Supplier Negotiation: Preparation, BATNA and Planning Your Concessions

Why does preparation decide most of the outcome?

The Chartered Institute of Procurement & Supply (CIPS) sees planning as a large part of the whole negotiation process: without it the desired outcome is unlikely, and more planning effort generally brings better results. ^[3]

CIPS lists what the negotiator should prepare before the meeting: ^[3]

• Ceiling: the most you will pay, based on budget and volumes.
• Market: its structure, the level of competition, external factors, and supply and demand.
• Supplier: their financial position, including cash flow and how dependent they are on your business.
• Alternative: a BATNA, fallback positions and a walk-away point, in case no agreement is reached.
• Cost base: facts about the cost of the product or service to support the terms you ask for.
• Concessions: what you can give up, and what you cannot.
• Exchange: what you can offer so that the supplier feels it gains something for each concession.

What is a BATNA and how do you set it?

BATNA stands for “best alternative to a negotiated agreement”: what you will do if no deal is reached. Roger Fisher, William Ury and Bruce Patton introduced the concept in Getting to Yes. ^[1] It determines whether to accept the offer on the table, how much leverage you have, and when to walk away. ^[1]

In procurement, the BATNA is usually an alternative supplier, splitting volume between suppliers, deferring the purchase, or making in-house. The Program on Negotiation at Harvard Law School recommends two things: ^[1]

1. Realistic, not hypothetical, alternatives. A verbal quote from an unqualified supplier is not a real alternative.
2. Comparison on truly equivalent terms. The cheapest offer may look weaker once all its terms are taken into account.

In procurement this means working out the full cost of the alternative: lead time, the cost of qualifying a new supplier, extra stock, quality and payment terms. CIPS notes that a BATNA helps set the maximum price the buyer should pay and keeps operations running if the negotiation fails. ^[3] Because circumstances change, reassess your alternative whenever new information emerges. ^[1]

The walk-away point and the zone of possible agreement

Your walk-away point (reservation point) is the worst terms you will accept, and you derive it from your BATNA analysis. The zone of possible agreement (ZOPA) is the space between your walk-away point and the other side’s, and it exists when both parties can find outcomes they prefer to an impasse. ^[2]

You estimate the supplier’s walk-away point by analysing their alternatives, through research or by asking directly. ^[2] Useful signals include their cash flow and how much they need your business ^[3], and whether they have other customers of the same size or spare capacity.

If your ceiling is below the supplier’s floor there is no ZOPA, and both sides are better off pursuing their alternatives. ^[2] So set your walk-away point before the meeting and write it down, so that you do not revise it under pressure.

Hypothetical example: a packaging supply contract

An organisation needs 100,000 packaging units a year. The current supplier asks SAR 12 per unit with two-week delivery, and the budget allows a maximum of SAR 11.50.

• Alternative: another qualified supplier offers SAR 10.80, but needs six weeks to deliver. The organisation estimates that extra stock and the cost of qualifying the new supplier add about SAR 0.50 per unit, so the alternative’s full cost is SAR 11.30.
• Walk-away point: the organisation will therefore pay the current supplier no more than SAR 11.30. This is below the budget ceiling: the BATNA analysis gives a sharper limit than the budget.
• Estimating the supplier’s floor: market research suggests the current supplier has spare capacity, so the organisation estimates it might accept about SAR 10.60.
• ZOPA: roughly SAR 10.60 to 11.30, with a target of SAR 10.90.

In the meeting the organisation opens at SAR 10.50 and the supplier responds with 11.80. The organisation offers to extend the contract from 6 to 12 months, makes clear this commitment has a cost for it, and raises its offer to 10.80. The supplier moves to 11.20, so the organisation makes a smaller concession: payment within 30 days instead of 60, with the price raised only to 10.90 and two-week delivery held, and the supplier accepts. All figures are hypothetical and illustrate the method.

Common mistakes in supplier negotiation

• Going in without an alternative: without a BATNA you are more likely to accept an agreement that does not serve your organisation. ^[3]
• Comparing on unit price alone: the cheapest offer may be weaker once all its terms are counted. ^[1]
• Settling price first, then everything else: this loses the chance to trade across issues. ^[5]
• Silent concessions: a concession you do not label or cost is rarely reciprocated. ^[4]
• Moving your walk-away point mid-meeting: if genuinely new information emerges, reassess your alternative in its light ^[1], and call a break to do so rather than adjusting under pressure.

How should you plan your concessions?

Concessions are planned before the meeting, not improvised during it. Practices summarised by the Program on Negotiation include: ^[4]

• Trade across issues: give ground on an issue you value less in return for one you value more, for example paying part of the fee early in return for faster completion. This trading, known as logrolling, can leave both sides better off.
• Label your concession and show its cost: if you do not make clear that a concession costs you something, the other side may not notice it or reciprocate.
• Make decreasing concessions: concessions that shrink in size signal that you are nearing your limit, and lead the other side to less ambitious counteroffers.
• Do not fill silence with a concession: if the supplier does not respond to your offer, neither withdraw it nor add a new concession.
• Do not automatically match the other side’s concessions, and keep your target in view throughout.

Negotiate the package, not just the price

Settling issues one at a time, price then delivery then service terms, limits the scope to create value. It is better to agree at the outset that “nothing is final until everything is agreed”, and then make offers as packages that combine issues. ^[5]

Useful trades include accepting a lower unit price in return for faster payment, a longer contract or a larger order. ^[5] Where the two sides expect different things of the future, a contingent term of the kind the Program on Negotiation describes can bridge the gap: if the buyer doubts the supplier will meet the deadline, it can offer a higher price for on-time delivery and a lower one for delays, which a confident supplier will accept. ^[5]

The limits on negotiation in government procurement

All of the above applies directly in the private sector, but government entities are bound by procurement law. In Saudi Arabia, the new Government Tenders and Procurement Law took effect on 1 December 2019 and allows negotiation to reduce offer prices in two cases: where the best offer’s price is noticeably higher than prevailing market prices, or where its value exceeds the amounts approved for the project. ^[6]

Rules differ in the other GCC states, and between federal and local entities, so check the procurement regulations that apply to your organisation before any negotiation after bids are opened. The same preparation still helps in every case: knowing the market and the full cost is how you tell whether a price is “noticeably higher” in the first place.

Conclusion

Before any supplier meeting, write down three things: your best alternative at its full cost, your walk-away point, and your list of concessions with what you will ask for each. Then negotiate the whole package, concede in decreasing steps, and do not go past your walk-away point.