Tips to manage vendor contract negotiation  

by Adarsh Raj Bhatt in
people sitting down near table with assorted laptop computers

Image credit: Unsplash

Key Takeaways

  • When it comes to managing vendors, there are six important areas where you should concentrate your efforts. You should evaluate your position properly, recognize what the other party desires, be straightforward in your communication, develop genuine empathy, build personal relationships when possible and avoid burnout while negotiating.
  • Collaboration is essential. If you've reached the point where you're proactively negotiating with a vendor, both sides feel there's a good deal to be made and an advantage to be obtained. Having a positive attitude will go a long way toward ensuring the negotiation's success.
  • It's important to make sure the contract is "mutually acceptable." It's pointless to make a vendor accept conditions that are considerably worse than what they would normally accept. This can create animosity and a lack of enthusiasm over time, perhaps leading to contract violations somewhere down the line.
  • While there may be financial consequences for prolonging the negotiation process, they should be evaluated against the possibility of not getting what you want from a particular vendor. In general, the recommendation is to avoid entering into a sub-optimal agreement just because finding a better alternative would take more time and headspace.
  • During the negotiation process, you should evaluate your vendor, their market, and how the present economy has impacted their operations. 
  • Secondly, be flexible about what works for you as most discussions will not end with both parties receiving precisely what they want, so be willing to compromise. 
  • Thirdly, you should be honest and transparent because when you're not open and upfront during negotiations, you're doing yourself, your company and your vendor partnerships an injustice. 
  • Lastly, don’t let failure get to you. Instead, maintain your presence on the vendor’s radar and keep an eye out for future possibilities or contact them again when you're in a better position to meet their criteria.

Vendor Negotiation: The Basics

Negotiating a contract with a vendor could take months of planning -- or even longer -- to iron out the specifics, depending on the scale of the contract. You'll go through the processes of drafting and establishing a mutually acceptable deal with a vendor during vendor contract negotiation. Interacting with contacts, outlining requirements, clarifying your demands and restrictions, and, ultimately, the actual negotiating are all part of this process.

Depending on how they go, negotiations surrounding contractual agreements could either squander or save thousands of dollars (if not more) on major projects. When negotiating a vendor contract, keep these three factors in mind, especially if you're inexperienced:

  • There is a set of basic concepts and methods for negotiating that should be studied and implemented to make you more competent at negotiating.
  • To be a good negotiator, you don't have to use a certain style or strategy.
  • Rarely does a negotiation take place in a single, organized event. It's an extensive procedure that may start as soon as you make initial contact with a prospective vendor. Remember: EVERY encounter is a chance to either negotiate or set the foundation for the future.

To begin with, the overarching idea is that negotiation should not be confrontational.

  • Collaboration is essential. If you've reached the point where you're proactively negotiating with a vendor, it's quite plausible that both sides feel there's a good deal to be made. Having a positive attitude will go a long way toward ensuring the negotiation's success.
  • It's important to make sure the contract is "mutually acceptable." It's pointless to make a vendor accept conditions that are considerably worse than what they would normally accept. This can create animosity and a lack of enthusiasm over time, perhaps leading to contract violations somewhere down the line.

How to Negotiate Vendor Contracts

When it comes to managing vendors, there are six important areas where you should concentrate your efforts:

  • Evaluate your position properly
  • Recognize what the other party desires
  • Be straightforward in your communication
  • Develop empathy
  • Build personal relationships when possible
  • Avoid burnout

Evaluate your position properly

It may appear simple, but you'd be shocked at how often misunderstandings are revealed during negotiations, thus lessening your chances to achieve the desired outcome. 

Complicated negotiations could sometimes boil down to simple issues such as how soon your company can compensate a vendor. Do you know with certainty if your accounts team has the actual means to make a payment as quickly as stipulated in the contract? Evaluating your position helps not only in the negotiating process but also in moving forward smoothly.

When dealing with a vendor, you should ask yourself the following questions:

  • What is the size of my budget?
  • What is my definite timeline for closing a deal?
  • Who is required to approve this and when will they be available?
  • Which aspects of the proposed agreement are "must-haves" and which aspects are "good-to-haves?"
  • What are my options if I can't close this deal?
  • Is it possible for me to walk away?
  • What is the procedure for contract dispute settlement or termination if things go south later?

Recognize what the other party desires

If you're working as a team, you're likely to have a decent understanding of what your potential collaborator wants. You should also keep the following on hand for easy reference when negotiating points or questions arise:

  • Documents such as contracts and proposals
  • Notes of phone calls and meetings
  • Email correspondence
  • Website of the vendor, which includes current news articles (e.g., strategic goals, team changes, potential plans for the future, etc.)
  • References from other customers of the vendors

All of these resources provide you with direct knowledge and much-needed context about your potential partner, which may help you negotiate more effectively with them.

Be straightforward in your interactions

Clear communication is essential for defining your expectations with a vendor and negotiating favorable terms. You may focus on creating a relationship built on values like trust, openness and candor by negotiating with a single point of contact.

