Using Strategic Sourcing to Improve Contract Negotiations

Knowledge is power, especially when it comes to contract negotiation. When your company begins negotiating a contract, you need to analyze everything. That may sound a bit hyperbolic, and perhaps it is, but when you’re in business, it does you little good to be surprised when you go into a contract negotiation. Before you award a contract, you will want to analyze the market at large, the specific spending habits of your own company, and the spending habits of any company you intend to do business with.

The Market at Large

Analyzing the market at large is a simple strategy, but it’s a productive one. Ask yourself general questions first, and then whittle it down to specifics. What forces are driving the market that your company is involved in? What forces are driving the market of your employer?

Those two questions are related, but the answers are rarely identical. Your company goals and direction may have little to do with a supplier’s goals and direction, so you need to understand both sides of the coin. Otherwise, your negotiation strategy will be limited to simply what your company needs. You lose versatility by not understanding the driving market forces for a supplier.

Your Own Business

It’s typically easiest to analyze your own company’s needs first. You need to understand who your main stake holders are, what’s important to them, and what the overall goal is for the company.

For example, let us suppose your company deals with scientific research. You want to make a purchase for laboratory supplies. Ask yourself the following questions: who will be affected by this purchase? What is important to them? If your key stakeholders are the scientists themselves, then are they more concerned with timely delivery, or bulk purchasing? Understanding your own company goals can make a big difference in how your company handles contract procurement.

Next, take a look at your company’s historical spend data. Understand the purchases that you’ve made in the past. How could those purchases have been improved? What areas of the purchase would you do differently in order to maximize cost efficiency? Could compliance have been managed better?  Asking questions like this will give you a good idea of how our company has typically handled negotiations, and it gives you an even better idea of how to handle them going forward.

The Supplier’s Business

It’s a safe bet that a supplier will have historical spend data for your business before they do business with you. You should be armed with specific data for their company as well. Delivery methods, historical spend data, customer satisfaction ratings, and anything else you can find out about a supplier will empower you in a negotiation situation. It will give you a base from which to work, and from there you can begin to negotiate potential rebates, group sales rates, future contracts, etc.

Find out what is important to the potential supplier. If their goals are incompatible with your own, or they are asking too much, then there will always be another supplier. This is the reason that we do analytics in the first place. Remember that you aren’t limited to a single supplier, and that you can always find another vendor. Be strategic in who you select as a supplier.

Use the Right Tactic

Going into a negotiation, and knowing what you know about the company or individual that you intend to draft a contract with, you will want to decide which style of negotiation to use. There are five or so typical tactics:

  • Competition
  • Collaboration
  • Compromise
  • Accommodation
  • Avoidance

Not all of these are equally useful in the business world, but it would be wise for your company to be flexible in your contract negotiation style. For example, with a supplier whose products are the only ones that your company can use, you may need to accommodate their asking price. This does not mean, however, that you shouldn’t try to lower that price, or ask for rebates or discounts. It simply means that your company may not be able to simply walk away from the table.

In general, however, there is more than one supplier that can meet your needs. You may need to play hard ball. You may need to be willing to find another manufacturer, if the current asking price is too high and the company you’re negotiating with simply won’t compromise or collaborate with you. You will need to decide which tactic to use based on your research of the company in question.

Control the First Draft

Although being the one to write the first draft on a contract may raise your legal fees, it will likely save you money in the long run. When you control the first draft, it allows you to set the initial asking price. When you set the initial price, set it lower than what you are actually willing to pay, but don’t necessarily let on to the other party that this is your intention. This allows some wiggle room for you during the negotiations. The price can climb comfortable for a while, because it is still within the realistic limits of what you are willing to pay.

Alongside this, include in the contract a list of anything you could possibly attain from the other company from the outset. If they agree to your terms, then you’ve just won a fantastic contract. If not, then there is a long list of unnecessary items that you can eliminate from the contract to look like “the good guy” who is willing to compromise. This will help you seem like a reasonable person when you start to make compromises, especially if you do so willingly. Don’t be extravagant in your asking price or initial terms, but don’t be timid either.

If you need help drafting a contract, or storing your current contracts, one of the best places to get help with this is at Concord. Their services will help you draft and negotiate the terms of your contract with ease.

Maintain the Relationship

Negotiations do not have to get ugly. In fact, the more pleasant the negotiations, the more successful your company will be in getting return customers. Remember that the person across the table from you has feelings, too, and they are also looking for the best deal for their company. They want to negotiate properly and be able to distribute their products, too.

What this means for you is that you should never descend to do anything that would damage that relationship. Be open, honest, and kind during the negotiation process. Help their company out, even while you’re helping your own. Make some compromises and concessions that will help them see you as a profitable business partner. The better your relationship with your vendors, the better your sourcing experience will be.

Centralize Your Contract Storage

If you ever hope to be able to consistently analyze your contracts, especially dated contracts that can be easily lost, then you will want to find a way to organize and store them in a location where your team can easily access and analyze them.

Perhaps the best place to store contracts is in a cloud-based contract management system, such as Concord. It’s an easy to use system that allows you not only to store your contracts, but to track their usage, deadlines, and to reuse contracts later. You can draft new contracts, store them, negotiate their terms, and edit them all online. When you’ve finished with that, you can sign them electronically, which will save you a lot of time, and save your partners time as well.

This also means that you have a good way to follow up on the contracts while the terms are being carried out. Using a cloud-based repository will allow you to get email alerts when deadlines approach, summarize key terms for you, and help you review the contract whenever and wherever you please.

For future contracts, rather than drafting an entirely new contract, you can always recycle an old one, altering only what you need to, and sign it electronically to save time. This is just one way to maximize your sourcing strategy.

Analyze the Terms of the Contract

When you are coming up on another opportunity to buy, analyze the contract that you signed for the benefits and drawbacks. Consider the total cost of ownership that was implied in the contract, and decide whether or not that cost was worth the product. If it is, then maybe you scored a good deal. If not, then what would you do differently? What would you ask for next time? Is the supplier that you purchased from willing to meet those terms, or do you need to negotiate a deal with a new supplier?

Consider, too, how your deal affected your supplier. Did they lose money on the deal? Are they likely to do business with you again? If your contract cost the supplier more than they were willing to give, then maybe you need to lighten up your approach to maintain good relationships. Only your team will really know what needs to happen going forward, but be sure that you ask yourselves these critical questions to determine if the contract should be renewed, or awarded to a different party.

Maintain Supplier Relationships

After you’ve made the purchase and fulfilled the contract, you need to be sure that you treat your business partner with respect and dignity. You’ve done everything that you could during the negotiation process to foster a healthy relationship, but now you need to maintain that relationship. Be sure to make delivery dates, and do good business.

If you liked their services, recommend them to others. This helps them be more generous with you, because they trust you and know that you’re good for business because you bring them customers. This is, of course, only one example, though there are numerous others. Whatever you do, be sure that you maintain the good will that you have built with this company because it could lead to more lucrative business deals for both companies in the future. That’s really the point of strategic sourcing, isn’t it? Making sure that your company gets the best deals for the best price.

 

To learn more, fill out the form on this page to chat with one of our contract management specialists, or call us at 844-693-7446.