Contract Negotiation Strategies
The final stage in the vendor selection process is 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 that both of you will meet your corporate goals and objectives by signing the contract. Successful contract negotiation means that both sides look for positives that benefit both parties in every area while 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
The following contract negotiation objectives can be used to evaluate the contract on each of the following items:
- 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, financing terms
- Acknowledgement of: Effective dates, completion/termination dates, renewal dates
- Identify and address potential risks and liabilities
- Define and set reasonable expectations for this relationship currently and into the future
Strategies for Planning Contract Negotiations
- List rank your priorities along with alternatives: As you develop your contract negotiation strategy, you may keep returning to this area to add additional items. You will not be able to negotiate effectively all areas of the contract at once. You want to be sure that what is most important to you is discussed and agreed upon before you move to less important items. In addition, you may 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 contract 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 will be better to walk away from this contract if the vendor does not agree to it? List these along with the rationale so they are not forgotten.
- Define any time constraints and benchmarks: In any substantial project, you will want to set performance measurement standards that you will expect from your vendor. If these are essential to your business, then you will want to negotiate a fair and equitable penalty when they are not met. For example, project completion dates, the delivery date for the first batch of parts, start date for the service, lead times, etc.
- Assess potential liabilities and risks: What is 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 a potential negotiation stumbling block or deal closer. For example, if the vendor (or an employee) have the possibility of being exposed to confidential information, you will want to be sure a confidentiality clause is put into the contract with the liability assumed by the vendor.
- Do the same for your vendor (i.e. walk a mile in their shoes): Now that you have completed the contract negotiations planning process for your business, repeat the same process as if you were the vendor. What area do you think is most important for them? What risks or liabilities will they want you to assume? Your list won't be perfect, but it will succeed in putting you into a frame of mind to look at things from their perspective. This is how great partnerships between client and vendors are built.
Before the actual contract negotiations begin, make sure the following items are reviewed and confirmed:
- Determine if you will need legal counsel: Negotiating a contract for one year of janitorial services in a small office is vastly different than negotiating a contract to outsource a fairly large call center. If you feel the least bit uncomfortable reviewing contract "legalese", do not hesitate to retain a lawyer specializing in contract negotiations.
- On-Site or teleconference: Agree upon where the negotiation session(s) will take place. If you think you have the upper-hand by negotiating at the vendor's site, then propose up front that you will travel to them. If the distance is too far to travel cost-effectively, set up a teleconference to accomplish the negotiation session. Make sure it is a video conference because body language speaks louder than words.
- Make sure the person representing the vendor has authority to negotiate: Before your people travel to the vendor's site or the vendor travels to your site, make sure the person/people representing the vendor have the authority to negotiate on behalf of the vendor's company. It would be a huge waste of time to hear at the end of a long negation session "Well, let me get back to you after I hear what my boss has to say about this."