In the first part of this series, I wrote about the ways that global trade – especially multi-lateral trade agreements – increase the complexity of the economic landscape for private sector companies. In this post, I will take some of the critical success factors for negotiating these agreements and apply multi-lateral negotiating principles to multi-tier supplier management.
Multilateral trade agreements between countries involve high profile negotiations and generate global debate thanks to their scope and complexity – and sometimes their controversial nature. Any time three or more entities sit down at the negotiating table together, the potential upside opportunities are expanded, but so are the risks.
Although most of procurement’s negotiations are bilateral (involving two parties) extending our reach multiple tiers into the supply chain has compounded what we are trying to accomplish through each contract. Getting visibility into, and control over, what our suppliers’ suppliers do is critical, whether it is for risk management or regulatory compliance.
Rather than attempting to manage the second tier of the supply chain from a position one step removed, why not bring all parties to the table to negotiate directly? If procurement decides to take a multilateral approach to supplier management, there is a lot we can learn from trade agreement best practices.
One of the characteristics of a multilateral negotiation is that all parties at the table are (or at least should be) treated as equals. Larger entities have less at stake and more to offer the other negotiating parties, but giving a direct voice to smaller suppliers provides them with precisely the opportunity to stimulate innovation that procurement claims to want. If we acknowledge that the practices and capabilities of the full supply chain need to align with our expectations in order to compete successfully, then the benefit of speaking with tier 2 suppliers directly is two-fold. 1. We gain the opportunity to set contract terms with them, rather than hoping our direct suppliers will pass along our preferences and priorities. 2. We have an opportunity to hear their questions and feedback on our current business practices.
If we act based on the assumption stated above, that all parties in a multilateral negotiation are equals, we should also be able to assume that each will act in their own best interests. Depending on the stakes, and the relative size of the parties involved, it is not out of the question for a coalition to form between the tier 1 and 2 suppliers. This is especially true if they have a pre-existing relationship that procurement is inserting ourselves into. Look for signs such as one party never disagreeing with the other or not pushing hard enough for something they could reasonably expect them to want. Note that anticipating actions and positions for each party before the negotiation takes place will be the best way to spot coalition behavior once discussions are underway.
Consider a Mediator
The complexity of the issues that arise during a multilateral negotiation often lead to talks – and therefore results and outcomes – stretching on and on without resolution. Since even the best corporate negotiators may not have experience with multi-party negotiations, trying to facilitate and negotiate at the same time may be too much to ask. Bringing in a skilled, objective mediator that has proven their ability to manage multilateral commercial negotiations may speed up the negotiation, improve the benefits to each party, and ensure that the agreement endures over the full intended term.
Companies today are well aware that the value associated with their supply partnerships requires those companies to be equally effective at managing their own supply chain. It is not new for questions about that supply chain to arise during negotiations, but making them multilateral adds a new level of understanding. By bringing the second tier directly to the negotiating table and making them an active part of contract terms and conditions, procurement gains visibility and control over how those suppliers do business and reduces risks that procurement would not otherwise have the access to mitigate.