Keep talking. Why every organization needs a chief negotiator

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Milan Prilepok, Partner in Operations, McKinsey & Company & Spurti Kumar Chivukula, Knowledge Expert in Operations , McKinsey & Company

• The craft of negotiation in procurement is a powerful tool for the bottom line, but also to make bolder, measurable commitments toward ESG efforts.
• In some sectors where suppliers can account for up to 80% of carbon emissions, negotiating annual reductions can help meet ESG goals across the value chain.
• By investing in dedicated negotiation deal teams committed to building skills, organizations can develop and incorporate a form of negotiation DNA into standard procurement practices.

If discussions over everything from pandemic-relief bills to trade agreements and return-to-work plans tell us anything, it’s that the future welfare of businesses and individuals alike will be contingent on the craft of negotiation.

Yet even though artful negotiation is often the key to unlocking value in commercial contracts, CEOs and CFOs tend to stick to M&A agreements or financing deals. But there is substantial added value from broader world class negotiation maturity.

In an environment where change has become the only constant, procurement has been buffeted by disruptive supply-chain forces that are increasing margin pressure. At the same time, organizations are facing increased pressures from customers, consumers and investors to make bolder, measurable commitments toward ESG efforts.

Better, more accurate, and faster procurement decisions have never been more urgent—with the craft of negotiation becoming a powerful tool for generating impact not only for the bottom line, but also for communities and society as a whole.

CEOs and CFOs know it too. In new research from McKinsey & Company, 93% of business leaders of companies with more than $1 billion in revenue reported “great interest” in introducing a new role to improve negotiating results: that of chief negotiation officer. Furthermore, 70% agreed that a “negotiation centre of excellence” would have a broad impact on negotiation outcomes for their suppliers, customers and M&A efforts.

While introducing a new C-suite position or creating a centre of excellence won’t happen overnight, 75% felt a CNO role will materialize within the next three years. There are also steps senior executives can take today for positive business and ESG impact tomorrow through better negotiations.

Know when and where to intervene

With disruptions becoming more frequent and severe, I find that innovative, experienced negotiators—those able to pivot artfully in navigating unpredictability—prove especially valuable, capturing cost savings of 10% or more even in the most difficult circumstances.

In some sectors where tier one, two and three suppliers can account for up to 80% of an organization’s carbon emissions, negotiating annual reductions in carbon emissions and waste with suppliers can help meet ESG goals across the value chain.

Negotiation experts can deliver other sources of value as well, including higher quality and service levels, greater access to innovation, shorter lead times, and more flexibility in contract terms. CEOs and CFOs have the opportunity to shape larger collaboration through negotiations, for example negotiating across their value chain with their suppliers, customers, and JV partners to collectively invest in more robust blockchain technology for enhanced materials or product tracing.

It should come from the top

Not surprisingly, 96% of the CEOs and CFOs we interviewed suggested that the world-class negotiators in their organizations could raise earnings before interest and taxes by 3% or more, while the majority still believe the potential of at least 5% EBIT improvement. Yet we find that few companies are truly at the top of their game in essential elements of successful negotiations.

Why? In more than 20 years of working with companies across sectors and sizes around the world, the procurement function seldom looks to the C-suite for help, leaving CEOs and CFOs unaware of issues they could help solve.

CEOs indicated they would and could weigh in more to support procurement on negotiations and suggested that procurement could take a more direct approach in requesting targeted support. Indeed, our research and observations confirm that this is the primary reason why the top team is not involved more frequently in procurement negotiations. On the flip side, few of these C-suite offices explicitly make themselves available as a resource.

While it would be unrealistic for a CEO or CFO to spend time with every supplier, a little time can go a long way to build stronger relationships—96% of respondents said that their involvement is seen as high value by their teams. A CEO or CFO who speaks with 15 critical suppliers creates a foundation for future negotiations led by the chief procurement officer and supporting staff—74% indicate that significant value can be created when they reinforce consistent messages and expectations with suppliers.

Deploying these top executives effectively means focusing on only the most urgent issues. Answering just a few questions can help determine which suppliers the CEO or CFO should speak with, and why.

• Is now the right time to negotiate? Is my company facing shifts in demand, supply, new environmental regulations or finances that make renegotiating right now imperative?
• If negotiating now, what should I focus on? Which deal terms form the largest source of value, and how bold should my aspirations be?
• What’s the right balance between short- and long-term goals? Is it possible to balance pricing concerns with deepening a strategic-supplier relationship?

Building world-class negotiation skills throughout procurement

Both to support top executives effectively and sustain impact from the supplier conversations that CEOs and CFOs lead, procurement practitioners will need highly developed negotiation skills and strategies.

That goal is achievable if a company commits to a few measures and conducts a quick review of the historical investment in training budgets, gauging spend for procurement compared to other departments.

Underinvestment is often stark: our research shows that on average, sales professionals receive at least five times as much negotiation training as their procurement counterparts. Furthermore, by investing in dedicated negotiation deal teams committed to building skills, institutions can develop and incorporate a form of negotiation DNA into standard procurement practices—from preparation (such as data collection, analysis and negotiation strategies) to execution of supplier negotiations.

As businesses continue their restart over the next twelve months, their ability to get the most from their supply contracts could determine whether they can seize the potential for new growth and new relationships. By making the appropriate investments, procurement can be an engine to jump-start the entire enterprise for a profitable and more sustainable future.