Considered more of an art form than a science, effective negotiating in the contracting business is an acquired skill, learned over time
Are you an effective negotiator? If not, don't be too quick to place the blame solely on your own shoulders. Most electrical contractors learn to negotiate through trial and error. And despite being a primary component to business survival, apprentice and professional association programs spend little — if any — time teaching the basics of negotiating. Like many business skills, negotiation is learned on the job and employed with varying degrees of success.
Negotiation isn't about dominating your opponent. Instead, effective negotiation presumes you are entering into a longer-term relationship with your counterpart, where constant interaction is necessary to the success of both parties. Negotiation is a process where each party wins or, as one contractor puts it, “when the deal is done, both parties are a little disappointed.”
As such, negotiation permeates almost every segment of life. On the business side, suppliers, customers, and employees are all seeking to improve their monetary position. How much more profit can a supplier squeeze out of you? For customers, it's all about getting something for nothing, and employees invariably believe they are worth more than their competitive wages.
This article outlines the basic practices successful business negotiators use to achieve their goals and improve the bottom line.
Do you know what constitutes a good deal for your business? All too often, individuals enter negotiating sessions with a singular driving objective in mind and ignore any other ramifications of a contract. In many cases, they are unaware of the impact other variables have on their decision-making process. In the hands of a keen negotiator, these neophytes are easy prey.
Inexperienced electrical contractors usually fall victim to this trait when negotiating a new project. Their objective is to win the job — at any price. Unscrupulous builders, intent on making low price the only variable for a project win, use this knowledge to drive low bids down even further. The unskilled contractor holds firm to his singular objective (winning the project), ignoring other important factors such as price, time, and liability. Even though the contractor may win the project, he may eventually lose his firm.
The key to preventing this situation is to understand the various dynamics that impact any deal. Again, for a project bid, a host of variables comes into play, including time frame, delivery dates, quality control, staffing, raw material availability, and pricing. When negotiating a deal, your counterpart may want a concession on pricing. What is your counter proposal? How can you accommodate any movement on your price and still ensure a profitable transaction? The answer revolves around the interplay of the other project dynamics. For example, you may be able to give a little on price if the project time frame is moved to accommodate a slow period in your firm — a period when you will have idle resources.
Over time, the different dynamics that comprise a deal will become apparent. Never stand on a singular objective as the basis for defining negotiating success. A skilled negotiator will strip away your advantage in every other aspect of the deal — except for your singular objective.
Test-drive the deal
On occasion, you may not have enough knowledge to formulate a strong negotiating position. For example, you may be trying to enter a new market, develop a new supplier relationship, or hire for a new employee position, leaving you without enough facts to understand what parameters should be expected. How do you “get smart” quickly and not get bested in your negotiating session?
Obviously, relationships with other electrical contractors may be the first stop in your education process. Professional associations provide a good backdrop for establishing and maintaining relationships with your peers and, in most cases, serve as a useful forum for leveraging their personal experiences. In addition, your peers are typically willing to share their knowledge to help you overcome an obstacle. However, let's say you are not a member of an electrical contracting association, and you are forced to educate yourself in some other way. When this occurs, another option is to “test drive” the deal, walking through the transaction with real vendors and using the experience to gain value.
Office technology is one area where many electrical contractors feel they have inadequate knowledge to make an effective decision. For instance, assume you are forced to buy a new accounting system for your business. Like any good consumer, you start the process by “Googling” accounting systems for electrical contractors. The result? More than 2 million hits and approximately 40 to 50 potential accounting systems that theoretically could meet your needs.
In this situation, a “test drive” is recommended. Invite a number of accounting system vendors (no more than five) to your office for a pitch demonstration. At the end of their demonstrations, ask them what variables you should use to evaluate accounting systems. After listening to several vendors, a list of common variables will appear (i.e., auditability, ease of upgrading, maintenance, etc.). These variables now constitute your deal components, allowing you to more effectively make an informed decision. You are now in a position to negotiate!
Next, begin the accounting system acquisition process all over again. This time, you can review a broader range of system alternatives and more quickly eliminate vendors from further consideration using the information gleaned during your “test drive.” Congratulations — you are now a more informed consumer with a stronger negotiating platform.
The art of listening
It's not uncommon during complex negotiations to reach an impasse where neither party is able to achieve movement. When this occurs, the best solution is to place yourself in the position of your opponent. This empathetic approach will help you understand your opponent's objectives. Once understood, you can modify your negotiating position to play up the benefits of your bid in-line with your opponent's objectives.
This dilemma typically occurs during employee compensation negotiations — seldom a pleasant experience for the owner of an electrical contracting firm. By nature, employees believe they are worth more than their current compensation and, periodically, try to push their advantage with the owner. Owners, on the other hand, may view employees as a necessary evil — never truly delivering on the full value of their existing compensation. Inevitably, battle lines are drawn.
