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Best Practice Negotiation

May 3, 2011

On the IACCM Learning site, a student has posed the following question:

“In practice, I have negotiated both the commercials and terms and conditions in parallel. However, in some cases where there is an absence of an RFP and terms and conditions are more complex, I believe that it is probably more advantageous to negotiate the terms first. Simply put, if we cannot get the terms and conditions met, the commercials become irrevelant. On the other hand, where there is flexibility on terms and conditions, this flexibility can be used as a good bargaining chip for exchange during negotiations. I welcome any thoughts regarding best practices in this area.”

The question reflects a common dilemma for negotiators, regarding the best sequence for planning and reaching a conclusion. This question reflects the view that ‘if we can’t agree on the fundamentals, what is the point of getting to the detail?’ But others might question ‘What are the fundamentals?’ – if we can’t get close on price and scope (‘the commercials’), then why would we want to talk about our underlying philosophies on things like risk allocation and payment terms?

It seems to me that there are multiple factors that might influence the relative sequence and prioritization of the negotiation. These include whether the parties are familiar with each other, whether the deal or transaction is a one-off, whether there are or will be a ‘master agreement’, whether there has already been significant validation of the supplier’s core capabilities to perform ……

But this question of how best to plan the negotiation is important and many times, organizations appear to get it wrong. So what hints or tips do you have regarding good practices?

  1. Robert Magee permalink

    In my experience terms and conditons are often second order factors in a major negotiations. That is not to say they are unimportant or that they are not a cause of failing to reach agreement) but the key for success is to focus initally on the key elements of the deal – the scope, the price, the timescales and the critical” must haves”(which may well include certain key terms and conditions). Once these have been identified and agreed in principle, then it makes sense to commence negotiation on the details.

  2. Stan Kablukov permalink

    We have the same approach in our company practice as Robert mentioned. Initially we would concentrate on scope, price, and timelines and once everything is agreed (conditionally of course) we talk about legal Ts & Cs. If there is a point of an impasse we seek advice from our Legal Department. In a tender we always negotiate with at least 2 companies so that we have Plan B in case Plan A fails.

  3. Peter permalink

    A price cannot be submitted in isolation of the riskiness of the deal. Is it business as usual?; have we done this before?; are third parties involved?; is there political risk?; currency risk?; etc etc. Risk register is order of the day.

    Payment profile/commercials should always follow this risk profile. There are exceptions, e.g. a strategy to penetrate a new market may necessitate more onerous risk absorption than business as usual.

    The risk profile is determined (amongst other things) by the acceptance (or otherwise) of certain of the t`s and c`s: e.g. ownership of IP; early termination; LAD`s; service credits; indemnities; liability > x.

    It follows then that commercials are submitted (non-binding) with assumptions made carved out so as to how the future contract should look. If those assumptions vary in time, then the price would vary accordingly. To sum, commercials are based on risk subject to agreement downstream, if no agreement then no contract. More usual is contract but with price fluctuation.

  4. 1. I’ve long thought vendors should offer a canned, “premium” set of T&Cs with all the usual concessions they’d eventually make to get a deal — but make it clear that it comes at a premium price, e.g., it’s reserved for deals of at least X dollars / pounds / euros in size. (The advantage is that if the customer demands the premium T&Cs, the negotiation becomes about money, not about the T&Cs themselves.)

    2. In a similar vein, when I was in-house at a publicly-traded software vendor, I once forced a customer’s junior outside counsel to back off of the extensive changes he’d requested in our very customer-friendly T&C. I said I knew I wouldn’t be able to convince him he didn’t need his changes. So, I said, I was going to give him everything he’d asked for (save for one deal-killing change).

    But, I said, there was a catch: The business people had already agreed to pricing. That pricing was predicated on using our standard T&Cs. I was the gatekeeper for T&C “pricing.” Then I said the price would be X, where X was 40% more than the business people had agreed to. (Of course I’d cleared this tactic in advance with our sales execs.)

    The customer’s junior outside counsel was outraged. He’d never heard of such a thing. I said, you don’t understand, you win; I’m giving you almost everything you asked for.

    The customer’s procurement person spoke up. (I suspect our sales guy had tipped him off.) He said, why don’t we go offline and discuss this. We agreed. A few hours later, our sales guy let me know that the customer had withdrawn all their requests for changes, and the deal went through on the previously-agreed pricing.

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