ASSIGNMENT 2

NEGOTIATION - SOURCING IT SERVICES

Aditya Rajeevan
Gopalakrishnan Srinivasan
Mushonnifun Faiz Sugihartanto
Palash Maru
Jicheng Li
Contents
1. PROJECT SUMMARY ............................................................................................................... 1
2. NEGOTIATION AGENDA ......................................................................................................... 1
3. NEGOTIATION PLAN ............................................................................................................... 2
3.1. Team Members Roles and Responsibilities .......................................................................... 2
3.2. Points of Negotiation ............................................................................................................. 3
3.2.1 Total Price ....................................................................................................................... 3
3.2.2 Project Completion (Conversion) Time .......................................................................... 3
3.2.3 Contract Type .................................................................................................................. 3
3.2.4 Guarantees ....................................................................................................................... 4
3.2.5 Compensation and Penalties............................................................................................ 4
3.2.6 Terms of Payment ........................................................................................................... 4
3.2.7 Market System................................................................................................................. 4
3.2.8 Ownership of Market System .......................................................................................... 4
3.2.9 Education/ Knowledge Transfer...................................................................................... 5
3.2.10 Service Agreement ........................................................................................................ 5
3.2.11 Project Management and Organisation ......................................................................... 5
3.3. BATNA (Best Alternative to a Negotiated Agreement) ....................................................... 5
4. NEGOTIATION APPROACH .................................................................................................... 5
5. NEGOTIATION TACTICS ......................................................................................................... 6
5.1. Agenda .................................................................................................................................. 6
5.2. Communication: .................................................................................................................... 6
5.3. Spatial Configuration ............................................................................................................ 6
6. THOUGHTS ABOUT COUNTERPART ................................................................................... 7
7. INVESTIGATION FRAMEWORK FOR OBSERVER ............................................................. 8
APPENDIX 1: PREVIOUS YEAR AGREEMENT ...................................................................... iii
APPENDIX 2: SUMMARY OF SUPPLIERS OFFERED .............................................................iv
APPENDIX 3: SUMMARY OF NEGOTIATION PLAN .............................................................. v

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1. PROJECT SUMMARY
Negotiation is an integral part of the purchasing process wherein both the parties come together
and put forward their requirements and contract terms. As efficient purchasing can reduce
expenditures significantly, the purchasing department dedicates ample amount of time and
resources to prepare its negotiation plan. The report chalks out the plan of action and intended
objectives of the negotiation process from the buyers perspective.
The team represents FF logistics which intends to buy services from IT company to change the
mainframe computer environment to client based server system. FF logistics is a profitable
company with extra ordinary liquidity but as the margins in the transportation industry has
reduced considerably they need to employ better systems to increase effectiveness and efficiency.
Main Objective:
● Conversion of mainframe computer environment to an internal client/service solution
○ To facilitate faster and efficient administration.
Additional Work and intended results of each:
● Implementation of market system
○ This would enable FF logistics to track position of overhaul trucks ,influence
current and future clients effectively and to improve their management and
control claims of customers.
● Education of personnel
○ Personnel working for FF logistics needs training to improve their competency in
handling computer systems.
● Documentation
○ To improve the understanding of cash flow within the supply chain
After the initial round of investments done last year, FF logistics has € 1 395 000 left to invest to
acquire the services they require. Based on estimates given by IT experts,the proposed changes is
expected to take between 20,000 to 22,000 hours.
Based on the RFQ which indicated a max completion time of 22,000 hours FF logistics has
received three explicit quotations. From JBIT, Maneken PIT, Leuven LN IT.

2. NEGOTIATION AGENDA
The process of negotiation will take approximately 60 minutes. It will be divided into two
rounds. Both rounds will last for 30 minutes with a 30 minutes break between the successive
rounds. A gant chart is prepared to outline the timeline:

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 Table 1. Negotiation Agenda

Figure 1: Negotiation Agenda Framework

3. NEGOTIATION PLAN
A successful negotiation process requires the plan and member roles to be defined clearly. This
section gives a detailed description of various aspects of negotiation as well as the modus
operandi of the negotiation planned. The summary of the negotiation plan is summarized in the
table in Appendix 3.

3.1. Team Members Roles and Responsibilities

A well-planned team with required expertise in the relevant areas is a key to a successful
negotiation. A team with the required members and defined responsibilities is an essential
prerequisite for a negotiation plan.