You and the vendor can only work together to remove any hurdles that are impeding an agreement after clear and efficient interaction has been established. Effective communication isn't only about what is stated to keep a contract moving forward. It's also about being on schedule. You present yourself as a solid future partner by reacting appropriately and promptly to concerns or suggestions from your prospective vendor.

Develop Empathy 

This will capitalize on the research you've done in preparation by ensuring that you pay attention to what the other side says throughout the negotiation. Effective listening is essential to being empathetic. It appears to be simple. After all, you might wonder, how difficult can it be to pay attention to what the other person (in this case, the vendor) is saying?

The reality is "very," especially if you're in the middle of a difficult discussion. While the other person is still speaking, it's easy to become preoccupied with your next argument or reply. Focusing on listening and then repeating the important points that someone has just articulated back to them to clarify your understanding is a standard technique here. This generates a positive feedback loop since the other person appreciates you listening to them and will extend the same empathetic attitude toward you, creating a win-win situation.

Build Personal Relationships When Possible

There’s a pearl of wisdom that's dispensed everywhere, despite the fact that it's clearly ridiculous. It is the adage, "It's not personal, it's business." Here’s why it’s ridiculous. At the end of the day, it’s people who operate businesses -- which means that the quality, type and status of their relationships have a significant impact on business outcomes.

Think about who you're going to be negotiating with. What do you know about them from past conversations and what data can you find on their LinkedIn page that extends beyond their career? You don't have to become their closest buddy but developing a connection with them will certainly benefit you in the long run.

Avoid Burnout

If your negotiations do come down to a single meeting, you should be present for as long as it takes. As participants discover that the negotiating process is taking longer than planned, fatigue might set in. But if you're properly prepared, you may actually be able to use this to your advantage because others may begin to make compromises in order to expedite the process. They may be under time constraints because they have to catch a flight or the initial caffeine rush from their first coffee may have worn off, they could be hungry, thirsty, tired, etc.

Follow these easy steps to put yourself in the best possible position:

  • Expect the negotiation to take longer than the allocated time and add at least half of the scheduled time on top of that. Any travel should be planned accordingly.
  • Make sure you have enough food/drink on hand to be energized for the duration of the process. Don't expect it to be available.
  • If the environment feels excessively warm, ask for the temperature to be lowered or take frequent breaks to maintain your attention levels.
  • Maintaining a calm demeanor can preserve your energy while also promoting trust and empathy.

Even if your vendor contract negotiation does not include a single summit-style meeting, these tips will still be useful. For instance, don't rush to immediately respond to an email if you don't have to, as this might lead to inaccuracies or misinterpretation. You should also avoid bringing out complicated documents at the end of the day when fatigue is more likely to play a role. Instead, save them for the next day and examine them with a fresh mindset.

Vendor Negotiation Strategies

Evaluate your vendor

Evaluate your vendor, their market and how the present economy has impacted their operations. You'll have a proper insight of their standing and how they might be able to modify your contracts this way. Develop a market understanding of what other vendors charge and what startups identical to yours pay for similar products and/or services. When you have this information, rather than posing questions and getting answers, the topic turns to a more constructive discussion and you have a greater chance of getting the terms you want.

Be flexible about what works for you

Most discussions will not end with both parties receiving precisely what they want -- so be willing to compromise. Both parties can make concessions in a win-win situation, resulting in a profit for everyone. In a partnership setting, win-win negotiations involve a long-term strategy, with a strong likelihood of achievement and success for both parties over time.

Be honest and transparent

When you're not open and upfront during negotiations, you're doing yourself, your startup, and your vendor partnerships an injustice. When it comes to engaging with a vendor and having them know where you stand and what you need, candor works best. If you want to maintain a long-term business arrangement, you must be willing to compromise on certain points. A frequent compromise is to renew the contract for a longer duration than you initially intended in order to achieve your terms. Remember that if one side genuinely believes that they didn't receive a fair deal in a negotiation, it's less likely that additional deals will be made in the future.

Don’t let failure get to you

Negotiations may not always provide the results you desire -- and that's fine. 

It's possible that you'll have to walk away and look for a new vendor to work with. It's not necessarily a failure if you don't get a deal. It may just have been the wrong moment or one side might have decided that it's not a good match -- even if neither side can quite explain why. 

Maintain your presence on the vendor's radar and keep an eye out for future possibilities, or contact them again when you're in a better position to meet their criteria.

Conclusion

The concern that if negotiations fail, you'll have to restart the process from the beginning and seek new service providers is linked to burnout. If you've invested a lot of effort in the process up to this point, that idea may seem overwhelming. While there may be financial consequences of prolonging the process, they should be evaluated against the possibility of a less favorable contract with any particular vendor. 

In general, the recommendation is to avoid entering into a sub-optimal agreement just because finding a better alternative would take additional time and headspace. With that said, it's up to you to decide if "done" is preferable to “perfect” or even to “done well.”

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