CIPS Exam Report for Learner Community:

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1 CIPS Exam Report for Learner Community: Qualification: Diploma Unit: Negotiating and contracting in procurement and supply Exam series: May 2016 Each element of a question carries equal weighting unless otherwise stated. Question 1 (a) Explain THREE requirements that an offer must fulfil in order to be legally valid. (b) Explain what is meant by 'battle of the forms' in relation to the precedence of the buyer's contract terms or the supplier's contract terms. Learning outcome addressed 1.2 Mark 15 marks 10 marks Command word explanation. The command word for both parts of the question is explain. This means that answers should give reasons, or account for something, so that it is clear and easy to understand. This applies to both parts of this question. Examples of good content/good approaches in answers: In part (a) answers should explain any THREE of the following requirements of an offer: An offer must be a definite, unequivocal or unambiguous statement of willingness to be bound in contract. This means that an offer is not a general picture of what a seller may be willing to sell (e.g. a catalogue or goods placed on the shelves of a shop). Nor should it be (e.g.) a request for quotation from a buyer. It should be remembered here that an offer can be an offer to buy or an offer to sell. The person/organisation making the offer (offeror) must intend to be bound by it. A legally valid offer is one which the person/organisation receiving the offer (offeree) only has to accept, on the basis of terms laid down by the offeror, in order to complete a legally binding contract. If proposed terms are likely to change as a result of (e.g.) negotiation, each new set of terms is a separate offer. An offer must be communicated successfully to the offeree. This might appear to be obvious but in cases where offers are communicated (e.g.) by post, or telephone, it is possible that the offeree might not be aware that an offer is being made. Equally, if the offeree has limited knowledge of contract law, they may not be aware that a legally valid offer is being made in any circumstances. The offer must be open (still in force) when the offeree accepts it. Once an offer has been 'closed' (e.g. by an end date stated in the offer) or revoked by the offeror, it can no longer be accepted. The party making the offer must have the capacity to do so e.g. not a minor (below the age of 18 years in UK law), of unsound mind or intoxicated by alcohol or drugs. In an organisation, the person receiving the offer should be given capacity to do so by senior management. MAY16_D4_EXAM REPORT _LEARNER_COMMUNITY_FV 1/9

2 In part (b) answers should explain that the battle of the forms is a situation where no acceptance to an original offer has taken place, usually because what the offeree intended to be acceptance, was actually a counter-offer due to differences occurring between the offer and the intended acceptance. Such differences would usually occur because of a difference in contract terms. The term battle of the forms derives from the fact that a stream of documents (forms) may pass between buyer and seller with each one containing the sender s contract terms meaning that the document would be a counter-offer when related to the previous form. Actual documents (forms) involved in the battle could be a purchase order that differs from a quotation or an order acknowledgement that differs in some way from the purchase order. Once the goods have been delivered (because any differences contained in the various documents preceding delivery may not have been identified) and accepted by the buyer, a legally binding contract is deemed to exist with the binding terms being contained in the last document that passed between the parties. This situation is often referred to as firing the last shot. An example of this might be the buyer signing the supplier s delivery note without inspecting the supplier s contract terms. This would mean that the buyer has accepted the supplier s contract terms. Examples of content for merit/distinction grade answers: In part (a) higher marks were awarded for clear explanations of three of the above requirements of an offer with the inclusion of examples to illustrate these requirements. Such explanations gave a clear outline of the legal principle and examples included such things as, (e.g.) under definite, unequivocal or unambiguous statement of willingness to be bound in contract, either the seller giving a detailed quotation including contract terms or the buyer placing a purchase order giving clear details of what is required. In part (b) higher marks were awarded for answers that explained the sequential process of the battle of the forms involving the chain of documents ( forms ) that constitute the battle of the forms. Such a process would typically start with a Request for Quotation which would be followed by a quotation, a purchase order, an order acknowledgement, a delivery note and ending with an invoice. Examples of poorer content/ poorer approaches in answers: In part (a) mistaking contract for offer was a poor/incorrect approach. This involved giving the essential elements of a contract such as acceptance and consideration as part of the answer. These elements are required to make a contract legally binding but are not required to make an offer legally valid. In part (b) a poor approach was to focus on how to avoid the battle of the forms (e.g. by both parties negotiating and agreeing contract terms). Such agreements are considered necessary in practice but were not part of this question. The question only requires explanation of the meaning of battle of the forms. Concluding comment: In part (a) a very large number of answers focused on elements of a legally-binding contract. This led to part (a) being the most poorly answered question in this exam. In part (b) many answers focused on how to avoid the battle of the forms rather than the meaning of the phrase battle of the forms. MAY16_D4_EXAM REPORT _LEARNER_COMMUNITY_FV 2/9

