Five Ways CEOs Can Boost The Bottom Line By Improving How Their Companies Negotiate

company’s negotiation skills

By Milan Prilepok

“Improve our negotiation skills” may not appear near the top of every CEO’s to-do list. But that’s a mistake. A huge chunk of what a company does – selling to customers, buying from suppliers, striking deals and alliances, and resolving legal disputes – depends on effective negotiation. Crush that, and you’ll make better and more profitable deals; mess it up, and your margins will suffer. Not only that, you’re at risk for losing key customers, missing out on crucial relationships and on priority access to innovation and supply. Simply put, a lack of negotiation savvy undermines the execution of your strategy.

Skeptical? In our 2021 McKinsey survey of more than 125 CEOs and CFOs of companies with revenues topping $1 billion, 96% of the executives said that world-class negotiators in their companies would add at least 3% to their EBIT performance. These business leaders see the bottom-line impact clearly. They understand the value of proactively setting up the organization to negotiate successfully.

Surprisingly, despite this level of potential impact, only 22% of those surveyed strongly agree that their organizations are currently capable of capturing this value. Why is this the case? Many organizations haven’t appropriately invested in their operating model, infrastructure, and skill building to make an impact on complex negotiations.  

Here is what a CEO can do to make a difference. Start with these five strategies.

1. Set a cultural norm and mindset that negotiation creates value, so it is a core skill for company leaders.

Just as with any cultural value that a company wants to make a priority, the CEO’s commitment to negotiation excellence must be consistently visible at all levels of the company. This commitment may have its greatest impact in deals with the company’s biggest customers and its most strategic suppliers, but it’s also crucial in negotiating acquisitions, divestitures, joint ventures, and alliances. In a typical manufacturing company with $1 billion in revenues, the total annual value subject to negotiation could easily exceed $1.6 billion, since it includes sales deals with customers, purchase agreements with suppliers, potential claims from suppliers based on market change, performance related penalties with suppliers, various litigation with external parties, and M&A activity.

The CEO can set the tone by checking in bimonthly or quarterly on the status of key negotiated relationships, particularly agreements coming up for renewal. Not only should chief executives require negotiation strategy briefs regarding key customers or suppliers, but to drive home the importance of adhering to these principles, CEOs should encourage – and even participate in – a targeted amount of scenario analysis and role-playing simulations with their negotiating teams.

Since a CEO’s time is a precious resource, these efforts should consume no more than a few days annually. Such a commitment will generate multiple benefits. A team where the CEO attends negotiation dry-runs will recognize that their activities are in the spotlight. Based on our experience, such teams prepare with great rigor if they know that the CEO will be at the negotiation rehearsal – and some even request the CEO’s participation in their high stakes role plays. This level of preparation pays off when there’s an actual counterparty across the table. Just as the best sports teams hone their skills with intramural scrimmages, the best negotiation teams road-test their story lines, argumentation, robustness of their analysis, and actual language in real-as-possible mock negotiations.

2. Invest in negotiation infrastructure, including training and digital tools across the organization

When it comes to sales, companies often make major investments to improve skills. Training is a significant line item in sales budgets, and there are a variety of sales training providers who include negotiation skills as part of their programs. Sales also gets the lion’s share of the negotiation technology investments. CRM systems from vendors — when properly used — can track all the interactions with a given customer. This means any negotiation starts with a full history, even if the sales staff has turned over.

Despite the stakes, it’s rare to see the same investment on the procurement side. Based on our surveys, investments in negotiation training and infrastructure for procurement is typically less than 20% of what’s invested for sales teams. Many companies that spend half a billion dollars with suppliers may spend zero on procurement training and lack the most basic digital tools for tracking supplier interactions.  

Many top executives are starting to recognize the value they could be adding by investing in negotiation. In McKinsey’s 2021 survey of large companies, 84% of CEOs and CFOs said they would be setting aside at least $100,000 for negotiation training, infrastructure, digital tools, and assets intended to improve corporate negotiation capability. Many are investing far more, with some investments exceeding $1 million.

Companies should expose all major negotiators – those who negotiate sales and procurement deals as well as M&A dealmakers, legal negotiators, and technology buyers – to negotiation capability building. Both our experience and research confirm that negotiation is a skill that has a very high return on investment, for the time spent. As one tenured CEO postulated, “There is always more to learn and apply relating to business negotiations, I’m much better today than 5 years ago, and I expect to further enhance my negotiation aptitude going forward.”

Companies should also track procurement supplier negotiation interactions with the same rigor that they apply to sales relationships. We’ve observed several companies that recognized the need and then built such tools from scratch.

3. Participate directly in the company’s highest-value negotiations

CEOs should identify the company’s top ten to fifteen customers and suppliers, and work with respective sales and procurement teams to participate in some capacity in those negotiations, either directly with the counterparty or behind the scenes helping to craft the strategies.

