Negotiating results-based contracts 101
Learn how to negotiate better contracts and create a real impact for your business.
Much of the contract negotiation advice out there focuses on at-the-table tactics and counter-tactics. While such advice may have its place, what you do before you enter the room is what really matters. The most influential factors to any contract negotiation are in motion before a meeting ever takes place.
Omid Ghamami, CPSCM™, noted procurement author/speaker/consultant and CEO of the Procurement and Supply Chain Management (PSCM) Institute, has helped us put together tips for effective contract negotiation that will actually make an impact.
Keep reading to learn what you can do to negotiate contracts with your suppliers that create a real impact for your business.
Include Performance Outcomes
Many contracts are written to be inviting and enticing, with legal considerations in mind, but they miss the bigger picture. Contracts written this way will lead to a cascade of minor issues you’ll deal with in the future.
Chances are, your team is probably spending far too much of your time sorting out issues that arrive in “action-required” emails that never would have happened with a better contract.
So what do you include in your contract to avoid these mistakes? Performance outcomes. It’s easy to zero in on acquiring goods and services and forget about performance results, but you’ll do so at your own cost.
Think of a haircut, for example. If you go into your hairdresser and ask for your hair cut shorter on the sides, you’ll undoubtedly get a haircut, but you may not get the one you wanted. The service was completed, but the performance result was a variable you didn’t plan for. Of course, drawing up a contract for your barber may not make sense, but imagine you did. Imagine that you outlined precisely what you wanted from the barber beforehand– in writing. It may seem like a hassle, but you’d be guaranteed the desired haircut or your money back. And you’d save yourself the trip to another barber trying to fix a poor result.
The difference is between what you want to buy and what you want to achieve. Always craft your contracts around what you want to achieve.
More likely than not, your current contract templates are all based on an agreement for goods and services. There’s probably no trace of a performance provision. But you can easily bridge that gap with your suppliers between what they provide (the actual goods and services) and your end goal (the performance result) with proper planning.
Don’t make the mistake of thinking this through after the supplier already has your money. If you go to them with issues after you’ve already footed the bill, you’ll quickly find that they aren’t obligated to change a thing because, by all accounts, they’ve upheld their side of the contract. These provisions have to be part of the negotiation that takes place before.
Learn from your mistakes
Okay, you’ve planned, negotiated, and included performance results in your contracts. Something goes wrong. It’s not the end of the world, but you can stop it from happening again by new contract provisions for the renewal.
In other words: never get burned by the same issue twice. When you see an issue arise– write the solution into every contract where that issue could reoccur. You’ll be amazed at the time you find in your team’s schedule as you do this.
Another issue frequently arising in supplier contracts is disagreements over what the contract actually says.
There are too many words and phrases in the English language that don’t have a perfect or scientific meaning. Say you’re hiring a lawn mower, and tell them you want your lawn mowed smoothly. Well, “smoothly” could mean many different things. Maybe based on other lawn mowing jobs they’ve done, the company does mow your lawn “smoothly,” but to your eyes, looking over at your neighbor’s ruler-straight lawn, it doesn’t seem smooth at all. You should have defined precisely what you meant.
What’s the definition of good? On-time delivery? What is the definition of customer satisfaction? Best efforts? There are a million performance terms with no concrete definition that you’ll need to break down in your supplier contracts.
Say you lay out everything perfectly in your contract. The supplier has outlined what you need with performance results and clear definitions. You may not have time or resources to find another supplier in need. You better hope you’ve included predefined remedies.
A predefined remedy is something you have outlined in your contract that needs to happen to make up the difference when outcomes aren’t achieved. If you don’t include these, you may be out of luck. Outline exactly what will happen when certain requirements aren’t met and how the supplier can make up that difference.
Payment to performance
The final step is to tie your payment schedule to performance. Too often, a payment schedule centers around activity milestones rather than performance results. However, those milestones don’t always guarantee you’ll see the needed outcomes. So, keep your bargaining chip in your hand until you see the desired results.
Only hand over your payment when the outlined performance outcomes have been achieved (outlined and defined, as explained above). Ensure your contract includes that your payment schedule and terms will be tied to those outcomes.
The most essential part of contract negotiation isn’t anything you’ve read in a negotiation book. It has nothing to do with at-the-table tactics but with preparation and knowledge of both parties’ needs.
When you come to the table prepared, you’ll find greater success in creating contracts that benefit everyone– but you’ll also see greater success down the line as the supplier relationship continues.
No one can bring the same insight that the procurement team can into performance outcomes, remedies, and what that needs to look like for the contract to be successful. It’s your job to do your research and come ready to craft a contract that will drive success for your business far into the future.
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