3 Question 2 (a) Discuss FOUR differences between distributive (win-lose) and integrative (win- win) approaches to commercial negotiation. (b) Suggest THREE situations when a distributive approach may be appropriate for commercial negotiations. Mark 16 marks 9 marks Learning outcome addressed 2.2 Command word explanation Part (a) s command word was discuss. This means writing about the subject of the question from different points of view. For this question this involved taking the distributive and integrative viewpoints of negotiation. Part (b) s command word was suggest. This means that there is more than one possible answer and the most appropriate answer(s) were sought. Examples of good content/good approaches in answers: Part (a) answers should have begun with a brief overview of the distributive and integrative approaches to negotiation stating that they are pursued to achieve win-lose and win-win outcomes respectively. These approaches have little in common so answers should have drawn out the differences. Answers could have included four from the following situations: A distributive negotiation aims to win by competing to gain movement at the expense of the other party whereas integrative negotiations are aiming to achieve an outcome that benefits both parties. Distributive approaches will take a short term focus (even if it is just for the first negotiation), viewing relationships as transactional (very short-term) whereas integrative approaches work on building closer, more long-term, relationships and spend enough time to do so. Openness/trust is a feature of an integrative approach: there are no hidden agendas and outcomes are made visible early on. The distributive approach can often disguise/misrepresent the desired outcome in order to keep it hidden from the other party. The view here is that knowledge of a desired outcome gives power over the other party. Positions tend to be inflexible in a distributive approach to negotiation to achieve the desired target and this will be maintained using either rational or irrational arguments. The integrative approach is naturally more flexible to allow for alternative options to be generated as negotiation continues. The distributive approach can be seen as competitive and aggressive using ploys and threats to achieve goals where integrative approaches are more co-operative to help discover and develop common goals and themes between the parties. If a distributive negotiation breaks down it is likely to be terminated and/or a mediator called to try to resolve the dispute. However, if integrative negotiations reach impasse, the parties will take this as another issue that needs to be solved before approaching a mediator. Good answers provided a narrative for each of four differences between the two approaches to negotiation. MAY16_D4_EXAM REPORT _LEARNER_COMMUNITY_FV 3/9

4 Such answers provided a clear distinction between the two approaches relating to the specific difference being used as an example. Good answers also made the differences of approach relating to specific situations, as above, clear by discussing each situation separately. In part (b) answers should have briefly explained three situations when a distributive approach is appropriate. These might include: When an issue is regarded by one of the parties as non-negotiable. A good example of this might be health and safety regulations or a quality standard regulated by the country s law. If one party holds a stronger bargaining position it could be argued that it is appropriate stewardship that this position is leveraged to satisfy shareholder expectations. This could include monopoly suppliers or monopsony buyers. If the negotiation s immediate outcome is more important than the longer term relationship that may be developed. Examples would include the purchasing of low-value, standard specification products in a very competitive market. For a one-off transactional purchase when future, similar, purchases from the same supplier are unlikely. Examples of content for merit/distinction grade answers: In part (a) higher scoring answers examined the differences between the approaches in more depth and gave examples to support the answer and concluded that, although the trend is currently moving towards the more collaborative/integrative approach, both approaches have their value in different circumstances. In part (b) higher scoring answers gave reasonably detailed answers with good examples of the situations that were being described. For example, some answers referred to specific Health and Safety legislation. Examples of poorer content/ poorer approaches in answers: In part (a) one poor approach was to discuss the chosen situations from the above list very briefly, often merely stating a name. Another poor approach was to list points relating to distributive negotiation separately from the ones relating to integrative negotiation making it difficult to link the two sets of points made. Some answers did not link points made which means that, in such cases, the meaning of the command word discuss was ignored. In part (b) the only real problem that led to poor marks was not giving enough detail and/or only stating the heading of points that should have been given more detail. Concluding comment: Both parts of this question were mainly well answered although some answers gave more detail than was required. One thing that was noticeable is that some answers gave more points than were necessary. For example, some answers gave 6 points for part (a) and 4 points for part (b). Marks are not awarded for any points given after the total number of required points has been given. One noticeable thing was that some answers to part (b) clearly approached the question from a supplier s viewpoint. This would appear strange, given that this was a procurement exam but the question merely states that its context is commercial MAY16_D4_EXAM REPORT _LEARNER_COMMUNITY_FV 4/9

