• Nominate a “ bad cop” for your team in advance. The team may occasionally need someone to take a tough line with the vendor. If a “bad cop” is needed during the negotiations, the firm CFO, corporate counsel, or other senior manager is often happy to fill that role.
• Ensure that the vendor must close the deal. Ensure that throughout the process, the vendor invests considerable amount of time in the deal; the vendor sales team then often engages in “sunk cost fallacy” and believes that it must complete the deal because of the high level of investment so far. This has the effect of swinging the balance of power considerably.
• Employ “ bogeys” to force reciprocal concessions. This is a common negotiating tactic to put forward points that are not material considerations (bogeys); then quickly capitulate on the point to force reciprocal concessions from the vendor on other points. This can be an effective strategy, but it should be used with caution; it can quickly produce the reverse effect if the vendor agrees to the nonmaterial concession
early.
• Check the contract for liability limitations. Vendors generally try to contractually limit their liabilities to the total of their fees or to the limits of their insurance coverage. These liability limits can sometimes be far lower than the actual damages experienced by a business if there is trouble. The team should push for liability limitations that acknowledge the risk for the customer, not the vendor. For high-profile, large-investment projects, the vendor should also carry malpractice or E&O
insurance from a reputable insurance carrier.
• Never prepay. Occasionally, vendors offer discounts for prepaid services or products. The vendor manager gives up significant future inf luence over the vendor’s behavior by prepaying these charges. We have seen
clients with significant prepaid fees that are worthless because the vendor has gone out of business. However sharp the discount, the risk associated with prepaying is too high.
• Know when to disappear. If the sides are at an impasse, the vendor manager can “go dark” and avoid responding to vendor e-mail and voice mail; time is on the side of the buyer, and the dearth of information will put increased pressure on the vendor if the vendor ’s sales team believes that the deal is slipping away.
• Know when to say when. When the negotiation is close to complete on all pricing, terms, and conditions, the manager should have at least one final desired concession at the ready; the vendor usually gives this concession on the promise that the client will sign the contract immediately.
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Vendor negotiations can be daunting, difficult, and exhausting experiences. However, they are an unavoidable part of the selection process and have to be managed carefully to ensure the best pricing and terms. As a senior management acquaintance of ours once remarked, “Every customer gets the vendors that they deserve.”
Ethics in Purchasing and Vendor Management
Because purchasing often involves large transactions and the vendor selection process involves often arbitrary-seeming judgment calls, it is critical that those involved in purchasing adhere to the highest standards of ethics. This ensures the avoidance of both impropriety and the appearance of impropriety, as well as ensuring that the professional services firm receives the best value for its investment in outside spending.
Each firm should establish and publish policies for transactions with outside entities. To avoid any later confusion, these policies should be acknowledged and signed by all individuals involved in the purchasing decision-making process. While each individual firm may set its own specific principles or standards, the NAPM/ISM has created a good baseline from which to begin (see Exhibit 16.9).
An additional resource is the Illinois Institute of Technology’s Center for the Study of Ethics in the Professions (CSEP), which has aggregated a tremendous number of codes of ethics—more than 850 at current count—
available on its public web site (see the resources section at the end of the chapter). The CSEP library also includes guidelines and processes for establishing codes of ethics, resources links throughout the Web, and information on permissions. This searchable and comprehensive web site is the first stop on the Internet for those interested in establishing a code of purchasing ethics or for a broader, firm-wide code of ethical behavior.
Summary
Well-executed vendor selection and management is one of the keys to success for the firm overall. Because of high expense outlays and critical reliance on vendor-supplied products and services, professional services firms cannot afford to ignore the topic. The most experienced vendor managers find ways to share the burden of vendor management by instituting self-monitoring programs, which force vendors to report their own metrics and results and agree to be subject to periodic random audits of the scoring and performance. Further, they carefully allocate their attention in proportion to the vendor ’s overall importance to the business. These vendor managers approach vendor relationships with a keen appreciation of the value
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1. Avoid the intent and appearance of unethical or compromising practice in relationships, actions, and communications.
