A Guide to Contract Negotiation
Written by Julian Canlas
Want to be an expert in negotiating on your contract terms? Contract negotiation is the process of coming to an agreement on a specific set of terms between two or more parties. This includes the obligations each party must fulfil once agreed in writing and signed.
It can be tempting to rush through the contract negotiation process, file the document away quickly and let it run its course. However, the best negotiators tend to pay a great deal of attention to the details.
In this week’s post, we will be sharing some contract negotiation strategies and challenges.
Objectives Of Contract Negotiation
Contract negotiations are generally platforms for parties to evaluate the contract. Additionally, here are some other objectives of contract negotiations:
- Explain and define the goods/services to be provided.
- Achieve certainty of the contracting party’s ability to deliver.
- Seek the best deal.
- Clearly state the compensation involved (Total cost, financing terms, payment frequency, etc.)
- Acknowledge and re discuss key deadlines (Completion, milestones, termination, renewal, etc.)
- Conduct risk identification and assessment of potential liabilities.
- Opportunity to set expectations for the contractual relationship.
Importance Of Negotiation In Business Communication and Writing Contracts
Negotiation holds the key to getting ahead in the workplace, resolving conflicts, and creating value in contracts. When disputes arise in business relationships, it’s easy to avoid conflict to save the relationship.
If a business negotiator does not devote enough attention to ensure that a contract negotiation leads to a sound long-term deal, one can forecast broken contracts, damaged relationships, and lawsuits. These are usually associated with poor contract writing due to the neglected negotiation process.
One prevalent example is labour contracts. Labor relation contracts need to specify clear and mutually agreed upon notions of what the employee’s salary and benefits package would include. However, a labour contract negotiation does not stop there. Compensation is not the only aspect in a labour contract, but consider also, working conditions, safety concerns, worker rights, etc.
Challenges Associated With Contract Negotiation
Contract negotiation is the most important part of the contract lifecycle. A poor contract negotiation will materially impact a business’s bottom line and burden the company with taxing and expensive legal obligations for a long time. Poorly defined terms cause delays that can negatively affect a business.
Another issue is that there are lots of back-and-forth to keep track of. Both sides continuously offer different concessions, remove or modify contract clauses and communicate across different platforms (in-person, phone calls, emails), until a consensus is formed. This can lead to confusion amongst employees if versions are not updated accordingly.
Lastly, it is also logistically challenging for cross-functional teams due to the large amount of coordination required.
Stages Of Contract Negotiation
1. Preparation – Assembling Teams And Focal Points
In this phase, conducting adequate research and obtaining information is key. In a negotiation, the party with the most information automatically starts with the upper hand. Information such as relevant contract laws, industry standards, job requirements, etc. should be prepared beforehand.
At the same time, you need to assemble a negotiation team, depending on what you’re negotiating. The teams may look like this:
- Procurement – Responsible for the negotiation strategy, request for proposal drafting and pricing checklist.
- Legal – Contract formulation and review, setting legal terms and requirements, setting terms and conditions and reviewing the overall contract.
- Business needs – Defining deliverables, process performance, setting requirements and creating standards and milestones.
- Finance and accounting – Budget, total acquisition cost, total cost of ownership analysis and budgeting.
- Vendor management – Implementing performance standards and managing relationships with vendors.
- Cybersecurity – Data privacy, GDPR compliance, regulatory compliance and so on.
The list is non-exhaustive, and in small companies, the same members may take on the responsibilities of many different functions.
List your priorities in order of importance and prepare alternatives for each priority. Within this list, note down which are the points you must have, so you know that during the negotiation, you will make it your priority to obtain this term. Also, set a bottom line in which you will reject the contract.
Additionally, it would be great to have a rough timeline of the project planned out, that you can present during the negotiation. This helps with the discussion of important deadlines.
2. Discussion – Uncover Vendor Motives
Drive the discussion in your favour by taking control of the negotiation in aspects such as time, location, pace, which may be easily overlooked. Adopt an overall positive tone in the negotiation and point out or emphasize any parts of the negotiation that you strongly resonate with.
The vendor will ask about your budget and may attempt to upsell you under the promise of better results. You must ask the vendor about their motivations in taking this relationship with you, especially for enterprise deals. To uncover their motivations, you may want to ask questions (or do your own research), such as:
- When does your fiscal year end? Vendors are typically more aggressive at the end of their period to reach sales targets.
- How big is your team?
- Can your team handle an influx of demand?
- How are you, as a salesperson, compensated for this contract?
- What’s the size of most of your clients?
- Is our deal bigger than your average client?
- What level of support can we expect?
3. Goal Clarification – Use A Checklist
Finally, create a checklist on the services and deliverables you expect to get from the vendor. For example, the checklist could include key items on:
- Total pricing
- Total cost of the contract
- Support costs
- License fees
- Maintenance fees
- Onboarding costs
- Services and offerings
- Minimum deliverables
- Terms and conditions
Support your points with facts and not feelings. This translates into avoiding terms such as “I feel that…” or “I think…”. Focus on the deal and get your points across directly. Don’t beat about the bush then come to your main point so the other party does not misunderstand what you are trying to communicate.
