SIG University Certified Sourcing Professional (CSP) program graduate William DeMarzo shares his perspective on the old sourcing cliché “don’t leave money on the table."
In our SIG University CSP course, we learned the benefits of “leaving money on the table” as this negotiation style builds trust, transparency, and a collaborative relationship with suppliers. Yet, the concept of leaving money on the table seems to be taboo in today’s business environment. Nine of the top ten hits from a Google search of the phrase are articles about why it’s a bad idea, a sign of weakness, or otherwise poor choice to do so. Perhaps this is more a sign of a zero-sum society than a negotiating strategy, but that’s a topic for another essay.
Let’s be clear that there are many business transactions where it is appropriate to pay the lowest price for a product or service. For example, products that have defined specifications, from a #2 pencil to a powerful server, or a service that has a measurable deliverable, should be sourced at the lowest price in the market. But when is leaving money on the table a good strategy?
You Get What You Pay For
Perhaps the place to start answering this question by introducing a less inflammatory (and more common) phrase like “you get what you pay for”. Of course, no person or organization wants to pay more for a product or a service than they must, but the quality of the service being delivered must be factored into the purchasing decision. This is especially true in professional services, like HR, legal, marketing, and consultancy, when consumers have a choice of paying for the “A”, “B”, or “C” team. Sometimes the B or C teams are good enough for non-critical projects, and companies can benefit from lower fees. But trying to squeeze A team quality out of the B or C team or buying the A-team resources at lower than market rates, creates a downward spiral that often leads to delays, disruption, and dissatisfaction.
I’m going to digress for a moment and share two personal experiences that illustrate this dynamic. My wife and I recently decided to buy a new car. We decided on the make and model (Subaru Crosstrek), picked the trim level and options we wanted, then shopped all the Subaru dealers in a 25-mile radius. Since each dealer was going to deliver the identical product, we negotiated for the lowest price.
We also had our house painted a few years ago. We received four quotes and chose a contractor in the higher price range because his proposal was the most thorough and included a description of his crew’s experience and workmanship (i.e., his “A” team). We left money on the table by not going with the lowest bid but received a better-quality paint job for the extra money spent. We are confident that “we got what we paid for” in a positive way.
Now back to our day jobs.
Understanding Buying Value
Sourcing professionals are often in a dilemma because their performance is measured on cost savings. Still, they’re also obligated to deliver a quality supplier (and a healthy supplier relationship) to stakeholders. This is where the concept of “buying value” comes into play. The process starts by determining the scope and service levels needed for success with your stakeholders (A, B, or C team). Ideally, this is done before an RFx event. The project scope can be built around these service levels, but sometimes the service level tolerances are discovered during or after the sourcing event. For example, if quotes for the “A” team are greater than the project’s budget, then stakeholders may need to re-engineer their requirements or accept reduced service levels.
Once a baseline of service level requirements is established, the procurement professional's role is to negotiate a fair market rate with the supplier, which is where leaving money on the table comes back into play. While it may be in vogue to be a hard-driving negotiator and squeeze every penny out of the commercial terms, it may come at the expense of a long-term, mutually beneficial relationship. Leaving money on the table sends a deliberate message that both parties want a fair contract that creates a credible partnership, not one that is heavily weighted to the buyer.
The last point to make is about trust. The sourcing professional must build trust with internal stakeholders and dismiss the fallacy that procurement will force them to accept the lowest cost provider. Suppliers must trust that the sourcing professional is negotiating in good faith and will be fair in future dealings. Trust is gained with all entities by leaving money on the table.
The Certified Sourcing Professional (CSP) Program is a 10-week course that focuses on the hard and soft skills of sourcing, including strategic sourcing and outsourcing methodologies, as well as best practices in negotiations.
William J. DeMarzo is a Senior Sourcing and Supplier Management Professional with over twenty years of experience in strategic procurement and supplier management across multiple sourcing categories. Strengths include stakeholder management, senior-level contract negotiations, financial analysis and budgeting, strategic and tactical planning, and team building and leadership.