How To Carry Out Contract Negotiation With Suppliers
Contract Negotiation is a key element for any procurement, commercial or legal department. Unfortunately, far too often supplier contracts do not run as smoothly as they should. A lot can go wrong, such as delivery issues, payment problems, unexpected market changes, uncontrolled price escalations and miscommunications. Well executed contract negotiations as well as helping to mitigate unexpected issues also help to reduce the chance of them occurring in the first place.
What’s the formula for a successful contract?
A supplier contract can generally be considered successful when it contains the following:
- Both sides understand their rights and obligations under the contract and adhere to them
- Both sides mutually benefit financially operationally
- The deal meets the expectations of internal stakeholders
- An effective and efficient performance monitoring process exists
- Both sides are responsive and committed to resolving issues
Who is negotiating what?
Consider all of the above when negotiating a contract. Depending on the good or services being negotiated, there must be agreement on the basic elements such as price, delivery, quality, service, payment terms and other operational issues.
The next step is to identify the potential sticking points that can affect how successfully the contract will work in practice. These may include:
- Monitor the performance of suppliers based on key performance indicators (KPIs)
- The content and frequency of reporting, as well as meetings for reviewing
- System integration, order & delivery practices, and communication channels
- Dispute resolution, disaster management, and continuity contacts at both parties
- Skills transfer and training requirements
There are various objectives between the parties, and to achieve an amicable resolution, or at least an acceptable one, both parties must satisfy most of them.
The art of negotiation has been studied extensively, but here are our top five tips for finding the best solution and ensuring a successful supplier relationship.
Preparation is key
Take a strategic approach when negotiating with strategic suppliers. Make sure you select and brief your team well in advance. Setting objectives, defining roles in the negotiation process, researching, determining tactics, and planning meetings or phone calls are all part of this process. Decide who should lead your meeting or take notes during your conversation.
If negotiations fail, you need to have a back-up position. It is also important to consider the alternative options available to the supplier. The ability to think beyond a ‘take it or leave it’ ultimatum will allow you to have a choice mindset.
- Consider the following factors when preparing:
- What is your historic spend for that category and who are your suppliers (could you consolidate vendors to achieve savings?)
- Patterns and volumes of your purchases
- Current market data and past prices
- Volume forecasts
- Existing contracts with similar suppliers
- Your previous contract(s) with the same supplier: their performance, your spend
It’s possible you have existing or past contracts with multiple business units of a parent company – take a look at supplier data that has been normalized and enriched to determine if this is the case.
This type of information should be relatively easy to pull up if you have access to a spend analysis and contract management solution.
Preparing for supplier negotiations: 5 considerations
- What are the suppliers objectives?
Find out what the supplier’s objectives are. Don’t just focus on price and volume with strategic suppliers. Having this information allows you to anticipate their issues and brainstorm creative solutions in advance.
Are there any non-financial elements you could include in the contract that they would be interested in and that you could offer in exchange for discounts? Providing references or making introductions in new markets are examples of such activities.
You can gain a better understanding of supplier-related risks and opportunities by reviewing the supplier’s financials and ESG performance.
Discover who will be at the negotiations, their exact influence and role, and their preferred outcome. In addition to that, understanding the personality, preferences, and biases of the individuals is extremely valuable.
- You need to manage your team’s emotions (and theirs)
You may run into problems in negotiation meetings due to issues on your own team. Despite the idea that managing emotions shouldn’t be a consideration in business negotiations, financial, professional and time pressures can cause emotions to rise.
Eliminate any conflicts of interest. Know each person’s priorities, preferences, and loyalties. We all have our own “hot buttons” and biases. Also, don’t underestimate the impact of language and cultural differences. In many negotiations, rather than big differences in commercial position or desired result, personality conflicts and misunderstandings lead to failure.
Taking a break can be helpful if discussions for some reason get heated (on either side of the table). It is important to develop the skill of diffusing such situations, allowing arguments to escalate will result in failed negotiations.
- Make sure you listen to alternative viewpoints and are open to them
Learning to listen is an acquired skill. Think positively about their ideas before launching into your solution. Being impatient with people whose ideas seem opposite to yours is easy. Learn to shut up at the right time and let others speak.
Most of the time, there are several solutions to a problem. Look at the problem from both sides, not just your own. Then, not only can you acknowledge their point of view, but you will also be better prepared to find a solution that meets both parties’ needs.
- Learn from your mistakes
A debriefing is essential after the contract signing and the tying up of loose ends. To avoid repeating any possible mistakes, it’s important to schedule a “lessons learned” session during strategic sourcing processes. Remember the first point: could you have been more prepared? Would you have been able to prepare any data or analysis? Are there any points you want to remember when it comes time to renegotiate your contract?
- Make the most of the contract you have negotiated
Contracts are often the result of a lot of work, including all their terms and fine print. Make sure it isn’t forgotten. Do you have a central repository for contract information? Is there somewhere where contracts can be searched and accessed by all relevant people in your organization (especially if key people leave)? Can you let me know when the contract is up for renewal and if you intend to renew it? Consider your options for a unified way of tracking and managing contracts across your business if you don’t have one already, as you may be losing out on valuable information and wasting time and money