Top Ten Tips for a Smooth Contract Renegotiation

SSON News and Analysis
Posted: 07/09/2012

No-one wants to have to go back to the table to renegotiate a contract with a supplier or provider - but then, nor does anyone want to be operating under the terms of a contract that’s not fit for purpose. Unfortunately life’s not perfect and every now and then there might be no other option but to reopen negotiations in the hope of getting a better deal for your organization. This has been particularly evident in recent times as adverse trading conditions put the squeeze on what may up to now have been very successful partnerships: deals done in the good times might well not be appropriate for your company when the climate takes a turn for the worse.

With this in mind, for all those of you who might now be heading back to the negotiating room to redraw agreements, SSON has compiled Top Ten Tips for a Smooth Contract Renegotiation, with experts from a number of the shared services and outsourcing space’s top advisory and legal firms giving their suggestions for how to get what you’re looking for with the minimum of fuss. Remember, you can send your own suggestions, or comments on this story, to the SSON editor.

1. Know what’s right for your business

It might seem nonsensical, but many people enter contract renegotiations without having a perfect idea of what the business needs to happen - rather, they know what they DON’T want (and that tends to be what’s occurred during the previous incarnation of the contract under discussion). It’s crucial that, long before the actual renegotiation process begins, all your negotiating team has a crystal-clear conception of what represents the optimal outcome in terms of the requirements of the business as a whole - not just your part of it. That means spending plenty of time with various elements of the organization in the run-up to the negotiations to find out exactly what they’re looking to achieve in future, and how you can help them.

"Be very clear about your business intentions," advises Mark Robinson, COO at EquaTerra. "Take the time to meet with your business leaders to understand their strategies for surviving these turbulent times. Synthesize their input and then translate those strategies into a set of goals and objectives you hope to achieve from your portfolio of service providers. Confirm those goals and objectives with your stakeholders. Now you have a list of carefully defined business outcomes you will be seeking through renegotiation."

2. Have clear rules of engagement

OK, so you want to get the very best for your business out of these negotiations - but that doesn’t mean you should resort to absolutely every tactic to keep your counterparts on the back foot. It’s negotiation, not mortal combat… It might go against the instincts of the more aggressive amongst us, but destabilizing the other party or parties could be seriously counter-productive - especially as you’re looking to work with these people again! With this in mind, make sure both sides agree to a tight framework for the negotiations - going to quite a granular level of specificity if required - before they begin, so everyone’s aware what’s supposed to happen, when.

"Before you start the re-negotiation process, set out and agree fair rules with your supplier," urges Jill Stabler, Managing Consultant, Alsbridge. "These should cover the number of people to be involved, the timeline for concluding (or calling off) the renegotiation and a charter of behaviors and principles to be applied throughout the process. A clear and disciplined approach for the renegotiation sessions themselves is essential, as is senior-level client and supplier decision-making participation to avoid delays. Renegotiation provides an invaluable second chance to start as you mean to go on, and forge a working partnership with your supplier which will set collaboration precedents to stand you in good stead for the rest of your working relationship should your renewal go ahead. Mistrust and tactical games on the other hand will only serve to delay or derail the process."

3. Make sure it’s worth everyone’s while

So you want to renegotiate - for whatever reason - but it takes two to tango, and if you’re looking for an improvement in terms from your perspective you must be aware that your counterpart needs some kind of carrot to go along with the stick. After all, they might be perfectly happy with the way things are now - and here you come along asking them to look at changing what to them is an excellent deal. You can be 100% certain that your opposite numbers will be scratching their heads and asking "What’s in it for us?" - so make sure you can supply the answer to that question, otherwise your attempts to wrangle more favorable terms will come crashing up against a wall of "Why bother?"…

"There needs to be an incentive for the supplier to renegotiate. If the contract is coming to an end, and the renegotiation arises out of the possibility of renewing the deal the benefit for the supplier is fairly clear. However, for a mid-term negotiation, the customer needs to create the incentive. It might be the threat of exercising the break clause, or it might be the possibility of awarding additional services. Either way, something needs to bring the supplier to the table," cautions Duncan Pithouse, partner at DLA Piper.

