Welcome back to another episode of Smart Consulting Sourcing, the go-to podcast for all things consulting procurement. We’re thrilled to have you join us on our quest to master the art of buying consulting services like a pro. Today, we’re diving into a topic of great power and potential – negotiation.
In this episode, we are going to explore some fundamental concepts that can make a significant difference in your negotiation prowess. Get ready to uncover the secrets of BATNA, ZOPA, and discover how to identify savings opportunities within consulting proposals.
But before we immerse ourselves in the world of negotiation, let’s take a moment to reflect on our journey so far. In our previous episode, we laid the groundwork for successful negotiations by discussing the prerequisites. Let’s recap those key points:
Team Composition: Ensure the right individuals are involved in the negotiation process, including the procurement lead, project manager, project sponsor, and key stakeholders from finance and strategy for larger projects.
Separate Personal from Professional: Keep personal relationships aside during negotiations and consider bringing another person to the table to maintain objectivity.
Do Your Homework: Thoroughly research the consulting firm, and review any previous engagements or negotiations with them to inform your approach.
Define Your Strategy: Establish your negotiation strategy and tactics, including initiating discussions, identifying escalation points, and anticipating potential concessions and reactions.
Understand Decision-making Authority: Clarify the decision-making power of the other party to avoid frustrating surprises or vetoes, and consult with your stakeholders if needed.
Before we delve into the intricacies of negotiation, I want to take a moment to remind you that you can access all our previous episodes on the major podcast platforms. Whether you prefer to listen on Apple Podcast, Spotify, or Samsung Podcast, watch the episodes on YouTube, or read on the thought leadership section of your website consultingquest.com. So if you’re tuning in for the first time or want to revisit any of our insightful discussions, you can easily access our entire archive and stay up-to-date with the latest tips and strategies for smart consulting sourcing.
Level Up Your Negotiating Game by Embracing BATNA and ZOPA
Welcome to the fascinating world of negotiations! Today, we’re diving headfirst into this captivating topic, but before we begin, let’s address the elephant in the room – theory. Now, I understand that theory can sometimes be daunting, but I promise to make it as painless and engaging as possible.
To set the stage for our discussion, let’s introduce two important concepts that will serve as our guiding principles: BATNA and ZOPA. These concepts provide a valuable framework for structuring your negotiation approach, helping you navigate the complex dynamics of the negotiation process.
I will use a real-life example to illustrate the application of BATNA and ZOPA in a consulting project.
Applying The Concept of BATNA In Negotiating Consulting Agreement
Let me introduce you to NewCo, a Utility Company based in the United States. NewCo has been facing challenges with increasing operational costs and revenue pressure, prompting the need to reinvent its operating model.
To address these issues, the Executive Management team at NewCo has decided to embark on a 2-phase project consisting of a diagnosis phase followed by implementation. After a thorough Request for Proposal (RFP) process, they have chosen to work with their incumbent Consulting Partners, a reputable firm known for its comprehensive services and extensive market presence. The selection was driven by the confidence placed in the senior partner leading the project and the existing customer intimacy, which is expected to accelerate the project’s progress.
BATNA, or Best Alternative to a Negotiated Agreement, is a crucial concept in negotiations. It represents the fallback option or alternative course of action if the current negotiation reaches an impasse. Before entering into the negotiation process, it is essential to identify and evaluate the alternatives, also known as the “no-deal options.”
To determine the BATNA, each alternative is carefully assessed to calculate its expected value. The objective is to select the course of action with the highest expected value. The BATNA serves as a benchmark against which the proposed deal can be evaluated.
In addition to BATNA, it’s crucial to establish a reservation value, which is the lowest-valued deal that you are willing to accept. If the proposed deal falls below your reservation value, it is better to reject the offer and pursue your BATNA. On the other hand, if the final proposal exceeds your reservation value, accepting the offer becomes a viable option.
In the case of New Co, they have conducted a rigorous RFP process and have three strong finalists. In the event of a negotiation deadlock or a failed agreement, they have identified John Doe Consulting as a reliable alternative.
