Business Negotiation May 5, 2014

Why it is Crucial to Agree on How Performance Will be Measured

It is not enough for a buyer and seller to reach an agreement on what is to be done and what is to be paid for it. There is another problem, a difficult one, that often rears its head at the very end: “How is performance really going to be measured and when is ‘done’ done?” Most people do not give this matter enough thought, and they often suffer serious consequences later. That’s why the ideas brought up here are important. They apply whether you call a plumber to work at your home or contract with the largest manufacturing companies on a multimillion dollar deal.

Let’s say, for example, you hire a contractor to design and construct a pool in your back yard. The contract calls for water recirculating pumps, lighting, heating equipment, planting and cement walks. Equipment and labor are given a one-year warranty. That’s good, but there is more to it.

Do the warranties on equipment start one year from when the manufacturer shipped the pool heater, or one year after the heater was installed, or one year after the pool is working satisfactorily? In fact, when is the pool really done? When you can swim in it, or when the contractor says it is done? Is it done if the site has debris around it or the cement patios and walks are still blotched with excess sand and cement patches? When “done is done” is the forgotten issue in too many negotiations.

The measurement of services is more difficult than the measurement of product. Once my department was responsible for the acquisition of consulting services for an advanced research facility. All kinds of measurement problems arose. We agreed rather easily on a rate per hour. What we had trouble with was how to measure an hour. When did it start or stop? Was flying time chargeable? How many hours in a day? Who kept the records? How were they to be kept? When was the job done? Was the final report the point at which work ended? What if we found it incorrect or otherwise wanting? What action constituted acceptance and by whom? Who did the measuring? Who checked the measurer and how? Both the quality and quantity of services are hard to measure and control.

The absence of reliable measurement standards and procedures leads to inadequate compliance as well as certain aggravation later on. Before closing your next negotiation, ask yourself, “Have I defined the work or service to be done well enough, and have I set up good procedures to measure whether it is done as agreed?” You’ll be glad you did.

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PROCUREMENT at AMERICAN EXPRESS

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INTERNATIONAL SOURCING at FMC TECHNOLOGIES

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VICE PRESIDENT at GE

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PLANNER at HONEYWELL

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CONTRACTS MANAGER at HEWLETT-PACKARD
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