Contract Negotiation Strategies to Select the Right Vendor
Know your objectives and prepare for these pitfalls
The final stage in the vendor selection process involves developing a contract negotiation strategy. The worst contract negotiation objective is to bleed every last cent out of the vendor for the lowest price. Remember, you want to "partner" with your vendor so both of you will meet your corporate goals and objectives.
Successful contract negotiation means that both sides look for positives that benefit both parties in every area while still achieving a fair and equitable deal.
A signed contract that benefits both parties will provide a firm foundation to build a long-lasting relationship with your vendor.
Objectives of Contract Negotiations
These negotiation objectives can be used to evaluate the contract:
- Explain clearly all essential prerequisites, terms and conditions.
- Goods or services to be provided are unquestionably defined.
- Compensation is clearly stated: total cost, payment schedule, and financing terms.
- Acknowledgement is made of effective dates, completion/termination dates, and renewal dates.
- Identify and address potential risks and liabilities.
- Define and set reasonable expectations for this relationship, both currently and into the future
Strategies for Planning Contract Negotiations
- List rank your priorities along with alternatives: You might keep returning to this area to add additional items as you develop your contract negotiation strategy. You won't be able to effectively negotiate all areas of the contract at once. You'll want to be sure that what's most important to you is discussed and agreed upon before you move to less important items. You might also want to refer to the least important items if you have to give up something to get your top items.
- Know the difference between what you need and what you want: Review your priorities frequently throughout the negotiations planning process and one final time at the end. Be sure to ask the hard questions: "Is this really a priority for our company, or is it a 'nice to have'?" "Was this priority a result of some internal political jockeying, or is it for real?"
- Know your bottom line so you know when to walk away: Is there a cost or hourly fee that your company cannot exceed? Have you come to realize that one or two of the top priorities are truly non-negotiable and you'll be better off if you walk away from this contract if the vendor doesn't agree? List these along with the rationale so they're not forgotten.
- Define any time constraints and benchmarks: You'll want to set performance measurement standards that you will expect from your vendor, particularly with substantial projects. You'll want to negotiate a fair and equitable penalty when they're not met if they're essential to your business.
- Assess potential liabilities and risks: What's the potential for something to go wrong? What if unforeseen costs are encountered? Who will be responsible if government regulations are violated? Whose insurance will cover contract workers? These are just a few of the more common questions that must be addressed in any contract.
- Confidentiality, non-compete, dispute resolution, changes in requirements: These are other items that could be potential negotiation stumbling blocks. For example, you'll want to be sure a confidentiality clause is put into the contract if the vendor or an employee have the possibility of being exposed to confidential information.
- Do the same for your vendor (walk a mile in their shoes): Now that you've completed the contract negotiations planning process for your business, repeat the same process as if you were the vendor. What areas do you think are most important for them? What risks or liabilities will they want you to assume? Your list won't be perfect, but it should put you into a frame of mind to look at things from the other perspective. This is how great partnerships between client and vendors are built.
Make sure the following items are reviewed and confirmed before the actual contract negotiations begin:
- Determine whether you will need legal counsel: Negotiating a contract for one year of janitorial services in a small office is vastly different from negotiating a contract to outsource a fairly large call center. Don't hesitate to retain a lawyer specializing in contract negotiations if you feel the least bit uncomfortable reviewing contract "legalese."
- On-site or teleconference: Agree upon where the negotiation session or sessions will take place. Propose up front that you'll travel to them if you think you'll have the upper-hand by negotiating at the vendor's site. Set up a teleconference to accomplish the negotiation session if the distance is too far to travel cost-effectively. Make sure it's a video conference because body language speaks louder than words.
- Make sure the person representing the vendor has authority to negotiate: Make sure the individuals representing the vendor have the authority to negotiate on behalf of the company before your people travel to the vendor's site or the vendor travels to you. It's a huge waste of time to hear, "Let me get back to you after I hear what my boss has to say about this" at the end of a long negation session.