CIPS Exam Report for Learner Community:

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1 CIPS Exam Report for Learner Community: Qualification: Diploma Unit: D4 Negotiating and contracting in procurement and supply Exam series: March 2016 Question 1 Learning Outcome 1 (a) Discuss TWO key performance indicators that could be used in a contract with a supplier, illustrate your answer with relevant samples (b) Explain THREE reasons why it may be more difficult to develop specifications in contracts for services rather than in contracts for goods. (10marks) LO 1.1 (15 marks) LO 1.1 Learning outcome 1.1 Explain the documentation that can comprise a commercial agreement for the supply of goods and services. (a) There is a number of KPIs that could be used to answer this question and these might include the following aspects of procurement: Cost management: cost reductions obtained; cost reduction initiatives proposed/implemented; the range of cost variance from budgeted costs. Quality performance: number of rejects and returns, errors or scrapped items delivered; customer complaints (from users or end customers); certification under (e.g.) ISO 9000 and/or ISO Timeliness/delivery: frequency or percentage of late, incorrect or incomplete deliveries; percentage of On Time In Full (OTIF) deliveries; range of acceptable schedule variance. Service: promptness in dealing with enquiries or problems Resources: minimum number of staff or resources of specified grades allocated for the project The nature of any two of these should have been explained for high marks. However, the question asks for examples to accompany the description and such examples of applied KPIs could be: On an IT Service contract: A KPI might be the measured hours of uptime/downtime during working hours of the buying organisation. The target is 100% uptime; the acceptable range is down to 98% uptime, 2% downtime. Performance is deemed unacceptable at less than 97% uptime, more than 3% downtime. Measures of these issues would be taken frequently On a contract for the provision of social care housing: A KPI might be the cost per bed/per night, and the result of social worker inspections of the facilities. The relationship between cost and quality will provide data from which best value can be measured between different providers. The majority of answers to this question were of a satisfactory standard with many gaining high marks due to giving gave good examples, in many cases clearly taken from the candidate s workplace. Marks awarded were up to 3 marks for a description of a relevant KPI and 2 marks for use of a suitable example. Noticeable errors in answers included describing areas of measurement in detail without showing the actual measurement factors and in some cases, not providing examples to support the descriptions of the measurement factors. March 2016_D4_EXAM REPORT _LEARNER_COMMUNITY_FV 1/7

2 (b) Here, answers should have explained any three separate and distinct reasons that can make it more difficult to develop specifications in contracts for services than to develop specifications in contracts for goods Such reasons could have included: Services are intangible which makes specifying service levels and subsequently checking whether or how far they have been achieved very difficult. They can also be very subjective in nature which, again, can make specification difficult. Services are variable: every separate instance of service provision is unique because the personnel and circumstances are different so it is hard to standardise requirements. This lack of standardisation makes specification difficult. Services are provided in 'real time': transport, accommodation and catering services, for example, are only relevant when they are needed. Specifications therefore need to include the time of provision which may be difficult because the exact time might not be known at the outset. Many services can only be performed in particular locations and specifications may need to include explicit understandings about where the service is to be provided; the access required and any related issues such as confidentiality. A service may be procured for a long contract period during which time requirements may change from the original specification, thus requiring review, flexibility and change controls. It may, therefore, be necessary to include scope for such changes in the original specification. Answers to this question were of mixed quality: there were some good answers with many distinction marks awarded although some answers did not provide enough detail for high marks. Better answers gave explanations of how to overcome the difficulties of developing service specifications. There were two main errors found in some answers: Some answers seemed to view the question as concerning performance specifications as opposed to conformance specifications and described the differences between the two specification types. Some answers focused on comparing services to goods in terms of their respective natures and then giving detailed descriptions of the differences between the two. Question 2 Learning Outcome 2 (a) Outline FIVE pre-conditions that are necessary for an integrative (win-win) (15 marks) negotiation to be successful. LO 2.2 (b) Explain, with examples, TWO circumstances when a distributive (win-lose) (10 marks) approach to a commercial negotiation may be appropriate. LO 2.2 Learning outcome 2.2 Compare the types of approaches that can be pursued in commercial negotiations. (a) Successful integrative negotiation can only occur if both parties are predisposed and committed to finding a mutually acceptable, collaboratively developed joint solution. In other words, working together is necessary March 2016_D4_EXAM REPORT _LEARNER_COMMUNITY_FV 2/7

