Procurement Explained

5 Tips for Contract Negotiation: What to Consider Before Negotiation

This article shares 5 things to consider when negotiating with suppliers so you can be more prepared for procurement contract negotiation. 

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Updated: Oct 28, 2022

Commercial contracts that run smoothly throughout their lifespan are a rarity. So much can go wrong: uncontrolled price escalations, delivery problems, payment issues, unexpected changes in the market, miscommunications, or equipment failures.

While it’s hard to anticipate everything, many of the issues that arise have their roots in poor negotiation practices.

That's why in this article, we'll offer our 5 best tips for negotiating contracts in procurement. 

What does a successful contract look like?

Before diving in, let's outline what a successful contract looks like. Hint: it's more than just a good price. 

A contract can be regarded as a success when these conditions are met:

  • Both organizations understand their contract rights and obligations and adhere to them.
  • The expected business benefits, both financial and operational, are being realized.
  • Internal stakeholders are satisfied with the deal.
  • A performance monitoring process exists, and it’s efficient and fit for purpose.
  • The supplier is responsive and committed to resolving issues.

This suggests that a good contract should be a template for a successful supplier relationship. 

See how Procurement Analytics gets you the insights you need to help compliance and improve contract coverage.

What is being negotiated?

Negotiating the terms of a contract must take into account all of the above.

Depending on the commodity or service, the basic elements of price, delivery, quality, service, payment terms, and other operational issues need to be agreed upon.

Next are those potential sticking points which can determine how well the contract will work in practice.

These include defining:

  • The key performance indicators (KPIs) that will be used to monitor supplier performance.
  • Reporting requirements - content, frequency, and review meetings.
  • Communication channels, order & delivery practices, and any system integrations may need to be in place.
  • Key contacts at both parties for dispute resolution, disaster management, and continuity.
  • Training and skills transfer requirements.

Both parties to the negotiation have their own objectives and the aim is to satisfy at least most of them and reach an amicable solution.

5 Tips for Contract Negotiation:

 

A mess of paperwork sievo

Let us be your guide through the dark contract woods.

Here are our top 5 tips to get the best solution. Use these to ensure a working supplier relationship that delivers results. 

 

1. Nothing beats preparation

When negotiating with strategic suppliers, take a strategic approach. Select and brief your team well beforehand. This includes setting objectives for the negotiation, defining roles in the process, researching, deciding tactics, and planning the meetings or calls. Decide on the team leader and someone to focus on taking notes during your meetings or calls.

Always have a fall-back position in case negotiations fail and you’re unable to get the result you’re looking for (also known as your BATNA, the best alternative to a negotiated agreement).

Also, consider the supplier’s other alternatives. These will allow you to have a choice mindset and think beyond ‘take it or leave it’ ultimatum situations (if they arise).

Take a data-driven approach to preparation by looking at:

  • your historic spend and suppliers in that category (could you consolidate vendors to achieve savings?)
  • your purchasing volumes and patterns
  • past prices & current market data
  • your forecasted volumes
  • existing terms you have with similar suppliers
  • if you’ve had a previous contract(s) with the same supplier: their performance, your spend on those contracts

It may be that you have existing or past contracts with multiple business units of the same parent company. Look at normalized and enriched vendor data to see if this is the case.

If you have access to a spend analysis and contract management solution, you should be able to pull up information like this relatively easily.

 

2. Who is the supplier, really?

Try to find out the supplier’s objectives. Especially with strategic suppliers, think beyond just price and volume goals.

This information allows you to prepare to address their issues and explore creative solutions ahead of time.

Conflicting information sievo

Are there, for example, non-financial elements that you could add to the contract that would be important to them and relatively easy for you to offer in exchange for discounts or better terms? Examples include allowing public reference or making introductions in a new market.

Do your research and look at the supplier’s financials and ESG performance to get a better view of possible supplier-related risks and opportunities.

Find out who will be at the negotiation meetings, their exact influence and role in the process, and their preferred outcome. More than that, there is a huge benefit in understanding the personalities, their preferences, and any known biases.

 

3. Manage your team (and their emotions)

Some of the problems in negotiation meetings may occur because of issues with your own team. It may seem like emotions should not have to be a consideration in a business negotiation setting. But financial, professional, or time pressures can elevate emotions and tempers.

hugging

Identify any conflicts of interest and eliminate them. For each person involved, know their priorities, preferences, and loyalties.

Everyone has their “hot buttons” and biases. You also shouldn’t underestimate the impact of language and cultural differences. Many well-planned negotiations fail due to personality conflicts and misunderstandings rather than big differences in commercial position or desired outcome.

If discussions do for some reason get heated (on either side of the table), one way to cool off is to ask for a “time out”. taking a break can permit the discussion to get back on track. Being able to diffuse such situations is a talent worth developing.

 

4. Listen and be open to alternatives

Listening is a learned skill. Hear their ideas, acknowledge them and think about them positively before launching into your solution.

broken telephone

It is easy to become impatient with those whose ideas seem opposed to yours. Develop the ability to shut up at the right time and let others talk.

There’s almost always more than one solution. Try to look at the problem, not just from your own position but also from the other side.

By doing this you not only acknowledge their viewpoint, but you have a better opportunity to find a solution that suits both sides.

 

5. Reflect on lessons learned

An aspect often overlooked is the tying up of the loose ends and the contract signing is necessary for a debriefing. Especially for strategic sourcing processes, it’s important to schedule a “lessons learned” session so that we can learn from the experience and avoid repeating any possible mistakes.

Going back to point 1: how much better prepared could you have been? What data or analysis could you have prepared? What do you want to remember when the contract is up for renegotiation?

reading a book

 

Make the most of that contract

A contract, with all its terms and fine print, is often the end result of a lot of work. Don’t let it become a forgotten document.

Do you have a central contract repository? Somewhere contracts are searchable and accessible for all the relevant people in your organization (especially if key people leave)? How will you follow up when the contract is up for renewal?

If you don’t have a unified way to track and manage contracts across your business, you may want to look into your options for one as you may be leaving value on the table.

Elaine Porteous

Elaine is a freelance Procurement and Supply Chain writer, accredited by CIPS and APMP, with over 20 years of industry experience.

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