4. Bring the right people to the table

You know what you want, and you know how to get it - but do you know the people to get it for you? It’s crucial that you put together an appropriate team for the renegotiations - and that means taking a long-term view of what you want life to look like after a successful renegotiation period. Again, you’re looking to work with these guys - possible for many years - so bringing a clued-up, talented but abrasive member of your team to the talks might be rather counter-productive in the long-run. You also need to ensure that the composition of your team is representative of those wider business needs discussed above, rather than just looking at the requirements of your own sphere of influence.

"Assemble the right team," recommends EquaTerra’s Mark Robinson. "Experience shows it’s a mistake to attempt to renegotiate a contract using only the account team, service management and governance people on both sides. Although they must be involved, they are typically focused on near-term issues and actions. They lack the big-picture outlook - and executive presence - necessary to substantially renegotiate contracts. Pragmatically speaking, these teams also need to preserve an effective relationship so that they can work well together after the revised deal has been struck. Residual tensions from the negotiation can make that difficult. So make sure your service provider’s corporate staff is aware of your intention to renegotiate and is engaged in every step of the process. Also, identify and engage a corporate champion from your side to act as the focal point for your negotiating team."

5. Aim for success, plan for failure

Obviously - unless you’re involved in some weird Machiavellian scheme of your own, in which case, er, why are you reading this anyway? - you want these talks to succeed. However, just wanting it won’t make it happen, and you - and your opposite numbers - need to make plans for what to do in case the talks fail. This contract might be worth many millions of dollars and involve thousands of people’s jobs: going into renegotiations without a coherent understanding of what you’re going to do in the unfortunate event of an inability to come to an agreement is tempting catastrophe. Spell out in microscopic detail what needs to happen, and what each side’s responsibilities are, in the event of a breakdown in talks. You’ll need to keep working together for a while, at least, and you have to make sure the integrity of your current operation isn’t endangered while you look around for a new partner.

"Every negotiator should be prepared for the Best Alternative To Negotiated Agreement. Should the parties not be able to come to agreement, what happens? This should not be left to the last moment when agreement can not be reached. Also, by understanding the BATNA, both parties understand the floor and the ceiling boundaries," explains Steve Koutros, MD at Delta Management Advisors.

6. Understand the status quo

You’re unhappy with parts of your existing contract - and you know why - but you also need to be fully aware of all the other aspects of the deal when you head off to renegotiate it. Sure, it’s common sense, but it’s critical that everyone in your team understands all the ramifications of what’s already in play as well as what they want to put into play going forwards. For one thing, you may well find yourself in the position of being asked to make concessions in order to achieve your own goals: if you and your team aren’t fully aware of the consequences of making those concessions (and these consequences could be extreme and extremely complex) you shouldn’t be given the ability to make them.

"Know what the existing contract says - it's obviously important to have a detailed understanding of the current contract position, so the basis of what is being negotiated is understood and so that the relevant levers in the agreement can be pulled, to achieve the relevant objectives," says DLA Piper’s Duncan Pithouse.

7. Learn from your mistakes

It’s no accident that you’re looking to renegotiate: things haven’t worked out the way your business thought and hoped they would when the initial contract was signed. Everyone might have their own suggestions as to why this has happened - especially in such extraordinarily adverse economic conditions as we’ve seen recently - but the bottom line is that you need to make it work this time around, and in order to do that you need as full as possible an understanding of why things didn’t work out and where your own responsibilities lie. The fact is that it’s all very well blaming the economy, or any other factor, for your current troubles - but the original contract should have taken into account the possibility of these factors arising. Furthermore, the original contract should have facilitated a coming together of like minds in terms of both sides working together to solve their difficulties and resolve their differences. That this hasn’t happened is something you should think about long and hard, and work towards overcoming in this next iteration of the deal.