5 negotiations without dictating which party s viewpoint it should be answered from. This meant that credit was given for such answers. Question 3 (a) From a buyer s perspective, outline the impact of FOUR different market structures on commercial negotiations. (b) Outline the risk that exchange rates present when negotiating for an international purchase. Learning outcome addressed 3.2 Mark 20 marks 5 marks Command word explanation The command word for both parts of this question was outline. This involves giving the main features, facts or the general idea of the topic but omitting minor details. In part (a) such an approach was necessary because of the potential width of the market structure topic. In part (b) this approach was necessary because only 5 marks were being awarded. Examples of good content/good approaches in answers: In part (a) answers should have explained that the four main market structures are perfect competition, monopolistic (imperfect) competition, oligopoly and monopoly. Answers were required to outline the impact of the market structure but not describe the market structure in detail. The areas that answers should have focused on are: Perfect competition Here, the price of goods is determined by total market supply and demand with no one supplier able to influence that price. In such a market many suppliers of homogeneous goods exist. Features of such a market are: The buying organisation is in a powerful position because it can switch easily between the many suppliers and standard products. There is no real distinction between suppliers and products The buyer will hold a high level of information about products and suppliers Competition remains because the normal profit level is visible and if a supplier makes less than this it will leave the market. If higher profits are made then everyone will know and existing and new suppliers will want a share in that market. Buyers might be more willing to encourage suppliers to compete and drive prices down because if this puts a supplier out of business there are still many more suppliers left. A distributive approach to negotiation by the buyer is possible Monopolistic Competition Here, a large number of suppliers exist supplying slightly differentiated goods and services, which allow suppliers to vary prices. Many buyers also exist in this type of market and typical features of such a market are: MAY16_D4_EXAM REPORT _LEARNER_COMMUNITY_FV 5/9

6 The structure is more complex and allows suppliers to differentiate on other offerings as well as price. Examples of this include quality levels, delivery times and the possibility of service aspects such as economies of scale. Buyers, therefore, need to be clear about requirements across a range of variables to negotiate. Priorities need to be set against these variables to select the right suppliers and the right package of benefits in a deal. The power base is not so clear as in a perfect competition market and can change over time with some suppliers possibly leaving the market and others entering it. There remains the opportunity to negotiate and find a balance. Oligopoly This is seen as competition between smaller numbers of large suppliers of differentiated products. Each supplier risks losing market share if it increases pricing in isolation and it would risk a price war if it reduced prices. Buyers can focus on negotiating to gain the best value through non-price benefits because the supplier avoids price competition. The ability of suppliers to collude (form cartels) will keep prices high and reduce a buyer s bargaining strength. Buyers will need to be skilled and well-prepared to achieve benefits from negotiations with suppliers in this type of market. If buying consortia are developed, they can restore some of the power balance. Monopoly Here, there is a single producer/supplier and no competition exists at all. The supplier can set prices to maximise profit. Barriers to entry might exist but no substitute products are available. The monopoly supplier has absolute power and can dictate the terms of contract. The only point of leverage for a buyer is to find or develop alternative sources of supply or products. This is easier said than done, however. Prices in this type of market are usually higher and the buyer will have little leverage to reduce them because each buyer is likely to represent a small proportion of the supplier s revenue The supplier has no incentive to tailor products to the buyer s specification, which will add complexity and cost to its production. This reduces innovation, which is difficult for buyers if the buyer s market is dynamic. An integrative approach to negotiation might be more appropriate here. In part (b) the required answer mainly surrounds fluctuation and answers should have explained that foreign exchange fluctuations are a financial risk and if the buyer must pay in the supplier s local currency there is a risk of paying more if the buyer s currency weakens before purchase. There is a risk that, if the buyer s currency weakens, then less currency can be acquired and so the international purchases become more expensive MAY16_D4_EXAM REPORT _LEARNER_COMMUNITY_FV 6/9

