- 10 min read
- Bethany Mullinix
Introduction
Every thriving business relies on a network of contracts to stay successful. From employee compensation to vendor delivery schedules, these agreements set the standards for relationships, obligations, and expectations.
Contracts take shape through a series of negotiations on each side, where stakeholders create an agreement that defines their obligations and expectations as they work toward a unified goal. But without the proper contract negotiation strategies in place, you’re at risk for revenue and value leakage, strained business relationships, operational slowdowns, and much more.
In this blog, we’ll tell you how to negotiate a contract using 14 effective strategies and how Contract Lifecycle Management (CLM) software can help streamline the contract negotiation process.
1. Consider The 3Ps Of Contract Negotiation Strategy
The 3Ps outlined below will give you and overarching plan and steps. The subsequent, more focused strategies will align to these three phases of your negotiation process.
Prepare: Begin negotiations with a solid foundation. Start with a baseline contract draft (we’ll talk more about that in the next tip), then break that down into parts. Use easy-to-understand terms and language. If you have an AI-based contract negotiation platform, use it to quickly draft the contract with preferred language and historical data from previous agreements.
At this stage, you should also assess potential risks and liabilities. Consider what could go wrong, and make sure there are provisions to address those situations.
Choose your negotiating team.* Ideally, you should have a team of at least two and not more than four members. Prep your team by going over the contract and contract negotiation tips in advance with them. Share any pertinent information you learn about the other party during your research.
*Pro tip: Depending on the situation, you may want to keep a senior stakeholder off the team. That way, you can buy some time as you defer a decision to them or give them time to consider a proposal.
Prioritize: Clearly define objectives and prioritize which terms are the most critical for receiving buy-in. Conversely, look at the ones you can use as trade-offs in barter situations. Assess what leverage you have to make the best deal possible. Since you can’t negotiate all aspects of the contract at once, try to negotiate the important items first before moving on to the less important ones.
Probe: Foster open communication throughout the negotiation process. Establish rapport, be transparent about intentions, and actively listen to the other party. Resist the urge to multitask. Ask questions, stay engaged, give feedback, and acknowledge what you hear by repeating or summarizing important statements the other party makes. This not only reassures them that you’re listening but also confirms that you understand.
2. Always Draft a Baseline Contract
Don’t start with a blank slate, or you could neglect to include key information. Identify terms, conditions, and pricing and use them to create a baseline contract before entering negotiations. The baseline contract doesn’t have to be perfect, but it should contain the major terms and space for adjustment. Use historical data from previous agreements to inform your approach.
3. Define Clear Objectives
Set SMART objectives for contract negotiations. They should be Specific, Measurable, Achievable, Relevant, and Time-based. Then prioritize those goals – separate the “must haves” from the “nice to haves” and decide which ones you’d be willing to use as a trade-off.
4. Research the Other Party
Understand the other party’s business goals and challenges. Familiarize yourself with their negotiation history and identify potential leverage points to gain a strategic advantage. Start with online research, ask your marketing or sales team if they have any competitive intelligence, or even reach out to colleagues who have worked with them in the past.
5. Foster Open Communication Throughout the Contract Negotiation Process
Establish rapport and trust, be transparent about intentions and limitations, and actively listen to improve collaboration and help understand the other party’s motives. Ask open-ended questions, analyze their proposals and counter-proposals, observe their verbal and non-verbal cues, and look for common ground and shared values.
6. Consider the Total Cost of Ownership (TCO)
Look beyond the “sticker price” of the goods or services provided by the other company. Explore all associated costs, including the initial cost, maintenance, and additional lifecycle fees. Identify any potential risks with using – or not using – the product or service. If you’re unsure where to start, leverage contract lifecycle management (CLM) software for comprehensive analysis.
7. Prioritize Contractual Obligation Over Price
Although cost is an important factor, product quality or service can impact your customer satisfaction, brand image, and competitive advantage. Consider the strategic importance of the relationship and analyze the long-term benefits vs. any short-term savings. Identify ways to add value to contractual services or terms.
8. Be Willing to Walk Away
Know your BATNA (Best Alternative to a Negotiated Agreement) before you start negotiating so you can maintain a non-desperate stance. Calculate the risk and reward of any tradeoff options, weighing their potential benefit against their cost.
9. Use AI-Based Contract Negotiation Software
AI can shorten the time needed to draft a contract and quickly search a contract to highlight missing clauses and deviations from preferred positions. In addition, AI-based CLM software can let you draw on retrospective contract and performance intelligence to help you gain an edge in future contract negotiations.
10. Include Flexibility Clauses
Flexibility clauses (such as force majeure, hardship, renegotiation, and termination) can help both parties anticipate future changes and uncertainties by including options for renewals, scaling, or revisions. Define clear procedures for amendments when negotiating contractual obligations.
11. Employ a Good Cop/Bad Cop Contract Negotiation Strategy
Why is this tactic effective? We tend to like people who agree with and seem similar to us. And the appeal of what they’re offering is made even sweeter by the presence of the “bad cop.” Designate roles within your negotiation team, use contrasts in negotiation styles to your advantage, and ensure a unified end goal with your content negotiation strategy – despite differing approaches during contract negotiations.
12. Bundle Contract Terms and Limit Concessions
You can create a perception of added value by bundling (combining two or more items) in your contract terms, offering or accepting them at a more advantageous price than purchasing them separately. Not only could it positively affect your profit margin, but it could also enhance loyalty and give you a competitive advantage.
On the other hand, when you make concessions in contract negotiations, frame them as trade-offs, not giveaways, and tie them to tangible gains. For example, you could agree to accept a higher price for a service but stipulate that the price can be renegotiated after a year instead of locking into a standard three-year agreement.
13. Leverage Testimonials and Case Studies
Showcase successful partnerships and contract outcomes through real-world examples tailored to the other party’s industry or challenges. Provide evidence, examples, testimonials, or case studies that illustrate your past performance and achievements, especially those that align with your goals.
14. Review and Refine Regularly
Every contract negotiation is a learning experience. And it’s a great opportunity to fine-tune strategies and techniques. You can also use CLM software as a negotiation training tool to help track outcomes, store feedback, and manage contract data. Once the contract is in place, review it regularly to ensure you’re extracting the maximum value from the relationship and not allowing revenue leakage.
Uplevel Your Contract Negotiation Skills With Contract Management Software
Effective contract negotiation strategies are essential to a business’s success but can be time-consuming. Sirion’s comprehensive CLM platform can help streamline the entire contract negotiation process, providing easy-to-use tools for:
- Researching historical data
- Drafting and redlining contracts
- Version control
- Collaboration tools and audit trails
- Managing contractual obligations
- Improved compliance
Learn how it can simplify your contract negotiations. Request a demo today!
Additional Resources
AI Contract Negotiation: Insights to Up-level Your Enterprise
Mastering Contract Negotiations: Everything You Need to Start
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