"Outsourcing contracts get into trouble for a reason," says Alsbridge’s Jill Stabler. "This can be for a myriad of reasons but among the most frequently cited is relationship breakdown. This in itself can have a number of causes: cultural incompatibility, mismatched expectations, commitments of process improvement and efficiency not being honored - and of course poor service. It is worth pausing a while to consider why your deal may be experiencing issues. In order to work, a contract must be above all sustainable. To create sustainability the client needs to recognize that whilst turning the thumbscrews on cost may seem attractive to the initial business case, successful outsourcing relies on building sustainable relationships with suppliers, not screwing out every last concession. In order to deliver a good quality service a deal has to be profitable for the supplier. Smart re-negotiators will seek to ensure the future outsourcing relationship will be underpinned by clear mutual benefit on both sides."

8. Your tone matters - a lot

As mentioned, the dangers of including the more abrasive, aggressive elements of your team in the negotiations are pretty evident - but nor do you want to come over as wilting, supine adversaries whom the other side can walk all over. Finding the right tone is essential, and that means being respectful to your counterparts, even - perhaps especially - if you feel that the responsibility for requiring a renegotiation in the first place lies mostly with them. It’s also important to back up a suitably professional tone with hard data, of course: your balanced approach will be all the more successful if you can demonstrate clearly and fully why you think things need to change.

"Present a solid, factual, respectful case," urges EquaTerra’s Mark Robinson. "Everyone knows things have changed, so your service providers are likely expecting your call. If you’ve done your homework you will have plenty of facts and figures to make your case. But remember, it’s not just what you say, but how you say it. Your opening statement will not only set the tone for negotiations, it could also influence the outcome. An effective approach sounds like this: ‘We’ve done a detailed review of your services and we believe we have a clearer picture, given recent changes in market conditions, of where we need to go. We’d like to sit down and discuss things.’ Signaling a willingness to cooperate puts everyone at ease and creates an environment that encourages dialogue."

9. Know your other options

To whom do you turn if these talks don’t work out? Do you have another potential partner waiting in the wings - or at least available for discussions? If you genuinely don’t, and are actually thoroughly bound to the original contract you’re trying to change, there’s always a danger that your opposite numbers might be aware of this - and in that case it’s pretty likely that your bluff will end up being called, to general embarrassment. It’s not about sitting at the table and hammering your counterparts with the names of all the other firms that are simply dying to pick up this contract; however, it’s imperative to understand where indeed you can go in the event of things getting bogged down inexorably (and it might not hurt to let your opposite numbers know - politely of course - that a couple of other parties are indeed willing and able to pick up the pieces - although of course you‘d rather not have to go down that route, you understand…).

"Have viable alternatives," cautions Alsbridge’s Jill Stabler. "There is little point in trying to engage an incumbent supplier in serious renegotiation if you are unable to demonstrate that you have some realistic alternative options. Failing to do this will undermine your negotiating position, making it impossible to get the best value out of the process. One of the most effective ways to do this is to engage with the competition. This does not necessarily have to be in the form of a full-blown formal RFP procurement process, but can be done in an accelerated collaborative way. Suppliers will be more than happy to workshop a client’s needs, to gage their ability to provide the solutions required which gives a good indication of feasibility of changing supplier. Detailed financial implication analysis can follow once this initial question has been answered, and a good advisory firm should be able to help you to put some robust costing estimates together relatively early in the process."

10. Don’t dawdle

A too-hastily negotiated contract might well be what’s brought you to this situation in the first place - but while it’s vital not to hurry matters excessively, it’s just as vital not to allow matters to get bogged down. Indeed, a sense of appropriate haste is often even more important when renegotiating a contract than when negotiating the original, as every day that goes by is another day of operations under terms which, for whatever reason, you want to change. Top lawyers and arbitrators might adore protracted, hideously expensive negotiations, but for everyone else they should be anathema - your job is to get a better deal, sure, but if the original’s expired by the time your renegotiations are concluded, the next contract you sign might be one of employment in your local fast-food outlet.

"Instill a sense of urgency," recommends EquaTerra’s Mark Robinson. "This is not a time for bluster or bluffing. After clearly communicating your objectives and attempting to find ‘the middle way’ to achieve those objectives, let your providers know that if certain actions are not taken by certain dates you are prepared to pursue alternatives. And mean it."

SSON News and Analysis
Posted: 07/09/2012

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