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 Table 2. Team Members Roles and Responsibilities Division
Name Role Responsibilities

Gopalakrishnan Project Manager Head of Negotiation: The decision maker, lead the
Srinivasan & IT Head negotiation process based on the aspects.

Palash Maru Chief Present the Introduction of Project and oversee the
Purchasing negotiation
Officer Summarize and finalize the negotiation result

Aditya Rajeevan Chief Financial Takes care of the all financial aspects
Officer Documenting the agreement

Mushonnifun Faiz Observer Watches, observes, and makes notes related to

Sugihartanto activities that convey important information (body
languages, hesitation in speaking, side comments)

JiCheng Li Observer Watches, observes, and makes notes related to

activities that convey important information (body
languages, hesitation in speaking, side comments)

3.2. Points of Negotiation

There are several important points that should be negotiated. All of the negotiations below is
summarized in the table which is depicted in Appendix 3.

3.2.1 Total Price

FF logistics has a stipulated project budget of € 1 395 000. This budget is not to be exceeded in
any situation. The total price of € 1 249 440 should be the target price as it is cherry picked as the
lowest price given by all the suppliers.

3.2.2 Project Completion (Conversion) Time

FF logistics aims to get the project completed within 13 months. As predicted, the lesser the time
period for project completion, more the cost savings for the company. FF Logistics calculated
that there will be a saving of € 80 000 per month if the project is completed earlier than 13
months. Conversion time of 11 months or 20,000 hours is cherry picked as the lowest promised
project completion period.

3.2.3 Contract Type

The preferred type of contract would be procuring a fixed price-based contract with the defined
number of months for completion. This will enable FF Logistics to calculate the savings per
month if the project gets completed before 13 months. Another type of contract which is
acceptable will be a fixed price contract based on number of hours. As long as the total budget for

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both type of contracts is well under the defined budget for the project. A contract based on
number of hours should be preferred only if there is a guarantee from the supplier regarding the
project completion time to be less than 20,000 hours. The documentation of the finished systems
should be included in the work.

3.2.4 Guarantees
Guarantees will be based on the type of contract which will be finalized with the IT Company.
Whatever be the contract, the IT Company should be asked for a guarantee stating that FF
Logistics would not be liable to pay for any extra time over the stipulated time. If the IT company
fails to complete the project within the promised time, then they are liable to be penalized based
on some terms. For instance, they will have to complete the remaining project for free of cost.

3.2.5 Compensation and Penalties

FF logistics will aim at closing the deal for 11 months. If they reach consensus with the seller for
this deal, FF logistics shall put up the penalty clause stating the following: If IT company takes 2
more months (up till 13 months) then the company has to complete the remaining project for free.
If they take more than 13 months to complete the project, then they are liable to pay damages
amounting to € 120 000 and complete the project free of cost. € 120 000 is a damage cost which
the other supplier (Leuven LN IT) is ready to pay in case of any delay in the project. Hence this
cost is cherry picked to be included in the negotiation as the penalty cost.

3.2.6 Terms of Payment

There is a great room for negotiation about the advance payment to be paid to the supplier. The
best offer in terms of advance payment is cherry picked to be 28.7% which is provided by JBIT.
If the supplier wants higher percentage than the above mentioned, they should provide a
guarantee of project completion time and simultaneously agree on the clauses of penalties.

3.2.7 Market System

With the implementation of market system there will be a capacity utilization increase of 10 %
every year which amounts to approximately € 1 000 000. FF Logistics aims to invest with this
market system only if the calculated payback is less than or equal to 2 years. Currently, JBIT is
the only supplier that has given a detailed pricing for the market system and hence this is the
price to be cherry picked while negotiating. The aim should be to strike a deal for the system for
a price lower than JBIT. Moreover, IT Company should at least give the details of cost per pole,
cost per terminal, cost for accounts and ledger per office, cost of managing customers, and even
any other relevant offer and corresponding cost. The cost should include the hardware, software,
and installation. The documentation of the finished systems should be included in the work. If the
market system gives expected results, then FF logistics will consider installation of these systems
also on the German Market as well.

3.2.8 Ownership of Market System

The ownership of the market system should be transferred to FF Logistics and the IT company
should be the licence provider if they agree to provide the system. The ownership agreement will
include the clause restricting the distribution of this market system to FF logistics competitors by
IT company.

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3.2.9 Education/ Knowledge Transfer
The IT company should provide complete information about the procedure & pricing of
educating the personnel in order to operate the new systems installed. For instance, the price per
person and number of hours for the training. FF logistics aims to strike a deal for prices lower
than offered by JBIT as it is the only company that has provided the offer for education.