While negotiating the consulting agreement, New Co has discussed the pricing aspects of the project, which is divided into two phases. They aim to shorten the first phase from 8 to 5 weeks and lower the price for phase 1 from $125k to $50k, and for phase 2 from $380k to $300k. Their total budget for the project is approximately $400k.
Based on their evaluation, New Co has established reservation values of 6 weeks and $75k for phase 1, and $350k for phase 2. These values serve as critical thresholds to guide their decision-making during the negotiation process.
Understanding and leveraging BATNA and reservation values empowers New Co to negotiate effectively, ensuring that any potential deal aligns with their objectives and provides the expected value. It’s an important strategic approach that helps them navigate the negotiation process and secure the best possible outcome.
So, armed with the knowledge of BATNA and reservation values, New Co is ready to engage in negotiations, seeking to optimize the project terms and achieve their desired results.
Applying The Concept of ZOPA In Negotiating Consulting Agreement
When it comes to negotiating consulting agreement, both parties involved have their own BATNAs and the ZOPA (Zone of Possible Agreement) helps determine the range of acceptable deals for both sides. The ZOPA represents the overlap or common ground between the two parties’ BATNAs.
The ZOPA demonstrates the potential value that can be created in the deal. Where you ultimately land within the ZOPA determines how much of that value you can capture for yourself. It’s an important indicator of the negotiation’s potential outcome.
In the case of NewCo and Consulting Partners, the Consulting Firm has submitted a high price for the project. As the incumbent, they have rarely faced relevant competition from other firms when working with NewCo. However, this time, NewCo is determined to work with the best consulting firm available, signaling their seriousness about the project.
Understanding the significance of securing the account, Consulting Partners is willing to lower their price to retain the business. They have offered a revised price of $90k for phase 1, with the same scope but a reduced timeline to 6 weeks, and $300k for phase 2.
Upon closer examination, it becomes clear that NewCo and Consulting Partners have a ZOPA for phase 2, indicating potential agreement on the terms. However, a ZOPA does not exist for phase 1, requiring both parties to consider a trade-off or find alternative solutions.
Analyzing the ZOPA is crucial for NewCo as they navigate the negotiation process. They must assess the trade-offs involved and carefully consider their options to achieve the desired outcomes while maintaining the project’s value.
As negotiations progress, it will be essential for NewCo and Consulting Partners to explore creative solutions and potential compromises to bridge the gap between the ZOPA and find a mutually beneficial agreement.
The ZOPA provides a framework for understanding the potential areas of agreement and the scope for negotiation. By leveraging this concept effectively, NewCo can work towards securing a favorable deal while maximizing the value and benefits they receive from the consulting engagement.
Factors Beyond Price: Broadening Perspective on Negotiating Consulting Services
While we’ve been discussing the concepts of BATNA and ZOPA mainly in the context of price negotiations, it’s essential to remember that negotiating consulting services goes beyond just the price. So, let’s broaden our perspective.
You need to understand your priorities and how they relate to scope and price. What compromises are you willing to make? It’s essential to determine the trade-offs and find the best middle ground that aligns with your objectives.
When scoping a project, start with the “must-haves” and consider your budget and perceived value. Explore different options and combinations of scope and price that best suit your needs. Keep in mind that scope and fee are inversely related – you can reduce the scope to fit within your desired fee or increase the fee for a broader scope.
During the negotiation between NewCo and Consulting Partners, an agreement has been reached for phase 2 at $350k. However, phase 1 is still under discussion. Consulting Partners has reduced the price to $90k and the timeline to 6 weeks, but they are unwilling to go any lower. They explain that the internal diagnosis and external interviews have already put them close to their cost limit. As a compromise, they suggest narrowing the scope of the external benchmark to meet the client’s request of $75k and shortening the diagnosis phase to 5 weeks.
NewCo’s executives convene to evaluate the opportunity. Upon reviewing the proposals from other consultants, they realize that the price range for phase 1 over 6 weeks is between $80k and $100k. They decide to adjust their reservation value to $90k for 6 weeks. However, they emphasize the importance of the external benchmark and ask Consulting Partners to put in extra effort for phase 2.