Beyond the traditional conversation that occurs during these sessions (the employee wanting more and the owner not budging), there is a better solution. This involves negotiating from your counterpart's position — referred to as empathetic negotiation. For the employee, ask what impact on business revenues can be realized through improved work habits. For the owner, determine what employee work efforts would need to change to justify an increase in compensation. How can the employee and owner work together to achieve higher productivity from the employee that results in higher revenues for the company and, accordingly, higher compensation for the employee?
Realize the answer is not always about compensation. It may actually be associated with skill enhancement and career development. Because effective electrical contracting firms are constantly evolving either into horizontal markets or specialized penetration into vertical offerings, (see “The Power of the R Business Model,” EC&M August 2007), there are numerous opportunities for employees to branch out — increase their marketability and return higher levels of revenue to their current employer. However, unless you put yourself in the other person's shoes, these mutually beneficial opportunities may never come to light.
Power comes from doing nothing
The old adage that actions speak louder than words holds true in any negotiating session. The outcome of many negotiating sessions has hinged on one participant using body language as a form of establishing a new power base. Remember, verbal communication represents only a small portion of our overall communication capabilities. Facial expressions, where we choose to sit at the bargaining table, and hand gestures all play a role in communicating our acceptance or rejection of a negotiated position. Silence can also be a powerful bargaining tool. People are uncomfortable with silence and feel a need to fill the noise void. This holds especially true for people negotiating from a position of weakness. They feel that by filling the communication space with a number of different thoughts, something of value will be unearthed — therefore changing the mind of the other participant.
A typical example is when dealing with an employee termination. As the owner of a contracting firm, you likely will be forced at some point to let a member of your staff go. When an employee is dismissed, however, this actually represents a negotiation session — whereby the terminated employee may be seeking some level of severance pay, an extension on benefits, and possibly some form of recommendation. Often, employees fight the termination decision by filling the silent void left by the employer with reasons they should remain with the company. The better position would be for the worker to accept that the overall decision has been made and fight instead for termination benefits.
Another effective negotiating tool is to walk away, which signifies you are willing to leave the negotiations and kill any potential deal. The impact on your opponent is immeasurable, because it lets him know that any new negotiations will have to be initiated by him.
For electrical contractors, this is an effective tactic when negotiating supplier agreements — especially for commodity inventory items. Personal supplier relationships have long been an inventory distribution structure linking manufacturers, contractors, and end-users. Unfortunately, the supplier chain has been broken. Large-scale box stores have taken the position of being a supplier (and sometimes the contractor). Because of their size, these stores are able to negotiate pricing agreements with manufacturers that are far more favorable than local supply houses.
Electrical contractors, like any consumer, are price conscious. Because there are alternatives to the local supply house, contractors can use the simple tactic of walking away to signify their interest in pursuing other options. Suppliers, frantic to hold onto their customers, nearly always modify their pricing structure.
No decision is a decision
At times, it's common for your negotiating opponent to be unable to make a decision. For whatever reason, they can't articulate their areas of discomfort and, lacking confidence in their position, seek to stretch out a negotiation for an indeterminable time. This process is not only costly to you, but also non-productive. Sometimes, you have to realize that no decision is in fact a decision to retain the status quo.
This is where the concept of fear selling is appropriate. Fear selling is a process by which you point out the potential downsides of sticking with the status quo. For example, say you are trying to negotiate a long-term maintenance agreement, whereby infrared-scanning tools will be used to monitor the owner's electrical equipment. The owner keeps putting off making any commitment. After all, the equipment is working fine right now. Why should he spend money on something that isn't broken? When faced with this situation, the electrical contractor should clearly articulate to the owner the consequences of potential electrical equipment failure.
Emotion is the enemy
Another rule of thumb for more effective negotiating is emotion should never enter into the ring. Emotional people tend to make instinctive and sometimes irrational decisions. Because they are seeking an immediate conclusion to the negotiating session, they may end up agreeing to the current proposal on the table. In hindsight, they nearly always regret their decision.
The objective is to move from an adversarial emotional environment to a cooperative state that allows for the effective exchange of resolutions. Take an irate customer, for example. It's almost impossible to effectively negotiate a positive outcome with an angry customer, because his demands may not be in-line with the magnitude of his concern (“I want this job for free because your employee ran his truck over my yard!”). Perhaps the best way to defuse the situation is to listen sympathetically but stop short of making an offer to reconcile until you've had a chance to speak with your employee. This “cooling-off” period allows you to determine the extent of the problem, formalize some alternative remedies, and guide the negotiation from adversarial to a calmer, more conducive environment.
Making it work
For the most part, negotiation is an untaught skill that most of us have to learn on the job. When done correctly, however, negotiation is an art form. For you, the objective is to realize that you negotiate every day with employees, customers, and suppliers. Do you know the “anatomy” of each deal? What tactics should you employ to move a negotiation forward or, conversely, end it before you make a bad decision? If you step back, you will realize that negotiation can't be ignored — so you might as well do it right.
Dawson is managing director of LTV Dynamics, an international sales management and business consulting firm located in the suburbs of Washington, D.C.