Is a great deal a good idea?
It’s a silly question, right? If you succeed in negotiating a strong agreement which seems great for your organization and is better than you and your colleagues could ever have imagined, then you will, of course, be a ‘winner.’ Well, maybe just for the short term. Can you ever sign a deal that is simply too good? The answer is a resounding ‘yes.’
There can be many slippery slopes during negotiations, and maybe you’ve experienced them, but you don’t have to let them trip you up. If you follow the best practice tips I’ve suggested in this article, you could start achieving better outcomes for all parties. Your strategy will help you be a tough but fair negotiator in the eyes of buyers and suppliers. More importantly, your agreements will deliver what they are supposed to for all parties which, after all, should be the point of effective negotiating.
I am a better negotiator than you – wrong assumption!
Perhaps we tell ourselves we are good at negotiating. Commentators, colleagues, politicians, reporters and friends are all eager to describe how a contract should be negotiated and regale us with their wisdom. But what does a better deal really mean? I suspect too many negotiators assume that a great agreement is one that beats the other party for perceived weaknesses in negotiation skills. The implication is that a tough negotiation is one which provides an excellent outcome for ‘us’ and a poor outcome for ‘them’. But what will be the real payoff? Can the deal actually be too good, and could that be a trap?
Let’s ask the hard questions first
Why would a supplier ever sign an agreement that puts that supplier in a poor commercial position? Some of the most frequent mistakes include these:
- desperation on behalf of the bid or sales team to win or retain a contract;
- zeal to improve the bottom line (and often the top line as well);
- lack of due diligence and poor follow-up;
- misunderstanding the explicit or underlying commercial implications;
- being misled by the buyer;
- inexperienced staff;
- poor market knowledge…the list goes on.
The upshot is that the supplier, once backed into a corner, may become willing to sign up to very onerous terms either genuinely believing that the commercial deal works for their organization or believing they will find a way to make it work somehow. The ‘somehow’ might be a belief that they can make additional sales, do additional business, cut costs, cut quality, take longer and so on. To close the deal, suppliers may even be willing to guarantee or underwrite savings so that the buyer can have absolute confidence that their risks are reduced.
So, what can happen next if all goes well -- or not?
If all goes well if the supplier has a strong proposition and both parties are clear about the terms. It will not go well, however, if the supplier gets it wrong and cannot perform what their organization had hoped. According to the buyer, it’s the supplier’s problem, right? Any proficient commercial or contract manager might be empathetic in order to keep or develop a good relationship but will still force the supplier to meet its obligations.
In reality, if the supplier really cannot make it work then it is almost inevitable that things will get unpleasant.
The supplier may not deliver what you expected. Perhaps the failure to deliver is tied to a default which allows you to force the issue, or even terminate the contract, which might lead to your having a chance to resolve the situation in your favor.
Even if you can establish a default, you could face a long court battle, a service interruption, a re-procurement with the attendant costs, reputational damage, or people in your organization demanding disciplinary action against you or your colleagues. This could lead to the devastating impact a bad deal can have on supplier relationships -- particularly when the incident is part of complex, long term arrangements. The list of problems goes on…
Suppliers might claim that the failure of the deal is on you and your organization. What you once believed would be a great deal has now morphed into a “he said, she said” argument. This can go on for years, be very expensive and mean that neither party achieves what it wants and in fact all are now in a worse position than before the deal.
So, what can you do?
If you’re the buyer, signing a ‘bad’ agreement or becoming soft in negotiations and/or contract management is not the answer. Neither is it a good idea to punish the supplier and make it impossible for their organization to make a decent profit. If we are going to operate in tough commercial spaces, our job and responsibility is to get a strong outcome.
Best practices - Here are a few tips that will help buyers work better with sellers to avoid these sorts problems altogether:
- Seek a strong but fair agreement, do not seek to punish or pummel the supplier into submitting an offer which is terrible for them in the hope that it will somehow work out.
- If something seems too good to be true, it probably is, so be sure that you understand your supplier’s motives as much as possible for being willing to sign onto to the deal. Hoping a supplier’s organization will have to deliver product or service at any cost may be counterproductive if the contract does not allow the supplier to benefit in some way. However, a favorable approach for you as part of a wider arrangement -- and one which clearly benefits the supplier in other ways -- may place more risk on the supplier who may reasonably be expected to offer more for less return.
- Involve the right people in the negotiations. Although it may seem impressive to involve senior management, make sure that those with the knowledge and ability to identify issues and risks associated with the terms of the contract are actively and consistently involved, consulted and listened to, even if it makes arriving at a deal more challenging. You’ll be thankful for their time and input in the long run.
- Conversely, be sure to not give the supplier’s management team the impression they are working with junior level management. They will be less likely to offer the best deal possible if they feel that they are talking to junior staff and not being taken seriously and given sufficient respect. They may undermine the negotiations by trying to get their senior people to speak to your senior management, creating much confusion and risk through parallel and perhaps contradictory negotiations.
- Make sure all of the facts and data are available to the supplier to support their due diligence and keep records of what was provided and when. If you withhold key information, it will come back to haunt you later because the supplier will feel misled and may lose basic trust. This does not mean giving away your position or secrets. It means supplying reasonable information in a fair way so that the supplier can assess the situation and structure an offer. This approach lays the foundation for a strong commercial and contractual relationship which in turn could help all parties avoid recriminations later.
- Make the contractual obligations crystal clear and as watertight as possible. Discuss and resolve any areas of confusion as part of the negotiations and document everything in writing in accordance with any contractual requirements. Never fall into the trap of saying something like, “we all knew what it meant” and “X said it was fine in the negotiation.” When things get tough you must be able to point to, and assert, clear obligations if you expect the supplier to stand by their position and you to defend yours.
- Make sure people in your organization at all levels completelyunderstand, are committed to and will deliver on your obligations. Be aware that these deals often affect and depend on a cross section of the organization, and it is imperative that all stakeholders understand what is expected of them and how the mechanics of any negotiation will operate.
At the end of the day, no sensible supplier will allow you to get away with excuses like, “department X are a bit maverick” or “it was just a junior member of staff not understanding” or “X doesn’t like the deal or believes it is unfair.” Internal confusion or disagreement will only add to your problems and will also be sensed as a weakness by the supplier. From day one, your organization must understand and consistently deliver everything you have agreed to, especially if you want to avoid the dreaded “you signed up to it” being thrown back at you.
Results are up to you!
If you get it right, your hope of achieving what you want will materialize. You will reap a well-deserved reputation as a tough but fair negotiator among your colleagues in your organization and your external suppliers. More importantly, your contracts will deliver what they are supposed to for all parties which, after all, is the whole point of being a great negotiator.