Contract negotiation is art and science that creates a win-win deal, a stronger supply chain, and a healthy partnership with suppliers.
Purchasing professionals often use aggressive strategies to get the upper hand on a supplier during contract negotiation. A win-win deal is an art form and a science.
Why Traditional Contract Negotiations Don’t Work
Vendors who walk away from a deal feeling dissatisfied and poorer for their efforts won’t be loyal, and they won’t care if your business succeeds. Likely, they’ll be doing everything they can to increase their revenue to make up for the losses incurred during the contract negotiation.
In that case, the business may end up spending more than usual with this supplier over the contract term, as they’ll charge you for anything and everything outside the contract or project scope.
Making concessions is part of the negotiation process. When you assume the supplier only wants to get the highest price from you, the relationship becomes soured and challenging because you go into it ready for a battle, to beat them down to the lowest price without considering or communicating with them. This kind of poor relationship with a supplier could affect quality, production, and other important areas in your total operating costs.
It’s important to remember that suppliers are people.They have goals and milestones to meet.
They probably have quotas and quality assurance issues to deal with as well. Traditional win-lose contract negotiations and outrageous concessions no longer working because we’re not treating each other with respect, understanding, and compassion.
Negotiating contracts requires good interpersonal skills. The old way doesn’t work because it deteriorates relationships. The new way builds them. That’s what makes it an art and a science.
The Art & Science of Contract Negotiations
Negotiating contracts is an art form because you must be creative and innovative. You get personal with the supplier and create a custom contract that defines a win-win deal for both of you.
It's a science because you use behavioral psychology and motivational interviewing to meet your high-value and high-TCO objectives while also making the supplier feel good about the agreement.
Combining art and science is simple. Contract negotiation is 80% preparation and all about the conversation:
Ask, don’t tell. Rather than saying, “I need net-30, lowest cost, and month-to-month,” try “Can you please submit two proposals? One for my exact request and one for what I should’ve requested. Great attention will be given to both responses.”
Break down some walls. Meet the supplier before you send an RFP/RFQ. Ask questions like “how would you define a successful partnership with my company?” Or “what do you need to be successful?” Don’t assume you know the reasons the supplier wants to work with you. It’s better to ask.
Offer choices, such as, “I can do net-10 or provide you with three public testimonials if you could cut the cost 5%.”
Practice active listening, which is when you listen to understand, not to respond. Use the words, “this is what I heard . . .” and then say almost exactly what they said was important to them. Then, explore further by asking what’s most important to them. What comes second? Third? Encourage them to be specific, such as when they expect to be paid and who owns the product during delivery.
When purchasing professionals leverage the supplier's personal goals, they find a totally transformed, cost-effective contract negotiation strategy that saves the company money and builds stronger relationships with multiple suppliers. This makes your supply chain more competitive, agile, and valuable.
How to Find Your Low TCO, High-Value Concessions
Example Concessionthe are suppliers matrix :
Perceived value with Supplier(Scale 1-5,5=High)
Total Cost impact to purchasing/customer(Scale 1-5,5=High)
Concession value (in rank order of impact)
Using Customer and firm same as reference for advertising
payment terms of net 10
Initial payment received at end of quarter, ahead of delivery.
Weekly forecast updates provided to supplier to optimize inventory requirements
Limitation of liability capped at contract value for direct damages
Ownership of new IP developments
To help you find the low-cost, high-value nuggets for win-win contract negotiation, start with the concession matrix. List the supplier's desires and rate them on a scale of 1-5, with one being low-value and five being high-value. Then, rate the purchaser’s cost value using a scale of 1-5, with one costing the company little and five being quite expensive. Then, subtract the supplier number from the purchaser number to get a concession value for that wish-list item.
Then, you look at those items with a concession number between 2 and 4 to see which desires you can meet.
Figuring out low-cost concessions can be tricky. Here are two examples:
Let’s say the supplier is trying to drum up business in a new market. You could offer public testimonials in exchange for a 5% price reduction.
The supplier is trying to gain traction in Google, significantly cutting administrative costs for their sales team. Offer to promote them on your website and social pages in exchange for a 10% discount. These are your owned channels, so it costs you nothing and gives them good SEO exposure.
The Bottom Line of the Win-Win
Somewhere along the line in contract negotiating, some have forgotten the most essential, life-affirming question of our existence: How can I serve?
When we serve, when we give, it boosts our confidence and improves our self-respect. It helps you build rapport with suppliers, who learn to trust and respect you as a person and the company as a client.
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