Dealmaking requires leverage.
Many people will stick to traditional methods of dealmaking and are confined to negotiation envelopes:
MDO: Most Desired Outcome
BATNA: Best Alternative to a Negotiated Agreement
LAA: Least Acceptable Agreement
These negotiation envelopes leave out one very critical component.
As a result, social capital as a tool in negotiations goes unnoticed. But when used and used correctly, social capital creates an end result that all parties will be proud of.
It’s not about making more money. It’s not about saving more money. The art of the real deal is about building a deal in which the other party wants to provide you a better option.
Step 1: Table Stakes
When Levi Strauss and Co. (LS&Co.) wanted help sourcing their marketing fulfillment, we gave them two options: Levi’s could either pay a flat fee or a lower fixed fee plus a gainshare, where we’d take a cut of whatever we’d saved them over the course of the contract.
Since we were in the early stages of our relationship with them, it made sense that LS&Co. wanted to transfer some of the risk to us, and they opted for a gainshare agreement.
My job was to execute a textbook sourcing project:
- Understand the client’s needs
- Source a qualified vendor pool
- Conduct an RFP process
- Shortlist the finalists
- Negotiate the deal
This was table stakes so I did something extra that created leverage (and more savings) for my client.
Here’s how it went down.
Step 2: Wine and Dine
Vendors under consideration often wine and dine consultants like me. To remain objective throughout the process, my company had a strict policy not to accept any monetary gifts from vendors. No dinners, no golf, no drinks. So instead of the vendors wining and dining me, I flipped the script.
I took them out.
Taking the vendors out meant I could better understand their management teams, their companies, and their values. I traveled throughout the country to meet with them, inviting the vendors’ leadership teams out for dinner.
I began to understand the people behind the companies. That created a level of social capital with the vendors because I invested time and money in building relationships with them. By giving first, I would invoke reciprocity, effectively endearing them to wanting to do business with LS&Co.
But wait, there’s more.
As I was getting to know the vendors, their goals, and their company culture, I discovered a key piece of information: these vendors would gain status, another kind of social capital, by working with LS&Co.
I knew that if I used this critical insight wisely, it could benefit all parties involved in the negotiation
Related: 12 Rules to Haggle Like an Indian
Step 3: Finding Leverage
Earning Levi Strauss and Co.’s business was extra attractive because it meant vendors could leverage the LS&Co. name to bring on more business at higher margins. This opportunity for them went beyond completing the sourcing project. Beyond the standard reference call. Beyond participation in a case study for their brand.
I saw even more: an opportunity for the winning vendor to speak at the SOCAP International Annual Conference. Considered the vanguard of the customer care economy, the SOCAP Conference is one of the leading events for Fortune 1000 executives. I would co-present with the winning vendor at the conference.
We’d discuss the process that ultimately led to the vendor being selected, and the conference would provide the vendor visibility and credibility to acquire the very thing they wanted—more customers at higher margins.
I immediately got the support of LS&Co.’s Director of Procurement Services, Jim Butler, who thought this was a great idea. (Thanks, Jim!)
Now we’re talking a three-way win from one standard sourcing process.
- The selected vendor benefited. (Speaking opportunity = Visibility + Credibility = More business at higher margins.)
- Levi Strauss & Co. benefited. (They saved more and positioned them as supply chain leader.
- My company and I benefited. (We earned more because we saved LS&Co. more.)
Multi-million dollar deals still come down to one thing: relationships.
Accounting for Intangibles
Too often, deals are considered strictly in terms of financial capital. For a traditional sourcing process, the terms would include the volume we buy, our projected needs, the price we want to pay, etc. We build those terms in the process. But if a deal can create precious social capital and give you more leverage than tangibles indicate, then why aren’t we pursuing these win-win opportunities?
When social capital is built into the process, it can drive down pricing far below what’s expected. In this particular deal with LS&Co., I had multiple vendors competing at that (lower) price level. Our extra leverage created what’s known as price compression.
Multiple vendors all dropping their prices for you is a great situation to land yourself in.
With price compression, Levi’s could make a decision based on more than price. They could base their final decision on the “softer” parts of the deal, the intangibles built completely on social capital.
Working social capital into the sourcing process, we got LS&Co. into a multi-year deal that saved them multiples over expectation and generated bonus revenues for our firm. All while the vendor benefited from the speaking arrangement.
Warning: Challenges Ahead
A deal like this comes with some obstacles you should understand.
First, building social capital takes time, which seems like a counterintuitive way to create leverage.
You need to invest a large amount of time getting to know each vendor on the shortlist, and vice-versa. This time investment increases the cost of acquisition, so you must be empathetic to this reality.
Second, other people involved in your deal may be resistant to your new thinking.
For instance, the incumbent vendor may be unwilling to lower pricing. I found myself in a precarious situation with the stakeholders inside LS&Co. who worked with the incumbent. The stakeholders became concerned when the vendor hesitated to drop pricing. They felt they were getting the best deal from the incumbent already and that moving away would cause more work later on. Eventually the incumbent lowered their price by almost 20%. Be patient and persistent.
The Art of the Real Deal = Relationships as Social Capital
When representatives are negotiating on your behalf—investment bankers, real estate brokers, or any type of business intermediary—you must recognize that their incentive is purely financial. There’s one thing they will not be able to convey to the other party, however.
Your intermediaries will never be able to build the relationships you can.
When you allow your intermediary, consultant, agent, or broker to negotiate the deal, you must take the added step of building a relationship with the other party directly. These relationships are rarely, if ever, established through your intermediaries.
Your goal: to build leverage through social capital so that the other party eagerly wants to do business with you.
That’s the art of the real deal.