The Biggest 1,000 Companies Could Be Losing $3.25 Trillion Annually--Here Is How To Avoid That

The value in NegoEconomics


We have calculated that among the 1,000 biggest corporations in the U.S., the annual loss by not utilizing Negotiation Economy (NegoEconomics) is $3.25 trillion.

How did we do that? We took the total revenue from the 1,000 biggest corporations – took the amount related to negotiations whether that be procurement or sales and calculated the potential NegoEconomics of that.

$3.250 billion is an enormous amount of money. Are you shocked or don't believe in this calculation? Well, let me tell you that I was just as surprised or perhaps even more!

Let's assume for the sake of argument that the researchers doing this research were not the smartest in the world and the real number is only $ 2.500 trillion. Wouldn't that still be enough for you to have a look at the potential?

Let's even add,  that the Ph.D. researcher professors were pretty drunk during their studies (which I am sure they were not), meaning the real number would only be $1.500 billion. Would that be of interest if you were a CEO of one of the 1,000 biggest corporations in the U.S.? That's at least an additional $1.5 billion per company in profit annually.

Watch the video for an introduction to NegoEconomics:

Where is NegoEconomics coming from?

Money costs money. Actually, money is a commodity just like a book, a computer, a car, a table or a house. We can put a value on money and different people and different companies have a different value. Look at your credit card. Are you paying 15% or 19% interest or even more than that?

Imagine you are running a small company with no or very little cash. You are agreeing to a contract with a company by the name of "Blossom." The total contract value is $10 million. Blossom is a wealthy company that has loads of cash. Part of the agreement was terms of payment, where Blossoms' negotiators were forcing you to accept payment when you deliver in six months from now.

This is troubling for you since you have sub-suppliers that are crucial for you to fulfill your order to Blossom. And they all require 30% upfront payment of the total order value, a total of $3 million. Money you don't have. You have two options: 1) You can go to your bank and ask for a loan for $3 million, or 2) You can ask Blossom if it wants to pay $3 million upfront.

In this case, Blossoms' negotiator tells you that is out of the question and even add that, if you require that, it will cancel the contract and search for alternative suppliers.

Your only solution is now to approach your bank and ask for a loan. The bank agrees but charges you interest. That means that your total cost of borrowing the $3 million for the period of time will cost you $150,000.

This, of course, reduces your profit off the deal by $150,000.

Let's have a look at this case from Blossoms' point of view. Its cost of paying you $3 million upfront would cost it $60,000. The reason? Its cost of capital is lower than yours.

Blossoms' negotiators believe they did a great deal by not paying up. You know you did a bad deal, but in reality, both parties in this case lost. They lost the potential of creating NegoEconomics in this simple variable called terms of payment.

What is the NegoEconomics lost in this transaction? The difference between your cost and Blossoms' gains. $150,000 minus $60,000 equals $90,000 lost between the two parties. What should you and Blossom have done instead? Well, by figuring out the difference between the cost of capital, they would easily have discovered that by utilizing this difference they got $90,000 to split. Imagine if you reduced your price by $120,000 – Blossom would make an additional $60,000 and you would save $30,000. A win for everybody (with the exception of the bank, which is not part of the deal by the way).

What is interesting is that when I am presenting this very simplified example of NegoEconomics, I meet executives who tell me they don't have the time to work on $150,000 when they are involved in a deal that represents a total value of $10 million. Then I usually ask them if they personally make more than $150,000 an hour. Most people I meet tell me they don't! Then I add that in a negotiation that has a total value of $10 million, you will easily find 200-300 variables that each will represent $150,000 in NegoEconomics.

What is really interesting is that in the last 5-7 years I have noticed that a majority of large corporations have ordered their procurement departments to generate positive cash flow, by expanding the credit from suppliers. Before, the typical credit may have been 30 days, but it's required to be 60-90 days. Who do you think typically got the lowest cost of capital? A major publicly traded company or a local company with 50 employees? Let me help you out. It's always the smaller company. And what is happening – the smaller company with a higher cost is picking up the bill for the huge company with a smaller cost of capital. It's crazy!

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