Negotiating a Contract is often a major challenge in the area of Procurement, because of the complexity of the contract documentation, different stakeholders which need to be involved within the process and the duration when this needs to be executed, often in a 2 week time span.
As a Service & IT Procurement Specialist I have often been confronted with these challenges all-in-one, meaning having to manage these challenges at the same time during the contract management process.
Here is the overall PCM Process which I provided in a new coming training course on how to set-up a contract with IT Spend:
We are specifically going to look at the Communication Phase which has to do with Negotiating the Contract with the Vendors. Here you should have already done the following:
1.The Scope has been defined together with your Internal Buyers and you have also included the the timeframe how long the Services or Products should be obtained from the Vendor.
- A Contract Template has been gathered with your Legal department, in terms of Amendments, SLA Terms and a Layout of a Frame Contract, which will be more closely looked at in the Tutorial on how to Implement a professional PCM Process in a Corporation.
- Prepared timelines to discuss and negotiate the Terms with the Vendors and have prepared to all technical know-how which is needed in order to professionally take part in the negotiation as a Procurement Professional.
Coming to the contract negotiation, you should always do the following upfront in order to prepare properly:
1.Learn about position of the Vendor: besides having a technical basic know-how, also learn the financial situation of the company and how much business has been done with this Vendor in your Corporation. Here you will know how dependent the Vendor is with your Corporation.
For example, I had a negoatiation a couple of years ago and the CEO of the company said that it was the worst year in terms of revenue in that year we negotiated the contract and I pulled out a newspaper article that showed that the Vendor has the highest planned revenue in the upcoming year.
So on one side, this was a quite offensive negotiation tactic from both sides. But we will cover this on tactics in negotation later on in this blog.
Therefore, a rise in price just because the Vendor believes that the prices should be raised, is not an approach which is professional. On the other hand, if the prices from the Vendor raw material producers are being raised and layed over to the Vendor, this is a more understandable reason which prices are being increased in this year.
2.Set the aims and tactics: together with your Internal Buyers, make sure that you clear the roles upfront. Often the roles are being cleared of the Internal Buyers with the Vendors directly. This gives you a sign that you have not yet received the trust as a procurement department. Therefore, gain the trust from your Internal Buyers and work together out how you will achieve your aims in the negotiation. These aims can be the following:
-Decrease the TCO Costs of the IT Software for the upcoming 3 years by replacing a inhouse support with an external premium vendor support
-Decrease price per item of office material like office tables by purchasing a higher sum and falling under another price scaling in the upcoming year
-Reducing the % company lease payment with the Vendor in the next 5 years, as monthly lease prices are not competitive and 2-3 other Vendors are providing enhanced conditions.
These are three aims which could be examples and are able to set in negotation as aims with your Internal Buyers. Each aim has another tactic, here it is important to not only think tactical but also strategic.
- Think long-term strategic and not only tactical, especially with long-term Vendors: This means that you should also be able to evaluate what your Vendor’s Performance is. This you will probably have already done when looking in -depth at the positioning of the Vendor. If a Vendor has just arrived in the company and has been perhaps blacklisted, here have a look at a link on the topic: What is a Backlist Vendor – the Blog , you should be able to communicate in an open and stakeholder aligned manner that you have other Vendors which will replace the Blacklisted Vendor if the performance will not rise in the upcoming year and therefore a Contract of 6 months can be installed, as your strategy will be to set-up a dual-sourcing strategy of another Vendor to compete in the category to receive best-performance will be implemented.
Looking now at the contract negotation and the implementation, make sure that you integrate what you have done in the preperation phase of the contract negotiation.
As they say, “plan the play and play the plan”. This will give you a professional position in this contract negotiation process and you will have the process under control. This gives you as a Procurement Professional the leader in process and give you the credibility within the Corporation.