Many professional services organizations, including insurance and financial services companies, have niche suppliers that play a critical role for the business. Most of these suppliers are considered ‘core’ or ‘strategic’ and have deep, long-term relationships with the business. In fact, there are some insurance companies that have engaged with the same suppliers for over 20 years.
These long-term relationships can pose challenges for procurement at the time of renewing contracts. Procurement generally prefers to run competitive Requests for Proposal (RFPs) to test price competitiveness and uncover emerging suppliers as well as new innovations in the market. These RFPs also help to keep existing suppliers from getting complacent in the relationship.
In some cases, internal stakeholders aren’t comfortable jeopardizing the relationship with competitive bids. As a result, these stakeholders may encourage procurement to not run a competitive RFP, or worse, may bypass procurement altogether when developing a contract renewal strategy.
An alternative approach for procurement is to work with stakeholders to create an incumbent supplier negotiation strategy. Such a strategy will support the stakeholders’ business needs while supporting procurement’s goals of obtaining the best value for the company.
Developing an incumbent supplier negotiation strategy requires close alignment with internal stakeholders and business partners. A strong incumbent supplier negotiation strategy will ensure that the supplier continues to drive innovation and maintains a fair market price.
To launch an incumbent negotiation strategy, there is a fair amount of work that procurement can do to assess the current market and incumbent price structure, research new innovations and determine stakeholder priorities.
There are three critical components to build an effective incumbent negotiation strategy.
Perform Market Assessment: The goal of the market assessment is to obtain information on the current suppliers and relevant pricing, including competing firms and new entrants to the market. Most market assessments are performed with a combination of internal and external inputs.
For example, procurement may look at existing agreements with other suppliers that provide the same or similar service to review pricing and see how they are structured. They may engage an external research firm or industry analyst to obtain their perspective on the market and current prices. The key in any market assessment initiative is to be as holistic and objective as possible, which builds credibility with stakeholders and incumbent suppliers.
Collect Supplier Intelligence: A significant risk in not running competitive bids is the complacency factor. Suppliers get comfortable with their client relationships and may be less likely to invest in innovation or to develop new capabilities. Procurement professionals should have the skills, resources and expertise to obtain supplier and industry intelligence.
In lieu of running a competitive bid, procurement should dig deep into the supplier’s industry to understand their competitors and any new capabilities that can be leveraged. Research what other suppliers are doing to drive innovation and try to determine if your suppliers are investing in those areas. One key point is that your research in this area must be relevant. Procurement can sometimes get a bad rap for comparing incumbents to irrelevant competitors, or for recommending suppliers that cannot provide equivalent goods and services.
Work closely with your stakeholders so you understand exactly what is being purchased and how those services influence the business. Don’t make the mistake of recommending irrelevant suppliers or innovation opportunities.
Qualitative data can help you uncover:
Is the supplier responsive to requests?
Does the supplier come to you with new ideas and ways to address pain points?
Does the supplier seem invested in the vision and growth of the company?
Are there any issues with the quality of goods or services being delivered?
Quantitative data will help your team understand:
Does the supplier bill us at the proper rate?
Does the supplier meet deadlines and important timelines?
Does the supplier invoice use the proper terms?
Once you have conducted the above steps, sit down with your stakeholders to review the results and build a negotiation plan. Determine what you want to ask and use the data you’ve obtained to support your requests. Have a plan for supplier push-back; take the lead on delivering the tough messages to allow your stakeholders to preserve their working relationship with the supplier. Decide with your stakeholders how far you are willing to push and what your ‘walk away’ points are. Remember, your suppliers will have a difficult time arguing against a well-constructed position based on verifiable data.
Competitive bids are a best practice for ensuring price competitiveness and robust solutions. However, a well-rounded and carefully researched incumbent negotiation strategy can deliver the same or better results without jeopardizing stakeholder or supplier relationships. In fact, you may find that your reputation with stakeholders is elevated to a new level because of your thoughtful approach to their business and core supplier relationships.