March 14, 2019 Last updated March 10th, 2019 168 Reads share

6 Steps to the Perfect Contract Negotiation: What to Do, What to Avoid

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Negotiations make strange bedfellows!

Coming to an agreement with a buyer – whether you sell software as a service or a physical product – can be a bit of a hassle. Especially when neither party is willing to budge on their terms, but still clearly want to work together.

So what’s the secret? How did Homer get his dental plan back from Mr. Burns?

In this piece, we’ll discuss some negotiation best practices you can use in a business environment. From a vendor’s point of view, getting the most out of the deals you are able to put together can be key to long-term survival, so it’s important to have these techniques on lock.

1. Understanding the buyer’s position

 

The first thing you need to do, even before beginning to discuss the actual terms of the agreement, is figuring out exactly where your buyer is coming from.

As a starting point, understand what they want from you. To what extent are you able to satisfy these needs? The better your solution is (in the eyes of the buyer), the more leverage you have in the negotiation stages.

You also need to consider how much leverage the buyer has. Are there other similar vendors out there they could quite easily talk to if they don’t like your terms? Or are you able to offer something that no-one else can?

Your assessment of the leverage both parties have should guide your negotiation tactics. This way, you can get the best possible deal without putting the buyer off.

2. Communicate your position

Now that you know where both parties sit, you can relay your initial proposal. This is essentially an attempt to feel out the buyer, and understand if your assessment of their position is correct. If it isn’t, you’ll need to adjust.

It’s normally best to start off with terms which would be the most preferable from your point of view. This way, you have the option to sweeten the deal if necessary. You can’t really make your terms less favorable to the buyer at a later date and still expect the deal to go through.

3. Come to a mutually-beneficial agreement

 

Remember, neither party should be signing a contract if it won’t benefit them. It’s up to you and the buyer to come to some sort of compromise.

Ultimately, the contract is the basis for a long-term relationship between the two parties. You need to consider the buyer’s perspective, as we outlined above, for the negotiations to be successful.

Ideally, you want to be in a position where you can walk away if the buyer is being unreasonable. This is an incredibly powerful option to have – as long as you’re not afraid to use it, it gives you the ability to never sign a contract that isn’t on your terms.

If you aren’t able to walk away, rather than giving in to a lower price, consider offering better features to get the customer on board. For example, as a call center software provider, you could offer your voice analytics module as a sweetener. Or if you sell a ticketing system, you could offer to customize the user interface for the customer free of charge if they sign an extended agreement.

4. Include EVERYTHING

You’ve come to an agreement! Well done 🙂

But the job isn’t over yet. You need to ensure that the important terms discussed are included in the final version of the contract.

Often, things fall apart when the actual contract doesn’t cover the verbal agreements both parties have made. For example, if the customer specifies that they will need access to phone support in order to use your product, this should be explicitly detailed in the terms of the agreement. You would have to include the amount of support (in terms of man-hours) the deal includes, and the potential issues your team will provide help with.

5. Specify payment terms and exit clauses

 

Two more things you need to include are the terms for payment – when and how the vendor will pay you – and an exit clause – the scenarios in which the buyer can back out of the agreement.

Without a clear understanding of both of these factors, both parties are essentially placing blind trust in each other to uphold their side of the deal. For example, with no payment terms, what happens if the customer doesn’t pay within four weeks of the day they were billed? How do you know when you’re allowed to back out of the agreement?

Payment terms and exit clauses may seem straightforward, but they’re actually some of the most crucial aspects of any contract. It’s important that if the buyer doesn’t want to agree to your payment schedule (for cash flow reasons for example) that you stick to your guns. Having one buyer who gets an extra week to make payment may add a significant amount of complication to your invoicing processes.

6. Get a process down

 

The main reason contract negotiation is so painful for many businesses is the fact that it takes so much time. Going backward and forwards over minute details is all too common, despite it providing very little benefit to either party.

Apart from having the ability to back down from negotiations which aren’t going anywhere, you can also develop a negotiation process to make things a lot quicker.

To do this:

  • Template the things which remain the same from contract to contract. For example, payment terms and exit clauses, and the specifics of the service you will be providing.
  • Allocate specific people to negotiate specific types of deals your firm often makes. Have one person for small-fry sales and a more experienced negotiator for bigger deals if possible.
  • Make a step-by-step process. The steps you outline will depend on the type of business you conduct, but generally, you will start with the buyer’s needs, make a proposal, receive feedback, and then come to an agreement.

Conclusion

Be careful not to spend too much time negotiating contracts as a vendor. Over time, the process can become extremely costly for your business if it is performed inefficiently.

This is why it’s so important to be able to walk away from deals when and as you need to. You want to be in a situation where there are few sellers and many buyers – and ideally, you want to offer a solution that none of your competitors can provide. This puts you in an immense position of power when negotiating deals with potential clients.

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Tom Paton

Tom Paton

Tom loves to educate firm on all aspects of B2B products and business process. Currently, he works for contactSPACE - an Australian provider of cloud contact centre software. In his free time, Tom is normally eating a cookie of some description. Nom.

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