3.2.10 Service Agreement

Although the service agreement usually costs 10 % of the contract cost, FF logistics should aim
to negotiate at a percentage lower than this. Since the total project cost aimed to be achieved is €
1 249 440, the target price for service agreement should be € 124 944.

3.2.11 Project Management and Organisation

The total responsibility of completing the project should be of IT company with periodic
supervision by FF logistics. FF logistics would like to have only one project leader who has in
depth knowledge and experience in managing gigantic projects like these. FF logistics had
previously worked with John Labile from IT company who possessed the knowledge and
leadership skills but nd was difficult to deal with. Hence FF logistics would not like to have John
as the project manager.

3.3. BATNA (Best Alternative to a Negotiated Agreement)

In case negotiation with IT company does not result in an agreement on multiple aspects of the
proposed deal, FF logistics needs to opt for an alternate proposal to acquire the intended
objectives. The BATNA for conversion project will be to opt for Leuven LN IT as they offer the
minimum total price for the project and aim to complete it within 11 months. Leuven even offers
to pay the penalty and complete the remaining work free of cost, if they are not able to complete
the project within the stipulated time. As for now, The BATNA for procuring market systems
will be JBIT’s offer. This choice can change depending on how competitive the offer of Maneken
PIT turns out to be.

4. NEGOTIATION APPROACH
To ensure successful negotiation, Principled Negotiation approach will be followed, which on
both substance and relation. It separates both substance and relation and develops them in
parallel. This also helps us when IT solution plans to play or uses dirty tricks.
The following points define the principled negotiation are given below:
I. People: Our goal is to make the buyer and seller to work together to find a proper solution
and to separate the people from the problem. So both the parties can benefit from the
negotiation.
II. Interests: To achieve a mutually beneficial deal, common interests will be discussed with
the supplier. The focus of negotiation should reflect the interest of making good deal and
not positions.

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III. Options: Always search for options that has mutual gains. It will be nice for trying to
broaden the approaches which will generate a variety of possibilities. Moreover, FF
Logistics should also be open for suggestions from the supplier.
IV. Criteria: Developing the objective criterias (standards and procedures) beforehand. The
choice of the supplier should be based on these criteria. Therefore, the negotiation with
the selling party should be based on how well the supplier meet the following criteria.
Therefore, the main goal of this approach is to have a “Win-Win” situation and the negotiation
should be benefited for both the parties.

5. NEGOTIATION TACTICS
Negotiation Tactics are important to be formulated in order to attain a sustainable competitive
advantage in the negotiation process. These tactics can be deciding on the agenda beforehand,
communication tactics and spatial configuration.

5.1. Agenda
A negotiation should be well planned and structured before hand and the specific plan should be
decided according to the quantity, amount and criticality of the purchase. The purchasing
personnel themselves must understand the professional knowledge related to the materials that is
needed to be purchased, so that all kinds of important information can be fully grasped in the
negotiation process. After the beginning of the negotiations, try to choose and negotiate with
people who have the power to decide so as to reduce the waste of time and make sure the
negotiation is not interrupted by other personnel. The opening offer should be clear and complete
with a firm attitude, in order to leave a serious and sincere impression. In the process of
negotiation, the various skills should be used to deal with supplier's problems and find a
breakthrough at any time.

5.2. Communication:
Learn to listen and control the speed of speech. While listening, think about each other's
intentions. Speed control makes us seem calmer and more confident. It is often more persuasive
to try to explain it from the other side's standpoint, the easier you make it for other side, the easier
they will give a positive answer. Then speak with data and facts to enhance authority and gain the
trust of the other party. Whenever possible, avoid direct language conflicts as much as possible,
which will make the relationship more hostile. After the beginning of the negotiations, both sides
will enter the glue period of bargaining. The purchasing personnel must be flexible, and they
must not overcharge and change the price arbitrarily.

5.3. Spatial Configuration

Spatial configuration during negotiation is a cardinal objective in order to build cooperation,
dominance or opposition. FF Logistics chose this layout to be more cooperative with IT
Company. Chief Purchasing Officer is placed in a more conversational position so that he can
oversee and control negotiation situation. The head of negotiation (Project Manager & IT Head)
is made to sit opposite to the counterparts giving him the advantages of dominance as well as

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conversational tactics. All buyers are made to sit away from the door. The sellers are made to sit
facing the window so that they can be easier to be watched by the observer.