After careful consideration, an agreement is reached, with phase 1 set at $90k for 6 weeks and phase 2 at $315k.
Negotiating consulting services requires a thoughtful assessment of priorities, trade-offs, and alignment with your budget. By understanding the relationship between scope and fee, and being open to finding common ground, you can secure an agreement that meets your needs and maximizes the value of the consulting engagement.
Spotting Savings Opportunities in Consulting Proposals
Let’s explore some additional areas where potential savings can be found within a consulting proposal. While adjustments to scope, duration, daily rates, and staffing often contribute to significant savings, there are other avenues worth exploring. As experienced consultants handling multiple projects each month, we’ve learned how to decode proposals and identify potential savings pools.
Take a close look at how travel expenses are handled in the proposal. Some consultants include them as additional expenses, while others offer an all-inclusive price where expenses are already accounted for. Depending on the project’s travel requirements, you may consider excluding travel expenses from the proposal and billing them separately. It’s advisable to enforce your own Travel Policies and seek upfront validation for larger expenses.
Keep an eye out for any additional percentage added to the proposal to cover SG&A expenses such as copies, telephones, and other miscellaneous items. This category presents an opportunity for negotiation, as it can be a starting point for price discussions. A 5% discount in this area can please the procurement team and contribute to their savings targets. Don’t hesitate to challenge these expenses.
Evaluate whether you truly require all the experts included in the proposal, and if so, consider whether their presence is needed to the extent budgeted. Sometimes, slightly reducing the number of expert consultants assigned to a project can result in significant savings without compromising the project’s success.
Many proposals assume that the entire team will start at full capacity from day one. However, in reality, not everyone may be ready to hit the ground running immediately. Optimizing the ramp-up and ramp-down periods by aligning resource allocation with project needs can lead to substantial cost savings.
If the proposal includes external expenses like market research or expert interviews, explore the possibility of paying for these directly. As a larger company, you may be in a stronger position to negotiate better pricing and avoid additional markups imposed by the consulting firm.
By scrutinizing these areas within a proposal, you can uncover additional opportunities for savings. Remember, it’s essential to balance cost optimization with the overall value and quality of the consulting services being provided. Stay proactive in your negotiations and don’t hesitate to seek alternative approaches that align with your specific needs and budget.
Rounding Up Today’s Episode
We have come to the end of today’s episode. So, let’s summarize the key takeaways:
Before entering into negotiations, define your Best Alternative to a Negotiated Agreement (BATNA). This involves identifying fallback options and evaluating the value of pursuing each alternative.
Determine the Zone of Possible Agreement (ZOPA), representing the range of deals acceptable to both parties. Understanding the ZOPA helps identify the potential for agreement and value creation in the negotiation.
Gather the right team and define your negotiation objectives. Design a strategy that aligns with your BATNA and maximizes value within the ZOPA.
Address the key elements of the proposal, such as scope, deliverables, expertise, and project duration. Negotiate to ensure a favorable outcome that meets your objectives.
Scrutinize the details of the proposal to identify potential areas for cost savings. Consider factors such as travel expenses, project ramp-up and ramp-down, and external expenses, and negotiate to optimize value.
Remember, effective negotiation is key to securing the best consulting services and achieving your desired outcomes while maximizing value. Because that’s how you… improve the ROI of your consulting spend. There you go.
Next week, we will tackle a topic that doesn’t get much attention but is actually super important: giving feedback to the consulting firms that didn’t make the cut. It’s not something that’s done often, but trust us, it’s worth it. We’ll explain why it matters and give you some tips on how to do it right, even if you’re short on time. So, make sure you join us for some valuable insights on this often-overlooked part of the negotiation process.
Till then, stay safe and keep up the smart sourcing game! If you have any questions or need further assistance with consulting procurement, reach out to Helene on LinkedIn or email her. She’s always game for a chat.
Au revoir, and happy sourcing!
; 
