Getting great value from monopoly suppliers is tough. If unchecked, monopolies – usually the product of a lack of demand, complex requirements or the need for significant infrastructure to meet set requirements – can exploit their unique position.
That’s why there are now regulators for monopoly-supplier relationships. The Single Source Regulations Office (SSRO), for instance, is an independent expert on Ministry of Defence (MoD) single source procurement. On average, single source procurement accounts for 45 per cent of the MoD’s total procurement (around £6 billion per year) and it’s estimated that the Single Source Contract Regulations (SSCR), which came into effect in 2014, will save £200 million annually.
How can the government address the challenge of delivering a ship to fixed cost and time aspirations.
But how can organisations drive even better value from monopoly suppliers when the opportunity to negotiate arises? Having negotiated greater value for the MoD many times, we know that understanding how existing relationships have evolved over time and the psychology of monopoly suppliers will enable you to release surprising value.
The first step is to develop an understanding of the existing commercial position and how it’s evolved over time. Understanding how existing agreements combine to define the commercial relationship is vital in appreciating what negotiating levers may be available. To achieve this, you need know previous decisions and what influenced them.
The significance of this is clear when we look at one of the UK’s major defence equipment programmes. As an international collaboration, the programme involved negotiations between partner nations and took a long time to complete. During the process, the UK’s team changed to suit people’s availability and career progression – resulting in a poor understanding of what had been agreed previously and why. In contrast, one of the international partners maintained a much more stable team and got a better deal.
When determining the negotiating strategy, it’s important to consider whether you can walk away. Is the supplier truly a monopoly supplier? It may be that replacing the monopoly supplier would be too costly, the transition would take too long or political reasons are prohibitive. Monopoly supplier relationships can be the result of conscious policy or strategy decisions, which can be challenged if the cost (in value terms) of sustaining the relationship is too great.
If the supplier is not a true monopoly supplier, as was the case in the 1990s with Microsoft, a change in perspective can shed light on how to generate significant additional value through negotiation. Microsoft dominated the PC operating system market and it took a legal case to raise awareness of the alternate operating systems, such as UNIX and Mac OS. Now, more than 10% of desktops and laptops don’t use Microsoft – and if smartphones and tablets are included, this rises to 86%. It’s possible to reflect such shifts in perspective in procurement strategies, with the potential to open supply markets.
If the supplier has a true monopoly, then threatening to walk away isn’t an option. Instead, the focus should be on how you can deliver the maximum possible value for money from the deal.
The psychology of negotiations with monopoly suppliers is different as they often enter negotiations with a mindset of loss aversion. This means that, in addition to considering the win-wins, you must consider the loss implications of any offer.
Perceived losses are highly unlikely to be taken, even if there is potential benefit elsewhere, due to the associated risk. On occasion, the probabilistic outcome can even exceed the current situation, in value terms, but not be taken due to loss aversion.
As well as being an added challenge, this presents an opportunity as ‘win-no lose’ offers can succeed. If a negotiating party is focused on ‘not losing’, it’s likely they’ll accept offers where the lack of downside can be clearly articulated. This is effective exploitation of the mindset of loss aversion.
We experienced this phenomenon when a customer was unable to clearly articulate how an increase in the amount of profit set against performance measures was a ‘no lose’ offer. The supplier would not accept the proposed changes as any potential increase in the proportion of profit ‘at risk’ was seen as unacceptable – even though 10 years of performance suggested that actual loss of profit was highly unlikely.
Negotiating with monopoly suppliers will always be difficult, but by having a clear objective for the negotiation, clarity on the levers you have available and an understanding of the psychology of the supplier and your relationship with them, you will have more chance of achieving the most valuable deal possible.