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01/15/2020

Interview with René Schumann: Negotiation strategy "Purchasing must be taken to an abstract level in order to bring new options into play

Game theory has left the ivory tower and has also arrived in the business world. At its core it is about modelling decision-making situations and deriving rational decisions from them. This makes game theory interesting for buyers as well. The purchasing consultancy Kerkhoff Consulting uses game theory insights and has already been able to achieve great successes for its clients, as René Schumann, Managing Director of Kerkhoff Negotiations, explains in an interview with MBI Buyers in the Market.

Buyers in the market: Mr Schumann, what can buyers learn from game theory?

René Schumann: First of all, the central question is how do I conduct negotiations? Negotiating is a craft that can be learned. Game theory is a method that can be used to conduct negotiations. One can imagine it as a patchwork of individual games and sequences. Buyers can learn from it and integrate this method into their everyday negotiation routine.

Can you give an example?

Very well known is the game "Prisoner's Dilemma". Here two convicts are exposed to a pressure situation which is very transparent and is produced by the police. The convicts have to decide independently if they want to testify or keep quiet. For the sake of an overall optimum, it would make sense if both would remain silent. But game theory says exactly the opposite: in such a situation, everyone wants to optimise themselves and will testify. The same happens in negotiations: Everyone wants to achieve his own goals and therefore the overall optimum does not come about. For the purchasing department, for example, which faces several suppliers, this means: Build up a prisoner dilemma! The suppliers are then quasi the offenders, but the buyer is no longer in a 1:1 negotiation situation. The buyer becomes the policeman who creates transparency between the suppliers and defines and ensures the rules of the game in the negotiation process. In this way, even sworn cartels between suppliers can be levered out.

Why do negotiations often come to a dead end and what is wrong with purchasing?

Basically one has to distinguish between two levels. The first is the meta-level, where it is important to build up a strategy before the actual negotiation. We at Kerkhoff Negotiations call this "War Gaming", i.e. purchasing builds a decision space for itself and defines for itself where I stand today, where I want to go and which options are available in the negotiation process. In reality, this abstract "identifying and evaluating options" and developing a "battle plan" out of it unfortunately happens very rarely. The second is the mental level. This is where the purchasing department makes operational mistakes. This can be the lack of eye level with the negotiating partner or the fact that one cannot stand the conflict in a negotiation situation. Frequently there is talk of a win-win situation. This works when the other side is also interested in mutual success. But what if the negotiating partner turns out to be a "hard nut to crack"? In such a situation, Purchasing often adopts a too passive attitude, enabling the other side to achieve its goals at the expense of Purchasing's goals.

In game theory, emotions are supposed to be removed from the trial because they are allegedly obstructive. But can you generalize like that? Are there perhaps situations in which emotions can even be beneficial?

It's not about blanking out emotions completely, that wouldn't be possible at all. The important thing is to manage emotions within the decision-making process, i.e. on the meta-level. In concrete terms, this means defining goals cleanly and without emotions. In the concrete negotiation situation, in an infight, so to speak, I have to be able to recognize and manage the emotions in my own team at an early stage. At the same time, it is important to anticipate the emotions of the other party and to consciously control them. To achieve this, we make targeted use of various instruments of behavioural economics in our day-to-day negotiations. Negotiating with monopolists is a good example of this. We often find that in a situation in which purchasing has been negotiating with the same supplier for years, it takes over the supplier's argumentation and also emotionality and represents it in its own company.

Here it would make sense to supplement the negotiator or, if necessary, to replace him. With this I take out the emotions.

Taking out the negotiator, I find that difficult. This can damage the person concerned and lead to a loss of face.

Of course such a thing should be done face to face. It is recommended that the buyer, who has conducted the negotiations so far and who often has the best relationship with the supplier, steps aside and leaves the actual conduct of negotiations to someone else. He can remain part of the negotiating team, but concentrate on the relationship level. It is important that the buyer, who acts on the emotional level, remains "clean", i.e. does not enter the negotiation swamp. In concrete terms, he could say at the beginning of a negotiation: "I believe in the relationship with you as a supplier and that we will achieve our goals. At this point, I would like to turn the floor over to my colleague."

It is not uncommon for negotiations to be haggled over the second decimal place in the price. Does this make sense, does purchasing perhaps set the wrong priorities?

It is not expedient to rely solely on numerical data facts in the preparation. In my experience, purchasing invests too little time in the mental preparation of a negotiation. As a result, purchasers are often not so good at dealing with emotional negotiation situations and often underestimate their own negotiating power. Salespeople are often better off here. This is also due to the imbalance in training budgets - the ratio here is 7:1 for sales. As far as priorities are concerned: it has worked well for many years. When purchasing is in a situation where it can choose between several suppliers, it has the feeling of being the winner in the negotiations. Then you don't have to prepare yourself in the last resort. But in the meantime the end of the line has been reached and savings are hardly possible with conventional methods. In this situation, game theory is the right choice.

In what way?

The answer of game theory is: get out of the concrete 1:1 negotiation situation, build up an abstract level in order to be able to bring new options into play. It is also very important to coordinate the negotiation strategy internally and have it approved by management. Because purchasing often has the problem that it is not perceived as credible by the supplier. The rules of the game for negotiations should be set out in writing and signed by the management. In this way, Purchasing can show that it has negotiating authority and is authorised to make decisions. Up to now, it has often happened that the supplier receives another call from the purchasing manager after the result of a negotiation, following the motto "We need another one percent more". With the support of top management, this no longer happens.

It is not uncommon for technology to present a supplier and the buyer has to see that he can still get something out of the price. How can purchasing increase its negotiating scope?

First of all, you have to see how a typical salesperson proceeds. He does not go to purchasing, but first to quality assurance, development or logistics and obtains information from there. In doing so, he "framed" his contacts in the specialist departments and these in turn have a more or less subtle effect on purchasing. Purchasing can counteract this by coordinating with the specialist departments, for example through cross-functional workshops. It is advisable to evaluate all suppliers, both potential and existing suppliers, using a bonus/malus system. In addition to quantitative aspects such as reject rates or delivery reliability, qualitative criteria should also be taken into account. For example, whether the supplier can also be reached at unfavorable times. These qualitative aspects are quantified and flow into the decision for or against a supplier. The special thing about this is that all suppliers are made comparable. A supplier can then no longer argue in a negotiation that he is particularly reliable, for example - this has already been taken into account in the supplier evaluation.

What successes are possible with this negotiation method?

On the one hand, Purchasing can move away from the sandwich position between Development and Supplier. It becomes the "process owner" and is on an equal footing with the internal departments, but also with the supplier. On the other hand, considerable savings can be achieved - in our experience, depending on the product group, between 8 and 12 percent are possible. A downright slide in prices often occurs with product groups where one would not have expected anything more. Especially in the current difficult situation, companies cannot afford to give anything away. They opt for game theory because it allows them to achieve maximum savings.

Does this also apply to small and medium-sized enterprises?

The negotiation method inspired by game theory was taken up by large corporations a good ten years ago. In the meantime, it has completely reached medium-sized companies via the supply chain. The prerequisite for its application is not the size of the company, but the precise analysis of product groups. From a negotiation volume of 5 million euros upwards, the additional effort for preparation and cross-functional coordination is worthwhile. We also have customers with 100 employees, but who procure a product group with a large volume - so it is well worth using this method.

Herr Schumann, thank you very much for the interview.
The interview was conducted by Mark Krieger.

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