Seven wastes of negotiation

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To be merged into a faster horse
The Toyota Production System (TPS) was created by Toyota’s chief engineer Taiichi Ohno to eliminate waste, called “muda.” Waste — as opposed to cost, is the enemy on any production line: a process that is expensive but necessary must add value and you should be cool about paying a fair value for it. Processes which do not add value are intrinsically wasteful. To eliminate waste, you have to know exactly what waste is and where it exists. Ohno categorised seven types of waste and for each one, suggested reduction strategies.

In a glorious bit of sympatico, the categories of waste cross over pretty well to the contract negotiation process, a fact which seems to have escaped every management consultant who has ever ruminated on the issue. A lot of them have.

Anyway, here, with feeling, are the seven wastes, as applied to contract negotiation:

Overproduction

Simply put, overproduction is to manufacture an item before it is required, or where it is not eventually required. In the contract negotiation world, “manufacture” is sales-led and the negotiation process necessarily involves client interaction, so overproduction does not seem on point at first. But is it?

• The revenue accruing to a broker out of the contract generation process is not a function of generating that contract, but of trading under it. A contract that is concluded but rarely or never traded under is an example of over-production.
• Thus, generating agreements that don't get traded on is a form of over-production.
• This is generally a sales problem. It is not easy to fix as it involves predicting the future, but the costs can at least be allocated to sales (in the same way that revenue is!)

Waiting

Whenever goods are not moving or being processed, the waste of waiting occurs.

• Drafts out to client: The negotiation process requires client input. Waiting on that is wasteful and is largely outside our control? Largely but not entirely: the easier and less objectionable we can make the client’s review, all other things being equal, the faster it will come back. How to make it easier and less objectionable?

• Make it shorter: the fewer words to read, the faster you read it.
• Make it nicer: Don’t include terms you don’t really need. Do you really need that NAV trigger? Before you say yes we do need it, ask yourself, “how many times have I ever actually enforced a NAV trigger?”

• Escalation: Eventually the client comes back to you, and they don’t like that NAV trigger. The negotiator needs to escalate this to the credit team. This involves composing that email, sending it and waiting for credit to read it and answer. Credit will, eventually, be fine with dropping the NAV trigger — that is a 15 sec decision, but it took 24 hours to achieve. Reduce this wait time by:

• Standardising terms to pre-approve obvious giveaways empowering negotiators to approve common points of contention
• Recalibrating standards to reducing gap between “starting offer” and “walkaway point” so that escalation not necessary:
• Standardising escalation process to capture metadata about necessary variations from the originally requested terms

Post-negotiation approval, execution and storage processes: Once the negotiation is finally approved there is a lot of time preparing execution agreements, summarising terms and submitting them for final formal approval, obtaining signatures and filing approvals, execution copies and capturing key agreement metadata in the firm’s risk and trading systems.

• Currently this is a labour-intensive, manual task. Technology here offers an enormous capacity for efficiency and digital audit.
• Digital execution seamlessly captures necessary information and auto files storage

• Process maintenance:

• Template maintenance and approval, version control, storage, retrieval
• Template library complexity – too many models?
• Playbooks, negotiation manuals
• Legal opinions

Transporting

Transporting product between processes is a cost incursion which adds no value to the product.

• Escalation points
• Execution processes
• Storage processes

Over-processing

Often termed as “using a sledgehammer to crack a nut,” many organizations use expensive high precision equipment where simpler tools would be sufficient.

• Credit points never used
• Superfluous templates
• Redundancy
• Unnecessary drafting
• Reading/reviewing unnecessary/convoluted text

Unnecessary Inventory

Work in Progress (WIP) is a direct result of overproduction and waiting.

Unnecessary Motion

This waste is related to ergonomics and is seen in all instances of bending, stretching, walking, lifting, and reaching.

• Hand-offs
• Approvals
• Escalations

Defects

Having a direct impact to the bottom line, quality defects resulting in rework or scrap are a tremendous cost to organisations.

• the more complex the product, the more room for error