Our Analysis 114 Our Goals 115 Identification of Consequences and Negotiation Options 115 Obtaining the Mandate to Negotiate 116 Elaboration of a Storyline 116 Procedure According to the Six-Phase Model 117 Conclusion 117 3.10 Lessons Learned 118 Consequences, Tradables and the Interests of the Other Side 118 Negotiation Mandates and Storyline 118 Conclusion 119 References 119 4: Negotiating: The Perspectives 120 4.1 Some General Rules of Conduct 120 The 11 Dos and Don’ts for Preparing and Conducting Negotiations 121 Conclusion 122 4.2 Further Areas of Application of the System of Negotiation 122 Customers from All Industries 122 More than Just the Price: Holistic Evaluation of All Properties 123 Applications: For Example, in Mergers & Acquisitions... 123 ... for Entrepreneurs and Start-Ups... 124 ... and Even Cybercrime 125 Conclusion 125 4.3 The Opportunities of Digitisation 126 E-Auctions: More than Just Saving Time 126 The Use of Data and Advanced Mathematical Methods 128 Adding Value with Yesterday’s Data 128 Optimizing Processes with Today’s Data 129 Rational Decisions for Tomorrow Based on Data 130 Conclusion 130 4.4 Negotiation: From Intuition to Science 130 References 131 Glossary 132 This book presents criteria and recommendations for successful negotiations. The System of Negotiations, which was developed on a scientific basis for this purpose, clearly illustrates the most important steps, tools and applications. By using game theory and behavioral economics, the success of negotiations in purchasing can be systematically maximized. At the same time, transparency and fairness offer a high level of acceptance among negotiating partners. To this end, numerous practical examples are used to show how contracts can be awarded in the event of competition between suppliers, and how various auction formats and differentiated communication can be used to achieve optimal savings potential. The content System of Negotiations Purchasing negotiations under competitive conditions and with monopolists Perspectives and areas of application New opportunities through digitalization Glossary The authors René Schumann is the founder and CEO of the Negotiation Advisory Group. He has many years of experience in purchasing negotiations in the automotive sector and in management consulting. Stefan Oswald is founder and CEO of the Negotiation Advisory Group. He gained his numerous experiences in game theory in strategic material purchasing at Daimler AG, among others. Dr. Philippe Gillen is responsible for the topic of Data Science and its application in negotiations at the Negotiation Advisory Group. This book is a translation of an original German edition. The translation was done with the help of artificial intelligence (machine translation by the service DeepL.com). A subsequent human revision was done primarily in terms of content, so that the book will read stylistically differently from a conventional translation