2. Demonstrate loyalty, to the employer by diligently following the lawful instructions of the employer, using reasonable care and only authority granted.
3. Refrain from any private business or professional activity that would create a conflict between personal interests and the interests of the employer 4. Refrain from soliciting or accepting money, loans, credits, or prejudicial discounts, and the acceptance of gifts, entertainment, favors, or services from present or potential suppliers which might influence, or appear to influence purchasing decisions.
5. Handle information on a confidential or proprietary nature to employers and/or suppliers with due care and proper consideration of ethical and legal ramifications and governmental regulations.
6. Promote positive supplier relationships through courtesy and impartiality in all phases of the purchasing cycle.
7. Refrain from reciprocal agreements which restrain competition.
8. Know and obey the letter and spirit of laws governing the purchasing function and remain alert to the legal ramifications of purchasing decisions.
9. Encourage that all segments of society have the opportunity to participate by demonstrating support for small, disadvantaged and minority-owned businesses.
10. Discourage purchasing’s involvement in employer sponsored programs of personal purchases which are not business related.
11. Enhance the proficiency and stature of the purchasing profession by acquiring and maintaining current technical knowledge and the highest standards of ethical behavior.
Exhibit 16.9
National Association of Purchasing Management Code of Ethics
of a partnership but also ensure that the vendors are delivering the value promised. Finally, they ensure that they receive a steady supply of information concerning critical vendors from objective third-party sources, including other customers and industry research analysts.
RESOURCES
Many of the resources and courses for purchasing are geared to manufacturing companies, which purchase raw materials and finished goods from outside suppliers in large quantities, or for federal, state, or local governmental
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agencies that must adhere to strict policies in purchasing process. However, the same vendor management principles apply to the lower volume purchasing experienced by professional services firms. Some resources are provided here:
http://www.napm.org
National Association of Purchasing Managers (NAPM)—recently renamed the Institute for Supply Chain Management (www.ism.org)—offers a wide variety of resources for purchasing managers, including seminars, books, negotiation advice, an online knowledge center, and self-paced classes. The NAPM (ISM) confers two certifications for purchasing professionals, the Accredited Purchasing Practitioner (APP) and the Certified Purchasing Manager (CPM).
http://www.cips.org
Chartered Institute of Purchasing and Supply (CIPS) is an international organization serving the purchasing and supply profession. CIPS is based in the United Kingdom and offers a variety of best-practice information, seminars, and other services to the purchasing manager.
http://www.amanet.org
American Management Association provides seminars, best practices, and information on a wide array of management topics, including purchasing management.
http://www.cmcamai.org
The Canadian Management Centre, an affiliate of the American Management Association, provides information on purchasing management and procurement best practices.
http://www.american-purchasing.com
The American Purchasing Society (APS) is a professional association of buyers and purchasing agents. It requires membership and provides subscription to Professional Purchasing monthly magazine. The APS confers two certifications for purchasing professionals: the Certified Purchasing Professional (CPP) and the Certified Professional Purchasing Manager (CPPM).
http://www.pmac.ca
Purchasing Management Association of Canada is an organization providing resources and information for purchasing and procurement managers.
http://www.nigp.org/index.htm
National Association of Governmental Purchasing provides public sector purchasing agents with training, education, research, and technical assistance.
Illinois Institute of Technology’s Center for the Study of Ethics in the Professions (CSEP) http://www.iit.edu/departments/csep.
Training and Certification
Many universities, colleges, and other educational institutions offer courses and certifications in procurement or purchasing management. The University of Alabama—Huntsville is one: http://www.coned.uah.edu/procman.cfm, as well at the California Institute of Technology: http://www.irc.caltech.edu
/courses/Strategic_Supplier_Management.htm.
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Templates and Processes
Many government purchasing agencies (federal, state, and municipal) post online their purchasing policies and processes. These can be valuable sources of information for the new purchasing manager or purchasing group. They are easily identifiable using key words such as purchasing, procurement, agency, or office in any Internet search engine.