Figure 2: Seating Plan

6. THOUGHTS ABOUT COUNTERPART

During the preparation on negotiation meeting, some of the counterpart behaviour has to be
observed. IT company might be aware of their competence as compared to the other suppliers
and hence may use this fact during the negotiation. Some other thoughts are as follows:
❖ The IT Company team might know that FF logistics is not an expert in IT, hence the IT
company might try to turn the negotiation to their favour on important subjects such as
number of hours, needed number of months and the total cost for the project.
❖ They may negotiate for higher price since they are giving an outstanding technical
support, good service & maintenance and a very high quality of programming as
compared to the competitors.
❖ They will be willing to keep John Labile as the project manager on the grounds that he is
the right person for the project based on his knowledge and expertise.
❖ They may extend the time period of the project (13 months) saying that they are providing
a very high and stable quality of programming as compared to others or they will ask for
extra price for overtime in order to finish the project On-time.
❖ They may negotiate on payment methods and may require a huge sum upfront.

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7. INVESTIGATION FRAMEWORK FOR OBSERVER
The observer keeps a close eye on the negotiation proceedings but does not participate in the
negotiation. Based on the observations made, the observer makes a report that outlines the
negotiation proceedings. The observations are then used to debrief the negotiators on what went
through and highlight the similarities and differences between preplanned negotiation plan and
actual proceedings.
What to observe:
People:
● Observing the body language of the members on the other side which convey their view
on the proposal on the table. Eg Hand and facial gestures in response to a certain aspect of
the proposal indicate the level of satisfaction with it .
● The communication tactic used by the members. Eg Change in voice or tone during
different phases of negotiation.
● The observer can step into the shoes of the counterparts to see their perceptions and
observing instances where both parties observe aspects from the same vantage point.
Negotiation strategy of the counterpart
● The observer can be a silent partner to the negotiator who makes an assessment of the
counterpart’s negotiation strategy and suggest changes in the negotiation approach to the
negotiator.
● The observer also can also make a sense of the direction, the negotiation is being steered
to by the other party.

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APPENDIX 1: PREVIOUS YEAR AGREEMENT

Supplier JBIT Manaken PIT Leuven LN IT The IT Company

Best technical support service
Good quality Will be offered very
(no extra cost for solving
documentation & competitive
problem, fast response by
programming Excellent quotation
Strengths sending staff directly to the
Good & Programming Hard working to get
problem)
knowledgeable FF Logistics
Run tests after installations &
Project Leader confidence
methods suggestion
Careless
Bad
Lousy Arrogant Project Leader is difficult
Weaknesses programmers’
documentation presentation person
disciplines
High Price
4,000 hours x 2,000 hours x €
Last Year 3,000 hours x € 77 / hour =
€72 / hour = € 74 / hour = € Not buying
Transaction 231,000
288,000 148,000

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APPENDIX 2: SUMMARY OF SUPPLIERS OFFERED

Supplier JBIT Maneken PIT Leuven LN IT Cherrypicked

Time 19,000 hours 19,000 hours. 11 months 11 months
(the control after
12 months 16,000 hours)
11 months

Contract Fixed Price : Total Price : € 80 x € 1,249,440 € 1,249,440

€ 1,567,500 19,000 hours = €
1,520,000 Extra months with Extra months with no
Guaranteed for no extra cost and extra cost and payback
delivering remaining Excess price /hour: payback € 120,000 € 120,000
hours for free if fail € 33

Payment € 450,000 in advance 40% at startup = 50% in advance = € 450,000 in advance

= 28,7 % € 608,000 € 624,720 = 28,7 %
40% after 5 months =
€ 608,000 Payment in each
20% after full 30th day
converting =
€ 304,000

Additional No Overtime Partly working in -

Notes inconvenient
working hours

Bid Price / € 82,5 € 80,0 € 68,5 € 68,5

Hour

Education € 900 per person Still in Study Not offer any € 900 per person
education / training

Market 1. Cost per "pole" = In promise for Not offer any 1. Cost per "pole" =
System € 27,500 offering market system € 27,500
2. Cost per terminal = 2. Cost per terminal =
€ 100 € 100
3. Cost for accounts 3. Cost for accounts
and ledger per office and ledger per office =
= € 7,000 € 7,000
4. Cost of managing 4. Cost of managing
customers per customers per terminal
terminal = € 150 = € 150
*Price include *Price include
hardware, software, hardware, software,
installation. installation.

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APPENDIX 3: SUMMARY OF NEGOTIATION PLAN

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