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Equating low cost with value for money is a common mistake in Defence negotiations. So, how can Defence and Industry move past the traditional tussle around profit and create better value deals?
John Glenn, the first American to orbit the Earth, has a particularly famous quote - “As I hurtled through space, one thought kept crossing my mind - every part of this rocket was supplied by the lowest bidder”. Glenn’s realisation way back in 1962 still has great relevance to negotiations taking place in the Defence arena today, where equating low cost with value for money is potentially a big mistake.
ASSOCIATING LOW COST WITH VALUE FOR MONEY
When it comes to Defence acquisition and sustainment contracts, around 90 cents in every dollar pays cost rather than profit. So, if the object of the negotiation is to reduce overall contract spend and get a better deal, it is far better to negotiate to reduce the cost drivers than it is to reduce the profit margin, because it is around nine times easier to achieve the objective that way than to simply focus on reducing profit.
While the parties will have a lot in common when negotiating Defence contracts, the Commonwealth and contractors will inevitably have slightly different perspectives as to what constitutes a good deal. The good news is that it is possible to negotiate so that both achieve a good deal. So, what would this look like? Defence contractors making an adequate profit but at the same time the Commonwealth ensuring a good deal for taxpayers and not spending money unnecessarily. In reality though, our experience over the years has shown that particularly when it comes to less experienced Defence negotiators, the default option is to haggle over the profit margin rather than being creative about finding ways to reduce cost – a much more fruitful and less competitive route. Solely focusing on profit is by its nature quite difficult given that profit is a very high priority for industry.
MOVING PAST THE HAGGLE
How can Defence and industry move past the traditional tussle around profit and create better value deals?
Creativity is important in trying to understand where the opportunities lie in reducing overall costs in a Defence procurement without affecting capability or compromising the objectives of the procurement. However, it’s important not to have tunnel vision and instead be able to stand back and look at the landscape from all perspectives. The more issues you can get onto the table to trade, the more likely it is that both parties will perceive that they’ve ended up with a good outcome.
There doesn’t have to be a winner and a loser in Defence negotiations – it is possible for everybody to be a winner. The key is good preparation to really understand exactly what “good” looks like in terms of what you want, and be clear about your own priorities and where you are prepared to be flexible to reduce the overall cost of the contract. It is equally important to be curious about what is fundamentally driving the needs and interests of the other party. The time spent exchanging information and building trust is incredibly valuable when it comes to the concession trading part of the negotiation, to reduce or optimise the cost drivers so that everyone ends up not just with a deal they can live with but rather an outcome that they are happy to implement because it represents a “good deal”.
SO HOW DO YOU BUILD TRUST?
Trust is built in many ways but the quickest and easiest is to be open with information. One of the common things we see in Defence negotiation is fear on both sides about being open but it is rarely the case that you can be “too open”. In most negotiations, there is virtually no topic that is unable to be discussed across the table. Rather, the better the understanding each party has of the fundamental drivers for the parties in the negotiation, the more likely it is that a good outcome is going to be achieved.
We always encourage our clients, whether it be the industry side or the Commonwealth side, to be much more open with information than they would traditionally be comfortable doing. One of the most rewarding outcomes of our Defence engagements is witnessing a great deal have more progress being made in a genuinely collaborative, open dialogue and the trust that develops as a result. It’s a lot less stressful and the people involved tend tobe happier with the outcome.
ROME WASN’T BUILT IN A DAY
Changing the way negotiation is undertaken in the Defence space is a slow process. It’s a long road, as there is institutionalised distrust between contractors and the Commonwealth. Some of this is not misplaced; there have been instances in the past that provide reasons for that lack of trust, on both sides.
Nevertheless, at Scotwork we are big believers in negotiating looking out the windscreen, rather than the rear-view mirror. If the parties can approach the process of negotiation on a basis of trust and openness (subject to probity and compliance of course), then life can actually be a bit easier – it doesn’t have to be tough.
Another key role we play is to help facilitate trust and rapport from the outset. There is a danger in any sort of negotiation of rushing to a conclusion too early. The building of shared understanding, rapport and generating a human connection between the negotiating teams is crucial to the execution of a negotiated outcome that is going to “stick”. It’s also important to remember that negotiators are people too and being “tough” or competitive can destroy rapport and trust. We advocate being firm on the negotiating issues and soft on the people.
Of course, being tough on the issues and soft on the people is sometimes easier said than done. It’s very common that when we get involved, it’s already reached the point where there is a high level of tension between the parties who are already in, or are close to starting, a negotiation. So, part of our job is often helping to dial down the tension on both sides to ensure that there is constructive engagement and information can flow more effectively. Tense negotiations tend not to be very effective – they’re fine if you are buying a fridge but not very sensible when you’re setting up a life of type, rolling wave through-life support contract for example.
The test of a good negotiated outcome is not how the contract looks at the moment of signature, but rather what happens over the next couple of years. This is particularly true in large and complex procurements, whether acquisition or sustainment. The test of a good negotiated outcome is that the people involved in implementing it do so of their own free will, fixing issues as they arise and making it work, not because the contract compels deliverables and activities but because of the goodwill and shared value created during the negotiation. That only really becomes apparent a couple of years down the track when everyone can look back and see what the team got wrong at the point of contract execution and what they did to fix it, because inevitably something will have gone wrong in that period. The more hard work spent building that shared goodwill at the point of negotiation, the better the likelihood is that you will be able to work through issues and problems that arise in the early stages of implementation.
To discuss your negotiation needs, get in touch with us:
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