With Value to Claim, Procurement Shouldn’t be ‘Scared’ of Negotiations
For decades, competitive bidding has been procurement’s default setting.
The process is familiar and transparent: Organizations issue requirements, suppliers submit proposals and buyers compare responses. In many cases, the lowest compliant offer wins. But what if that process is leaving value on the table?
That was the question explored during a recent Institute for Supply Management® (ISM®) webinar, “Why Negotiation Outperforms Competitive Bidding: The Data-Backed Case,” presented by Keld Jensen, DBA, creator of the SMARTnership and NegoEconomics negotiation models and strategies.
Drawing on research comparing negotiated deals with competitive bids, Jensen argued that organizations relying exclusively on competitive bidding may be sacrificing value, flexibility and supplier collaboration.
“I don’t want to offend anybody, but I think part of the reason is that some of these procurement organizations are simply scared of negotiation,” he said. “It’s so much easier to just put data into a spreadsheet, send out requirements, then get data back in that spreadsheet and then make a conclusion based on the numbers.”
This sentiment was confirmed when Jensen asked webinar participants if their companies had a clearly defined negotiation strategy. One commented that his organization’s strategy was determined on the fly; another referenced the negotiation synergy (or lack of) between procurement and other company functions.
Jensen’s message was not that competitive bidding should disappear. Rather, procurement professionals should be more deliberate about when they use it — and when negotiation offers a better path. But that requires communication and, most importantly, preparation.
“I have never sat in a real-life negotiation where the counterpart looked at my client and said, ‘I don’t think you’re profitable enough in this deal. We’re going to give you another million dollars.’ That would be nice, but it’s never happened,” he said.
He added, “So, you have to negotiate. And that’s how to create more value in a deal.”
The Limits of Competitive Bidding
Competitive bidding remains a cornerstone of procurement because it provides structure and objectivity. It can be particularly effective for standardized products, stable requirements and commodity purchases where suppliers offer largely interchangeable goods or services.
The challenge arises when organizations apply the same approach to more complex situations, especially in today’s environment.
“Uncertainty is hard to navigate in competitive bidding,” Jensen said. Geopolitical tensions, tariffs, energy costs, supply disruptions and shifting demand patterns create conditions that are difficult to address through static requests for proposals alone.
Jensen cited research from contracting organization World Commerce & Contracting showing that uncertainty has become one of the primary concerns keeping business leaders, as he put it, “awake at night.” In those circumstances, he added, negotiation creates opportunities that competitive bidding often cannot.
According to Jensen’s research of 1,000 negotiated deals and 1,000 competitive bids involving identical procurement scenarios, the former produced significantly higher agreement rates and stronger long-term outcomes.
Keld Jensen, DBA, discusses the value of negotiation during a recent Institute for Supply Management® (ISM®) webinar, “Why Negotiation Outperforms Competitive Bidding: The Data-Backed Case.”
The difference in successful deal completion was among the most significant findings:. Negotiated transactions resulted in agreements in 99.7 percent of scenarios researched, while competitive bids produced agreements less than half (46.7 percent) of the time. Suppliers earned 18 times more profits, while buyers enjoyed lower unit prices and TCO.
“A competitive bid is focused on decision basis … and what we (often) see is that the decision is the lowest compliant price,” Jensen said. “Communication is often minimal and pre-award only. Flexibility is very low, making (the format) best for standardized simple needs. So, I’m not saying that we should never use a bid. We just have to be careful when we use it.”
He continued, “Now, compare that to a negotiation, where the focus is total value and fit. It’s ongoing and more dynamic. Flexibility is quite high. And it should definitely, without a doubt, be used when there are more complex and uncertain needs.”
And that process, Jensen added, can uncover sources of value that would otherwise remain hidden: According to his study, negotiation creates US$147,000 more value compared to bidding on a $3.28 million contract.
Finding the Value Between Cost and Benefit
Negotiations aren’t a panacea, however. They can and do fail — either through an inability to reach an agreement, or through deals that leave an average of 42 percent of value off the table, according to Jensen’s research.
“At a fast-food place, you wouldn’t accept a burger that had a big bite already taken out of it,” he said. “But in every negotiation, somebody is taking a bite of the value.”
He added, “Competitive bidding is a zero-sum game because I may demand something as a buyer that will have a lower benefit to me but increase the cost to the supplier. A lot of businesses are conducting their negotiations and relationships the same way. And I’m sorry for my language, but that’s stupid.”
This, Jensen said, is where NegoEconomics — which focuses on identifying differences between one party’s cost and the other’s benefit — comes in.
A supplier, for example, might be able to provide a concession or accommodation that costs relatively little to implement but creates substantial value for the buyer. Conversely, buyers can impose requirements that create significant supplier costs while generating only marginal benefits for themselves.
Without dialogue, neither side fully understands those dynamics — leading to what Jensen called a “wasted” negotiation.
Jensen illustrated the concept by using payment terms. One supplier might offer 30-day payment terms while another offers 120 days. Although the second proposal may carry a higher upfront price, the buyer’s financing benefit could outweigh the additional cost.
Viewed strictly through price, the opportunity may be overlooked. But not when viewed through total value, which can become evident in a negotiation process. In competitive bidding, Jensen said, it’s not viewed at all — it’s a “blind spot,” he said.
Besides price, delivery and contract length, there are many other dynamics that could create mutual value, Jensen said. Among them: payment terms, warranties, installation support, inventory arrangements, risk-sharing provisions, service levels or implementation schedules — all that might never surface in the competitive bidding process.
“Bidding is not finding a dime of that value due to a lack of communication,” he said. “There’s no dialogue. There’s no mutual understanding of cost and benefit.”
Extra Points
• Although the webinar’s scope was detailing negotiation benefits, not strategy, Jensen said, “It’s not rocket science creating a negotiation strategy. It doesn’t have to be more than one or two sheets of paper. … The biggest issue is: Do you want to negotiate in a positional way or a collaborative way?”
He suggested that successful organizations tend to share four characteristics: (1) a defined negotiation strategy, (2) an emphasis on trust, (3) agreed-upon rules of engagement and (4) a deliberate focus on value creation.
• Jensen repeatedly emphasized that competitive bidding still has a role, adding that a “hybrid” approach can be an effective solution for many organizations. For example, procurement teams can use competitive bidding to identify qualified suppliers before entering negotiations with finalists.
• Lastly, AI was not discussed much during the webinar, but Jensen made clear that it will transform the negotiation process: “Negotiators using AI will replace negotiators not using AI,” he said. “That’s a promise.”
(Top photo credit: Getty Images/FangXiaNuo)