3 for integrative negotiation to work. Answers should have outlined five of the following pre-conditions that may lead to a successful integrative negotiation: Both parties believe that there is a greater likelihood of benefit from working together than from competing or working separately There are broadly common, shared or joint goals between parties Both parties are prepared to let go of the need to pre-plan or control the outcome and are prepared to consider the re-definition of emerging problems as well as potential solutions to such problems. Both parties are relatively confident in the process and their own problem-solving abilities although they may be prepared to enlist the help of a third-party facilitator or mediator. There is sufficient trust between the parties to exchange information and begin the negotiation process There is clear and accurate communication within the negotiation and a willingness to ask questions, exchange information, clarify responses, check perceptions and challenge assumptions Both parties understand the concept and processes of integrative negotiation and are not held back by 'traditional' adversarial negotiators who are suspicious of information sharing, concessions and so on. The above situations are all potential pre-conditions relating to issues between the negotiation parties although marks were awarded for description of other factors that may lead towards an integrative negotiation such as the value of the contracts being negotiated to each party and the time available for the negotiation process. The majority of answers to this question were good with candidates clearly having a sound view of the appropriate pre-conditions although some candidates gave too little detail to gain high marks, tending to list pre-conditions rather than outline them. The most common answers gave shared goals, trust and benefit for both parties as examples of pre-conditions. One error that a few candidates made was to describe resources for negotiation rather than pre-conditions. Examples of this were such points as ensuring that the right personnel are present or establishing a BATNA. (b) Distributive negotiation is, in effect, the opposite of integrative negotiation and usually occurs when the relationship between the two parties is transactional and not relational. In such situations, no further value is required by either party beyond the initial purchase so that each party will push for the best outcome regardless of any impact on their relationship. An example of such a situation might be a one off purchase where the purchaser is unlikely to purchase the item or service again and does not, therefore, need to try to develop a lasting relationship. In such a situation, it is highly likely that distributive negotiation would take place. Other situations that may justify distributive negotiation would include: A particular point relating to the potential contract may not be negotiable. Examples would include such as health and safety or other legal requirements If one party has a significant advantage in bargaining power and it would represent shareholders interest to use this bargaining power to maximise the benefits from negotiation. Typically, here, the purchaser would make every effort to gain the lowest price possible whereas the seller would try to gain the highest price possible. March 2016_D4_EXAM REPORT _LEARNER_COMMUNITY_FV 3/7

4 Where relationship building is less important than the results of a negotiation because purchases are routine and many suppliers exist in the market. This would mean that, if the negotiation were unsuccessful from the purchaser s point of view, they would be able to purchase the item or service from another supplier without any real difficulty. Where the value of the contract is relatively small and is, therefore, of no major concern to either party Where there is very limited time to conclude the negotiation meaning that both parties may try to push for an acceptable solution. The majority of answers to this question were good although some answers seemed to focus on explaining the nature of distributive negotiation rather than circumstances where it might be appropriate. The good answers usually gave good examples of circumstances where a distributive approach might be appropriate with many examples clearly originating from the candidate s workplace. Workplace examples, providing they are relevant, are always useful. The most common examples of distributive approaches, given in answers, concerned one-off purchases and highly competitive supply markets where there are many suppliers of the item (e.g. stationery) required by the buyer. Some answers gave too little detail to gain high marks and such answers tended to lack real examples. Question 3 Learning Outcome 3 (a) Variables are essentially the content issues for negotiation which determine its scope and focus. Explain THREE variables that can be discussed in a commercial negotiation. (b) For ONE of the variables in the answer to part (a) explain how a purchaser might set their objectives for the negotiation. Learning outcome 3.3 Explain the main variables that can be used in a commercial negotiation (15marks) LO 3.3 (10 marks) LO 3.3 (a) Potentially, there is a large number of variables that may need to be considered during a negotiation but the ones that occur most frequently would include: Price This variable occurs most often in negotiations and can involve a variety of elements such as the purchase price, a price review mechanism for long-term contracts, price adjustments (including their frequency and how they are managed), payment made on progress of the contract (usually known as stage payments), discount structures, incentive payments (usually included to motivate the supplier into better contract performance) and shared costs and cost transparency. Delivery This is another common variable and usually focuses on issues such as timings to deliver or complete the purchase, lead-times and any lead-time reductions that may be possible, remedial action for missed milestone targets and transport and logistics issues such as what type of transport will be used. Contract terms There is a very wide range of contract terms including the type of contract (one-off, blanket order, framework agreement, etc., pricing, use of sub-contractors, payments, health and safety, dispute resolution, Intellectual property and confidentiality, force majeure and termination rights, liabilities and warranties...and many more. This point gives candidates the opportunity to use their own workplace experience as a basis for this part of the answer. March 2016_D4_EXAM REPORT _LEARNER_COMMUNITY_FV 4/7