It is good to summarise all the key points presented during the negotiation and clarify once more all the terms that all parties have agreed upon throughout the session. Also reiterate any points that need to be looked into further and brought up in the next session if a conclusion or consensus has yet to be reached.
Contract Negotiation Strategies
1. Take your time and don’t overshare.
There is no need to hurry through a negotiation, so don’t rush into an agreement or rush to appease the other party. There is also a common misunderstanding that you need to share as much information as you can.
Rather, sharing too much information will leave you vulnerable in a negotiation. Try to find out more about the other party, because when you know their limits, it is easier for you to make a concession.
2. Research contract laws and seek legal help where needed.
It is especially important to know your rights and entitlements before the contract negotiation. You don’t want to be taken advantage of by the contracting party. If you are unsure of any legal issues, there are always plenty of resources available. Alternatively, you can seek help from legal professionals on issues relating to business or contract law.
3. Don’t make the first concession and be stingy to leave room for negotiation.
Being the first party to make a major concession could signal to others that they should raise their expectations. Hold your horses and test the waters first. Find out how strong the other party’s position is before proceeding further.
In negotiations, there is a general rule, which is to leave room to bargain when you open the discussion and give in slowly as you move towards an agreement. Your opening offer should always be higher than what you expect to get.
4. Things might not be what they appear to be. Be skeptical and don’t say “yes” too quickly.
Other parties may be withholding important information that you don’t know. The information provided may not always be complete. For example, parties will not openly reveal their budget for a project to you. You’ll need to probe further to find out their limits.
Do your due diligence on the party you are negotiating with and on the terms proposed. Don’t say yes too quickly! Phrases such as “I’ll have to run the numbers and see if this works for us.” or “I’ll need to discuss this with my partner and get back to you.” can be used to stall for time.
5. Create alternatives.
Have you considered your next best choice if this negotiation breaks down? A contract negotiation exists for you to find out if this partnership is going to work out in the long run. In the event that you decide this partner is not suitable, have you shortlisted any others? Are there any other services that you can engage in?
6. “I’m only asking for what’s fair and expected in the industry.”
This has been considered one of the most effective negotiation techniques. A party simply emphasizes that their requests are in line with industry standards, and ought to be expected. Of course, you will need the relevant statistics and evidence to support your point.
7. What are your top priorities?
It is a given that your contract negotiation will focus on revenues and risks involved with the project. Some are more important than others. When you know what your top priorities are, it helps you to keep your eyes on the prize and avoid being carried away by issues that are not as seemingly important to you.
8. Dealing with burnouts and ultimatums
Some contracting parties may resort to threats such as “Agree to these terms or there’s no deal!”. When situations like these occur, remain calm and you need to decide what the underlying deal is really worth to you.
Is it valuable enough for you to accept the other party’s ultimatum or put up with the endless haggling?
Otherwise, walk away from the negotiation. If the contracting party desperately wants to deal with you, they are likely to re-evaluate their strategy and tactics. Hence, the importance of having alternatives available.
Features To Look Out For In A Contract Negotiation Tool
You need to choose a contract negotiation tool that can complement your contract management platform. There are many options in the market but what should you look out for?
Ability to track contract negotiation status.
A tool that allows you to track all contract negotiation statuses and owners of each contract negotiation task across the business is very helpful. This tool should be able to indicate to you where each contact’s completion progress, and whether your team is facing any problems throughout the process.
Intuitive and friendly user interface
Prioritize the ease of using the interface versus the fancy features offered in consideration of your less tech-savvy employees. Many contract negotiation tools are often so difficult to use that end-users resort to directly contacting their legal team rather than operating through the software.
With the ability to sign electronically through tools like DocuSign, there is no more need for countless emails chasing after the related stakeholders for their signatures. Not only will this reduce your contract approval lag time, but also improve the efficiency of your workflows.
Digitizing Your Contract Management Processes
After you’re done with negotiating on your contract terms, it’s time to find the right management platform for you to store and manage your contracts. Here are some things to keep in mind.
Legal teams that lack a central system for contract tracking often spend the majority of their time piecing together contract edits and tracking down the most recent versions of contracts. This decentralization also exposes the company to additional risks.
With a centralized platform such as Contract Hound, contracts can be updated and edited in one location. All employees can retrieve the latest version of the contract, minimising miscommunications.
Ease of use
Companies want software that is built for non-technical users so that they don’t need to spend additional resources sending employees for training to onboard new technology. Fortunately, new legal technologies today allow for a high degree of configurability and control while maintaining a user-friendly interface.
For example, with Contract Hound, employees can easily comment on contractual documents or chat within the application. Employees no longer need to send out mass emails with attachments as colleagues can now be tagged in the chats on Contract Hound.
Enterprise grade security
Contract management tools these days allow great flexibility, giving employees various options for editing and commenting securely. No company wants their confidential information to leak out.
With Contract Hound, whether your company has tens, hundreds or even thousands of contracts, you and your team will know who exactly has access to each document. Owners can also set permissions and delegate access to employees such that not everyone can edit.
Store, manage, and view your contractual documents in one secure platform with Contract Hound!
Interested in learning how Contract Hound enables more efficient contract management workflows for companies like Journey Holdings and Digital Hill? Find out more on Contract Hound where we bring you through how you can simplify your contract management processes.
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