7 Examples of content for merit/distinction grade answers: Higher scoring answers to part (a) noted that, even in less than perfect competition markets, buyers hold the power to change suppliers if products are still standard and switching costs are low. Such answers also pointed out that often this market structure also has a large number of buyers which could enable the supplier to resist price decreases because they can sell elsewhere. Higher scoring answers also noted that monopoly suppliers may have the option of reducing prices if cost savings are derived from economies of scale, savings in their own bulk purchasing, production techniques and financing. Also monopoly suppliers have more resources that they could use to support customisation in return for even higher prices. Higher scoring answers to part (b) gave good, detailed explanation of exchange rate fluctuations and the effects that these can have on procurement, as detailed above. Examples of poorer content/ poorer approaches in answers: In part (a) some answers completely misunderstood the nature of market structures and described (e.g.) the private sector and the public sector or the product sector and service sector. These are not market structures as such. Some answers used broad terms such as macro- and micro-economics and analytical models such as Porter s 5 forces to try and answer the question. In part (b) some answers focused on problems/risks associated with international purchasing in general and described such issues and risks as culture and language differences. Many answers gave reasonable explanations of risks but then spent much time discussing ways of avoiding/mitigating such risks which is not what the question required. Concluding comment: The majority of answers to both parts of this question were satisfactory although in part (a) some answers went into more detail than was necessary. A small number of answers covered Duopoly as a market structure, which was acceptable. Question 4 Discuss FIVE phases of a negotiation and suggest the activity that might take place at each stage. Learning outcome addressed 4.1 Mark 25 marks Command word explanation The command words were a combination of discuss and suggest. Discuss means writing about the subject of the question from different points of view and suggest means that there is more than one possible answer and the most appropriate answer(s) were sought. The point here is that answers should have explained the meaning of different negotiation phases and then, for each one, indicated typical activities that might take place. MAY16_D4_EXAM REPORT _LEARNER_COMMUNITY_FV 7/9

8 Examples of good content/good approaches in answers: Good answers were able to explain what activity takes place at each negotiation phase. Typical phases might be as follows (as listed in the LO): Preparation, Opening, Testing, Proposing, Bargaining, Agreement, and Closure. Obviously, there are seven phases in this list so answers were only required for any five of them although some answers put testing and proposing together which was acceptable. This question could also have been answered by discussing five phases from the following model: Identification of need: working closely with stakeholders to establish exactly what is required. The Procurement function may be able to input supply market knowledge but the user dept. will need to have the major say in the final decision. Information gathering: this could be about agreeing the specifications preparation. It could also involve (e.g.) finding out what other suppliers might be able to offer to provide a fall-back position in case the current negotiation does not provide a successful outcome. It might also involve trying to find out, prior to the negotiation, what the supplier has to offer. Information using: exploring the facts and data contained with the supplier s proposal, evaluating statements and looking at assumptions. It should also involve using the information gathered (above) to develop a negotiation strategy and tactics. Negotiation/trade/move/bidding: this is where the actual discussion and negotiation with the supplier takes place. For the buyer it will involve putting their case forward, reflecting on any statements/offers, etc. made by the supplier and carrying out any bargaining that might be necessary. Agree/summarise: here, good summarising and its impact on the outcome should take place. It should involve reaching agreement with the supplier and developing a written summary of this which both parties can sign. Finalise/implementation: this is putting the contract in place and embedding the decision so that both parties know what is expected of them. It might also involve agreeing the next meeting particularly if it is recognised that performing the contract might have difficulties which will require resolving. There was a variety of possible answers to this question although they should have traced a sequence of phases from preparation through the meeting and its various aspects up to finalising/implementing. The precise titles given to the various phases were not important provided that the meaning was clear. Marks were also awarded for answers using the following model: Pre-negotiation phase: similar to information gathering above. Introductory meeting: similar to information using above Discussion meeting: similar to negotiation/trade/move/bidding above Agreement meeting: similar to agree/summarise above Post-negotiation phase: similar to finalise/implementation above. Examples of content for merit/distinction grade answers: These were answers that gave a clear sequence of phases with each one being very clearly explained in terms of what the objectives of the phase might be as well as the activities that might take place to achieve these objectives. MAY16_D4_EXAM REPORT _LEARNER_COMMUNITY_FV 8/9

9 Examples of poorer content/ poorer approaches in answers: Weaker answers spent too much time on the planning and preparation phase giving great detail on (e.g.) research and information gathering. A few answers clearly did not understand negotiation phases and described such things as the Purchasing Cycle, explaining such concepts as tendering, supplier appraisal and supplier selection, none of which relate to negotiation phases or negotiation in general. Concluding comment: Overall, this was the best answered question on the paper with many answers gaining very high, distinction level marks. MAY16_D4_EXAM REPORT _LEARNER_COMMUNITY_FV 9/9