5 Quality what type of specification will be used; how might quality be tested and what tolerances may apply to quality levels. Specification the dimensions of the item; any design tolerances that may be included and any special features that the purchaser may require. Transportation what method of transport should be used (this depends very much on where the item is coming from and where it is going to); means of tracking the transportation progress; the use of Incoterms and which one may be applied to the contract and what packaging may be needed for safe transportation. Payment terms generally suppliers want fast payment whereas purchasers usually want to delay payment as much as possible. There are also varieties of payment such as payment up front (in cash) which may be seen as incentives for good supplier performance. Five marks were awarded for a good explanation of any three of the above. Answers to this question were generally of a high standard with some candidates gaining very high marks. The majority of answers used price, quality and delivery as their three variables although many answers put quality and delivery together and used another variable such as payment terms to complete their answer. Payment terms was used as a variable by many candidates with many such answers giving good detail. Some higher scoring answers provided examples of content issues from negotiations in their own workplace. Some answers were quite brief and higher marks were awarded to the candidates who displayed a good understanding of the elements within each of their chosen variables. (b) The intention here was for candidates to select one of the elements of their answer to part (a) and consider the objectives they might want to achieve when entering a negotiation concerning the particular element. All of the following are aspects of developing objectives and all can apply to any of the variables that candidates may have used in part (a). The bargaining mix the negotiator needs to understand priorities with the variable in question compared to others Linking variables is there a relationship between any of the variables or objectives that may be developed for the variables. If so, this should be taken into account when developing objectives. Objectives should be Specific, Measurable, Acceptable, Realistic and Tentative (SMART). The purchaser needs to choose a range of desired outcomes for the objective the Must/Intend/Like to achieve (MIL) breakdown is the most commonly used one. Developing a BATNA would also be included here. The purchaser should try to anticipate the above range for the other party so that they can prepare any defences required. Where two acceptable ranges overlap then there is room for negotiation This question was generally answered well with the majority of candidates using price as their variable of choice. Some answers provided good background issues such as MIL and BATNA as part of their explanation of how objectives might be set and the majority of answers used SMART. There were no common errors March 2016_D4_EXAM REPORT _LEARNER_COMMUNITY_FV 5/7

6 although a few candidates focused too much on organisational issues, using (e.g.) the Kraljic matrix as a basis for their answers. Some poorer answers gave a general outline of how a purchaser might set negotiation objectives without focusing on one of the part (a) variables. Marks were awarded for detailed explanations of how objectives might be developed and were awarded based either on width or depth. In other words, if answers described one or two of the above aspects of objective setting in depth, they were awarded high marks and if they outlined (less detailed explanation) a larger number of the aspects, they were given high marks. Question 4 Learning Outcome 4 (a) Outline THREE elements of the opening stage of a negotiation (b) Explain the closure phase of a commercial negotiation Learning outcome 4.1 Explain the stages of a commercial negotiation. (15 marks) LO 4.1 (10 marks) LO 4.1 a) The usual key elements (which may include behaviours) in this context are: Rapport building: attempting to ensure that the negotiation proceeds in an integrative way rather than in a distributive way (assuming this is the direction you want to take). Assertive communication: clearly stating your opening position as well as your desired outcomes Using questions to elicit information and clarification of issues from the other party Listening actively and efficiently in order to gain maximum information from the other party. This can help understanding (e.g.) their body language, tone of voice, feelings, etc. as well as the content of what they are saying Using facilitating behaviours to check understanding as well as clarifying any issues, asking for information and summarising sections of the discussion Utilising verbal and non-verbal signals to condition the other party. Creating an atmosphere conducive to agreement. This might involve social interchange and the expression of shared goals. Some answers to this question were of a reasonable standard although this was the most poorly answered question on the paper with many answers containing a consistent error found. This error involved focusing on aspects of preparation and/or pre-planning for negotiation such as research and gathering information about the supplier, rather than the opening stage. The big difference between these two aspects/stages of negotiation is that preparation takes place before the negotiation takes place whereas the opening stage takes place after the parties have met in the negotiation room and is, therefore, the actual beginning of the negotiation process. Higher scoring answers clearly provided three correct elements of the opening stage such as rapport building, creating a co-operative atmosphere and using verbal and non-verbal signals to condition the other party. Some candidates that had gained high marks for previous questions gained much March 2016_D4_EXAM REPORT _LEARNER_COMMUNITY_FV 6/7

7 lower marks for this question b) Answers should indicate why closure is important, and could suggest any of the following points: (Formal) closure ensures that the final summary is as agreed in the negotiation meeting(s), also known as ratification. It provides a foundation for the ongoing buyer-supplier relationship, based on a mutual commitment to formally and mutually agreed contractual terms and conditions It provides a tool for gaining stakeholder 'buy in' to the negotiated agreement It provides an agenda for action and allocation of responsibilities so that all parties know what they have to do to ensure that the contract is fulfilled as per the negotiated agreement The minutes (or summary) of the meeting act as a written record and confirmation of the agreement, which should assist follow-up, control and/or dispute resolution Formally and mutually agreed points can be incorporated into the development of contracts without further discussion Closure can allow the follow up of any outstanding points from earlier stages in the negotiation It can also assist the evaluation of the negotiation process, activities and outcomes. It was not necessary to include all of these points in the answer. Marks were awarded based on width or depth as in Q3b so that detailed explanation of one or two of the above points would have gained high marks as would have briefer explanations of a number of the points. The majority of answers to this question were good and gained high marks although there were some poorer answers. The most consistent error was for answers to describe the last phases of the actual negotiation process. In other words such answers were taking the view that negotiation was still taking place whereas closure means that the discussion has actually been completed. Such answers described the kind of offers that might be made towards the end of a negotiation as well as the drawing up of contracts with the involvement of legal teams. Answers, however, should have focused on (e.g.) ensuring that the details of the process have been recorded and that both parties should sign-off the completed agreement. March 2016_D4_EXAM REPORT _LEARNER_COMMUNITY_FV 7/7