Five Tips for Contract Negotiation...

It is probably true that everybody in business is frequently negotiating. We negotiate with colleagues in the same team. There is negotiation between departments. Managers negotiate with other managers and their teams. Often negotiation is an informal, unconscious process, part of everyday communication.

Contract negotiation is more specific - negotiating in the context of selling to new customers, renewing contracts with existing customers. So contract negotiation is only relevant for people in the sales role? Not exactly. Whilst the words may be different, for example - business acquisition, clients - lawyers, accountants, business consultants are involved in selling their services. So selling is not restricted to people with a "salesperson" label.

Regardless of the market and the terms used, the negotiation phase is part of getting business. All of us involved in securing business for the organisation will be familiar with these phrases...

"Your competitors are quoting us a keener price"

"You are to expensive"

"Some of the prices we have been given are more competitive".

"I am under pressure to reduce costs"

"We are being offered a better proposition by someone else"

Different words, different phrases, but all amounting to the same thing - your customer, or client is sending the signal that if you want to secure or retain the business you will have to negotiate.

In today's climate the pressure to negotiate is high. We may not be in a classic recession, but in many businesses earnings are down, budgets are being cut, there is an overall feeling of caution. This is the customer's perspective. From the seller's perspective there is a pressure to secure business, to retain market share, to meet the sales targets.

The example phrases above are all price related. Of course, negotiation is not always about price, but it is usually there somewhere! What is the trap that the person in the selling role can fall into? The assumption that to get the business the price will need to be reduced - this is the only way to get the buyer to buy.

The result may be that prices will need to be reduced, but we should not go straight to that conclusion. Here are some tips that will enable you to approach the negotiation phase with confidence, to minimise the margin implications, and to move away from a totally focused price discussion.

(1) Do not assume that you have to move into a negotiation phase

This may seem to be an odd first tip for negotiation! Let me explain. If a potential or existing customer says "your prices / fees are too expensive", what are they actually saying? They could mean that they do not see that they are getting value, that they believe that they can get better value elsewhere. This may be a perception, or it may be fact.

Your first step should be to demonstrate the value of your product or service - show the customer what they are getting for their money, highlighting wherever possible the positive factors of your offering compared to an alternative they have. In effect this is converting a price concern into a value argument, and is not about negotiation. If the value argument is not accepted then you may have to move to the negotiation stage. But do not go there immediately.

(2) If you have to negotiate do not focus exclusively on price

Consider of all the other variables that you can bring into the negotiation that can deliver extra value to the customer, and that will cost you less than reducing price. If you reduce the price by £1000, the value to the customer is exactly the same as the cost to you. If you agreed to give an element of additional service that delivers £1000 of value to the customer at a cost, say, to you of £500, you have minimised the impact on you and your business. Where possible meet price reduction demands by introducing other variables.

(3) Know how far you can go

You know what your best outcome is - that the customer accepts your original proposition. If you agree to negotiate you are acknowledging that the result will be accepting less. Be clear what the minimum acceptable agreement is for you, and be prepared to resist going beyond it. This is your fallback. The area between your optimum and fallback is a spectrum. The closer you stay to your optimum the better. Know your fallback, and move towards it in stages. Going from optimum to fall back in one move leaves you exposed.

(4) Make sure you know all of the issues the customer wants to discuss before you reach an agreement on any one point

There may be linkages between the points and every concession you make represents a cost. Working on a point by point basis does not enable you to assess the overall impact and how the negotiated agreement will look in terms of it's attractiveness and viability for you. Get the big picture before you go into detail.

(5) Approach negotiation as an exchange and not a giving exercise

Wherever possible exchange concessions do not give concessions. Remember, every time you give there is a cost. Your objective should be to retain the value of the contract by balancing costs and values via the trading process. Consider what the customer can agree to that represents high value to you, and low cost to them. Negotiation is a two way, not one way process.

This brief article has given some insights into how to approach contract negotiation. In the follow on article in the next "People Development News" we will give some tips on how to manage the negotiation meeting itself.

If you would like to discuss the training we offer in contract negotiation, contact us today for an initial chat on 01435 865 711 or at info@hrteam.co.uk