Getting To Happy—steps to contract negotiation success
From the April 2019 print edition
When it comes to contract negotiations there is good news: the process can likely be done in just a few steps. But there is bad news too: the negotiation is not likely to be easy. During the process, if the bigger party is going to force the smaller one to accept the contract, it’s easy for the bigger party, and the
contract is done in a single step, which amounts to “take it or leave it.” After all, the only thing that matters is that a contract is in place, right?
Well, let’s analyze that. In this scenario, we can presume that the bigger party is happy because they have a contract that contains all the terms their lawyers say they need. The smaller party is happy because the contract is in place so, presumably, they have some work. Everyone is happy without the need for negotiations.
But what does a good contract look like? Shouldn’t the contract reflect the nature of the business relationship and what one party can realistically expect of the other party if something goes wrong? We can put it this way, if the mom-and-pop shop that supplies all your widgets at rock bottom rates will indemnify you, their big customer, for whatever happens you should be happy, shouldn’t you? If something does go wrong, that big customer could shut them down in one fell swoop—contract success. And, on the flip side, the huge supplier that supplies the hard-to-find widgets and won’t agree to anything other than taking a defective widget back (as long as the customer pays for delivery), that big supplier will get off scot-free no matter what damage they cause.
But that is just how it is. The lawyers for the big companies won’t agree to anything else and small companies don’t want to push back and lose the work with the big customer.
Let’s go back to those easy steps (just four of them) and see if that gets us to a different place.
Step One: Figure out what business are you doing together. Why does that matter, you ask? Isn’t a contract just a contract? Let’s look at our mom-and-pop widget supplier. In this scenario they make a widget we use in our everyday work. It is essential, and if we don’t have it our work stops. If something goes wrong the mom-and-pop shop needs to be responsible. But that small guy can’t take on the financial responsibility for all your losses. So, you can get your indemnity, but it would likely be worthless, they wouldn’t have the money to pay big customer losses.
So how else could we approach this contract? Maybe we should look at why we are dealing with them. The mom-and-pop shop manufacture the widget at rock-bottom prices and take all the manufacturing risk (building, equipment, staff and so on). If something goes wrong what can the big customer realistically expect from the mom-and-pop shop?
Now we are cooking. If those widgets don’t show up on time and it is the mom-and-pop shop’s fault (and not a worldwide shortage of widget materials or because the customer changed the design at the last minute) they are going to pay.
For what? For all the costs the customer will incur as a result of the delay—having another shift on or a late shift on to accept the late delivery and so on. That is going to hurt. And why is it fair? Because it was the widget maker’s fault, and if they aren’t held responsible, we might have a sloppy widget maker on our hands. Better yet, if they know specifically what they are responsible for maybe it won’t happen.
Step Two: This step involves “the talk.” The widget maker and the customer need to be able to talk about the tangible implications of the contract. Maybe before the contract is signed, if the customer lets them, the mom-and-pop shop will tell them that to keep their costs low (which the customer really likes) they rely on one widget material supplier and two people in the shop who make those widgets night and day and that is the only way they make a profit.
Step Three: Analyze the risk. The customer wants to keep their costs low and likes the quality of the widgets the mom-and-pop shop produces. From the talk, they see the risks and have agreed to a communication plan and the customer is going to stockpile some widgets to manage the risk. And you could carry on—maybe you are going to agree on what will realistically happen if you receive defective widgets and so on.
Step Four: Sign that contract with some mutual understanding of the deal you have entered into. In our example above, the parties are dealing with narrow margins for error and can decide how to manage that, or not.
So there, four steps and you are on your way. Negotiations may not be easy, but they should be the foundational stone of any longer-term contractual relationship.