Alternatives are key when small business execs negotiate strategically

Filed under Special Reports

By Ann Meyer

Mary Koonce is owner of Cal's Electrical Service

Business owner Mary Koonce plans to use new negotiation strategies gleaned from a UIC Family Business Council presentation.

— With the manufacturing industry still feeling the sting of a slow-to-recover economy, business owner Mary Koonce said customers of her industrial electrical company are trying to negotiate longer payment terms and discounts.

“It’s hard for small businesses to handle. We’re the bank for them” when they delay payment, said Koonce of Cal’s Electrical Service Inc. in Wood Dale, Ill. Customers who had been paying in 30 days now are postponing payment to 60 or 90 days and asking for discounts on top of the extended terms. “It’s hard when someone changes the game half way through,” she said.

But after attending a seminar on negotiation strategies put on by the University of Illinois at Chicago’s Family Business Council Tuesday, Koonce has several new tactics to use, including alternatives to discounting her services. For example, she would consider offering customers a credit to secure future work, particularly if it comes with a promise of exclusivity. “We don’t want to be just another preferred provider. We want to be exclusive,” she said.

By thinking of creative ways to meet the customers’ needs while providing for their own company’s interests, negotiators can come out ahead, said Victoria Medvec, the Adeline Barry Davee professor of management & organizations at Northwestern University’s Kellogg School of Management, who gave the seminar Tuesday in Northbrook. Negotiations are a regular occurrence for business owners as they hire workers, purchase materials, unload property or close sales deals, yet many don’t know how to negotiate strategically, said Medvec, who has consulted with Fortune 500 companies on negotiations.

The sluggish economy has made negotiating more important — and more frustrating — for many businesses. “Every order with every customer is a negotiation,” said Brian McIlwee, president of McIlwee Millwork in Itasca, a provider of millwork to architects, builders, developers and remodelers. “We’re also negotiating with suppliers. It’s happening on both ends.” While the company’s business has shifted from predominantly new construction work a few years ago to more remodeling jobs, it has survived because of the strength of the relationships it built over time, McIlwee said. “Relationships are the foundation of everything,” he said.

A long-term view

They also can make negotiations tricky because companies don’t want to alienate customers, suppliers or partners by making aggressive demands. But often the larger issue is failing to consider all the factors that might be most important in the long run, Medvec said. When Rod Berthold of Gus Berthold Electric sold a building a few years ago, he sold it to someone he knew without a broker. After listening to Medvec’s presentation, Berthold said, “I probably left a lot of money on the table. We sold it to him because it was convenient.” Next time around, Berthold said he would spend more time examining the market and hiring a broker.

“What you never know in the real world is how might it have gone if I had done things differently,” Medvec said. Successful negotiations start with preparation. Learn as much as possible about the other side’s options. “The better I understand their options (and) their interests, the more power I have going into the negotiations,” she said.

Businesses need to analyze the marketplace, look for multiple options and remember that negotiations should be about more than money. “Discounting price doesn’t lock you in with a customer. It doesn’t keep out competitors. If all I do is negotiate price, all I do is not get paid very much money,” Medvec said.

Right deal, wrong deal

In general, the biggest mistake business executives make is negotiating the wrong deal, she said. Negotiating what is typical, such as price or salary, isn’t always the best course of action. Instead business executives might gain more by discussing factors specific to their companies’ needs.

Getting embedded with customers can trump price as a long-term goal, yet it’s often overlooked. For example, Elite Staffing wants to increase the amount of business it does with large clients, but it is confronted by competitors who emphasize price over quality, said Howard Topel, vice president of operations at the Chicago-based firm. Placing a partner on-site with a customer is one way to get noticed and gain information about what types of services the client might be looking for in the future, Medvec said. “Proximity leads to liking. When they see you more often, they like you better,” she said. “I would argue embeddedness is the No. 1 way to spark growth.”

Another approach is the one Koonce plans to try, offering a volume incentive plan where customers earn rebates or credits on future work. “You never want to bet on the promise of volume. You want to bet on the achievement of volume,” Medvec said. Negotiating prepayment is another way of solidifying a business relationship because it makes it harder for competitors to take away the business. Being willing to work with bankrupt or financially stressed customers also can lead to better terms, as Koonce found. When a company in bankruptcy asked Cal’s Electrical for “special terms,” she agreed instead of walking away but quoted them higher rates, which they accepted.

What matters most?

When hiring workers, businesses might come out ahead in the long run by expanding the discussion beyond the standard items of salary and bonus, Medvec said. Think about employment factors that are most likely to increase worker productivity and retention, such as flexibility, tuition reimbursement and vacation days. Those factors might be worth more to workers than a higher salary, while also helping the business achieve a stable long-term workforce.

In general, creating alternatives leads to more effective negotiating. Business executives should establish a best alternative to a negotiated agreement, or BATNA, before they begin discussions. “When we have a real, live alternative, we have more power,” she said. If a company doesn’t have alternatives, they can develop them by putting out requests for proposals or negotiating with multiple buyers. While doing so requires a commitment of time, it should pay off by providing more bargaining power in the negotiation. By expanding the give-and-take, experienced negotiators are more likely to come away with a satisfactory agreement.

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