When the CEO makes an appearance in those actual negotiations, it signals to the counterparty that this is a key relationship. Two-thirds of the respondents in our 2021 McKinsey survey of $1 billion+ revenue companies agreed that even if the CEO said exactly the same thing as the sales or procurement team during a negotiation, the resulting increase in credibility was a major source of value creation.

CEOs can also help by just saying “no.” When a customer or supplier hears a chief executive reinforce that “this is our best price, it’s not getting any better,” they know that there’s no option to go over their sales or procurement staffer’s head.

In the wake of Covid-19 supply-chain disruptions, CEOs are spending more time on supplier relationships. In last year’s version of our annual CEO/CFO survey, CEOs were spending 43% of their negotiating hours with suppliers; by 2021, that had shifted to 49%. For example, you can bet that automotive CEOs are now [if not already] attempting to strike and revise deals with chipmakers to restore supply and enable manufacturing to continue normally amid the semiconductor shortage. Those deals where the CEO had confirmed priority access last year are in a far better position right now. Similar CEO-led negotiations are happening in every industry where supply continuity has been threatened, from retail to media to energy.

4. Designate a Chief Negotiations Officer

We know there’s a fad for proposing new C-level staff these days. So maybe you think it’s a bit over the top for a company to be designating a Chief Negotiations Officer, responsible for maximizing the organization’s skill and execution in key negotiations, and ultimately capturing those several EBIT points.

But don’t just take it from us. In our 2021 survey, 94% of the CEOs and CFOs think an even chance or better that they’ll have a CNO within three years. And 96% expect the value of such an officer to be very high. Over half expect a 5% improvement in EBIT. Such value starts with improved margins, but continues with risk mitigation, securing higher quality and service levels from suppliers, guaranteeing continuity of supply, and earlier access to innovation. This level of commitment from senior executives is far beyond what we’ve observed in past years. The more complicated world of volatile supply chains, complex contract terms, and rapidly shifting technology is raising the stakes.

The CNO role would include defining negotiation standard processes and policies, designing and developing the negotiation capability building curriculum, developing technology to drive analytical insights, and participating in key negotiations. Because of their impact on the company’s finances and operations, such an officer would typically report directly to the CEO, CFO, or COO.

They may not have the actual title “Chief Negotiation Officer.” Their business card might say “SVP strategic relationships” or “EVP, Business Development.” But within the company, they would represent the corporate officer attempting to up-level the company’s negotiation skills and infrastructure to drive business results.

5. Build and measure key negotiation objectives for members of the leadership team

You can’t manage it if you can’t measure it. So how do you measure progress on negotiation capability?

We recommend including negotiation metrics in regular reporting. For example, the head of procurement needs to be able to articulate a strategy for deals with critical suppliers a few times annually – so the CEO can be sure every possible resource is being applied to those deals and negotiations. Potential metrics include what proportion of the top 30 suppliers have a comprehensive negotiation playbook and strategy, what proportion have had a structured role-play simulation, and what percent had an internal follow-up and port-mortem evaluation after a recent negotiation.

There are financial metrics as well, such as the total cost savings, enhanced quality, and even new revenue generated from these renegotiated deals.

Similar standards should apply to the head of sales when it comes to key customers, the chief counsel for legal negotiations, the CIO for major technology suppliers, and the head of strategy or M&A for corporate deals.

CEOs must also be ready to publicize efforts internally when things go right. A negotiator who’s secured an excellent deal should be held up as an example – perhaps conducting a “lunch and learn” session to share how they were able to secure a desired outcome. This will socialize the best negotiation practices across the enterprise.

For negotiation to become a strategic advantage, the CEO must make it visible

There’s a commonality to all of these suggestions. They raise the visibility of negotiation in the enterprise and standardize it as a required skill.

Just as organizations invest in capability building for key staff and executives around leadership, innovation, communications, and analytics, they must continuously stress the value and importance of negotiation skills.

That’s the only way to make excellence in negotiation part of the culture. And that is the most powerful way that a CEO can invest in better negotiation capability to drive actual bottom-line results.

About the Author

Milan Prilepok

Milan Prilepok is Partner and Global Leader of the Negotiation Service Line at McKinsey. He provides coaching on negotiations strategy to a wide range of clients from C-suite executives and board directors to procurement professionals, sales executives, chief counsels, and more. Milan is a former lecturer at The Wharton School and has taught at industry conferences and roundtables on negotiations at Harvard Business School, London School of Economics, Women in Negotiations (WIN), and the Conference Board, among others. He has delivered negotiation workshops to more than 16,000 participants across 270 companies in 35+ countries around the world. Milan has an MBA from the London Business School. 

LEAVE A REPLY

Please enter your comment!
Please enter your name here