From time immemorial, negotiations have been an integral part of any trade. A good negotiator can pave the path towards closing a deal at the most beneficial terms and conditions. No wonder, enterprises assign the task of closing the deals to their ace negotiators. However, human negotiators have their own disadvantages in numerous ways and here are the statistics from a KPMG report and a Future of Sourcing report that highlight the same.
17% to 40% of the value of supplier deals is lost due to inefficient contract negotiations.
On an average, enterprises have millions of dollars locked in inefficient agreements.
Global enterprises have thousands of suppliers and they can only actively manage 20% of them.
80% of companies rely on the varying skills and biases of their managers to strike good deals.
Rik Vera, an advocate for automation, questions the role of human negotiators in securing the most beneficial trade deals. He emphasizes that human negotiators can focus on securing beneficial deals for at most 3 out of several items. Rik Vera’s argument leads us to a set of questions-
- How can a large enterprise negotiate extensively for thousands of line items?
- Is it possible for procurement professionals to negotiate extensively across products and categories while managing tail-end spend?
- Can a procurement professional keep track of each line item and take appropriate action according to the price dynamics of that item?
The answer to questions 2 and 3 is No. And the answer to question 1 is Autonomous Negotiation. Behemoths such as Amazon have been leveraging the power of autonomous negotiation for some time now. By understanding how such enterprises perform autonomous negotiation, we can enable our procurement teams to win the best deals.
Continuous Learning
Autonomous negotiation is completely driven by artificial intelligence and machine learning (AI/ML). Data plays a crucial role in the entire decision-making process. In this situation, the data is nothing but information about the product price and demand. Algorithms that facilitate autonomous negotiations continuously learn and leverage such data points.
As a very first step the AI/ML algorithm determines the negotiable factors in your contracts. For instance, the price of the product. It is always negotiable. It compares the price with the current market price of the product and analyzes past price trends. The algorithm would not stop here. It would compare the product price, and learn from users, historic price trends, historic negotiation trends across vendors and categories. It would also consider time of the year, external market, commodity prices, and perform competitor price analysis.
Learning and leveraging new information is a continuous process and thus it is no wonder that the algorithm would learn from the latest transactions as well. Again, negotiation play books are retained within the organisation forever and thus no negotiation is lost, which usually happens when the ace human negotiator leaves the organization.
Negotiates on your behalf
Enriched with market information, the algorithm can initiate negotiations with suppliers. It can offer a deal to the supplier and make a counteroffer on receiving one from the supplier. By automatically conducting negotiations for each of the thousands of line items, the algorithm saves your procurement team from arduous tasks. Autonomous negotiation becomes an imperative when you are thinking about managing tail-end spend and procuring products at the best prices from the right suppliers.
Builds intelligence and predicts target prices
From historic data, the algorithm is now able to predict the target price for each product. It is programmed to alert the procurement professional to initiate an RFX or a rate contract if it finds that the product or raw material prices have reached nadir.
After learning how autonomous negotiation functions in the real world and enables you to ace negotiation, we are now set to know the benefits offered by it.
Autonomous Negotiation offers an array of benefits
- Saves buyer’s time and allows them to focus on high value tasks
- Seamlessly presents the essential data to the buyers and enables them to take informed decisions
- Ensures to hold negotiations to gain fair price and terms for goods and services
- Manages negotiations for thousands of line items
- Augments human intelligence applied in negotiations
How does Auto-Negotiation work in the real world?
For instance, a procurement professional wants to purchase laptops for the administration department. Instead of manually comparing quotes from different vendors and cross-checking laptop prices in offline and online stores, the professional can leverage auto-negotiation. Auto-negotiation will analyze the historical prices for the product, and the price paid for previous such purchases. It will also consider the time of the purchase as this factor may drive the prices up or down.
For example, a new product launch which usually takes place at the beginning of the year, demands a premium driven by the market’s enthusiasm. As time passes, the demand for the product may wane and thus a few months later, a user can buy the same product at a lower price. It will compare the prices of laptops, which meet the specification requirements that are offered by different brands.
To sum up the factors considered by the auto-negotiation algorithm, we can conclude that it analyzes historical prices, previous purchase price, time of the purchase, price quoted by the different brands and more such factors. It will negotiate the price with the vendors and present counter offers to the vendors. It ensures that the buyer would source the product at the right price and from the right vendor.
In our example, the procurement function had to source only one item. But in reality, procurement teams often purchase a large number of products at the same time.
Auto-negotiation facilitates simultaneous negotiations for thousands of line items and this feature is critical to improving savings in the tail spend that require a high amount of man-hours when managed manually. As auto-negotiation is nothing but continuous learning, the buyer will be more empowered the next time he or she uses auto-negotiation. It will suggest to the buyer the right time to buy and reduce the cost of purchase.
You would acknowledge that autonomous negotiation can bring a sea of change in your negotiation process. With autonomous negotiation, your enterprise can secure better deals at better prices and this is a fact that is set in stone.
