Seven wastes of negotiation
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Negotiation Anatomy™
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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 inherently necessary must add value, even if it is expensive[1] so you should be cool about paying a fair value for it.
Processes which do not add value are inherently wasteful. The job is to eliminate waste, not cost per se. To get rid of waste, you have to know exactly what waste is and where it exists.
Doctor Ohno categorised seven types of waste and for each one, suggested reduction strategies.
Even though he was talking about a phyiscal manufacturing line, Doctor Ohno’s 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
Headline: Don’t make what you don’t need.
Don’t make things before they are needed, or if they aren’t needed. Seems obvious, right? In the contract negotiation world, “manufacture” is sales-led and the negotiation process with direct client — you can’t negotiate without one, so there is buyer for every product, right? — so overproduction seems irrelevant. But is it?
- The one that craters: Many contracts get negotiated, but never executed: the client may not be serious, it may change its mind, or it may not accept your fundamental terms. Some times this is foreseeable, but it should be Sales’ job to identify and weed out clients who are highly likely never to executed a contract. Finding out you have a deal-breaker after a nine-month negotiation is a huge waste of time and resources.
- The dud: Even where the contract is executed, the revenue that accrues is not a function of executing the contract, but trading under it. A contract that is concluded but rarely or never traded under is an example of overproduction. Again, Sales should be responsible for identifying good quality potential revenue, and should be incentivised — that is to say, penalised for the costs of overproduction, the same way they are rewarded for revenues that accrue on sensible contracts — not to introduce poor prospects into the onboarding funnel. No financial services firm does this, of course.
Summary: Overproduction 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!)
2. Waiting
Over to you, Chuck
Whenever no-one is actively handling work in progress, in the sense of marking it up, or arguing with someone (internally or externally) about it, it is waiting. In a typical negotiation that is likely to be more than 90% of the time.[2]
- 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?”[3]
- 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
3. Transporting
Transporting product between processes is a cost incursion which adds no value to the product.
- Escalation points
- Execution processes
- Storage processes
4. 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
5. Unnecessary Inventory
Work in Progress (WIP) is a direct result of overproduction and waiting.
6. 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
7. 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
References
- ↑ If you can’t configure it so it costs less than the value it adds, consider why you are running the process at all: you have a loser of a business.
- ↑ I totally made that up, but I think it is conservative. Over a three-month ISDA negotiation, if you aggregate actual time physically editing a document, typing escalation emails and speaking to internal stakeholders and the client on Skype about the content of the document, would that be 24 hours? Highly doubtful. but let's be a little crazy and call it 48 hours. Forty eight straight hours - six full working days — of doing nothing but typing, editing and discussing. Over a three month period, 48 hours is 2.1% of the total time. So waiting time is 97.9% of the process.
- ↑ The answer, for the fiendishly interested, is never.