4 Strategies for Contract Negotiations & 6 Mistakes to Avoid

Planning for contract negotiations is the first step to success. Often the outcome is decided before any face-to-face negotiations occur. Negotiation is one, but important, step in the contractual process.

Start planning early at Request for Proposal (RFP) stage.

This is the point at which you need a strategy to achieve your preferred outcome. Ideally the contract terms and conditions should be drafted and attached to the RFP or tender and the prospective supplier should be requested to comment. The issues, which you now know about, can then be discussed in negotiations.

Research the other party in advance.

Knowing what the other party expects to achieve will assist with your strategy. Negotiate from strength because knowledge is power in contract negotiations. Is their aim to get the best deal on price, is it to gain market share, expand into new markets or defeat their opposition? Find out if they have a walkaway position and what it is.

Structure your negotiating team.

It sounds obvious that the interests of all the team members should be aligned but often they are not so. Finance want to get the best price, lawyers was to make the contract watertight, procurement want to see the cost savings secured, others may want to close the deal quickly and go home. Contract negotiations can fail if each person's loyalties, preferences and priorities are not voiced.

Before and at the table

Preparation is vital - conclude your own internal team negotiations before you engage with the suppliers. Undisciplined behavior and emotional outbursts can undermine even the best thought-out strategy. Simulate the negotiation with rehearsals including role plays using a lead negotiator and allocate individual roles to eliminate surprises. Overall, negotiating as a team has been more successful than using a sole negotiator despite the inter-personal challenges.

Negotiation mistakes.
Sometimes contract negotiations are undermined by one of your own team. Here are six common blunders, according to HBS professor James K. Sebenius*:
1. 2. 3. 4. 5. 6.

Neglecting the other side's problem. Letting price bulldoze other interests. Letting positions drive out interests. Searching too hard for common ground. Neglecting BATNAs ("best alternative to negotiated agreement"). Failing to correct for skewed vision.

An aspect often overlooked is the disbanding process and the necessity for a debriefing. It's important to schedule a "lessons learnt" session and it is a good idea to make this outcome available to other teams in the Company.

Procurement Procedures Those Little Words That Mean So Much

In any purchasing department there has to be procurement procedures. These are a group of directives that detail what can and cannot be done as well as how each activity must be undertaken. Most companies publish their procurement procedures so that all can see them. It is not only companies that have procurement procedures, governments, local governments and even countries have them as well. They are the rules and regulations that keep purchasing legal and appropriate. In all procurements, there are groups of standard procedures that are always defined and these are: Procurement cost levels Every company wants to keep their costs down so they limit who can order and how much they can order. Generally the higher the total order, the more senior the signature on the order. Purchase requisitions These are a way of dealing with day-to-day inventory restocks that are not handled by automatic purchase orders. It is important that it is well known as to who may order, in what circumstances and at what cost and stock level. Ethical codes The next most common of the procurement procedures is to dictate the ethics that people must embrace. These generally include: Gifts and inducements you do not take or offer any. Declaration of interest you declare any relationship with a supplier or a company that is tendering for work. Supplier interaction this is kept professional and within the standard terms and conditions. Confidentiality all activities, prices and terms are kept confidential.

Standard Agreements These are generally used at all times, except when prior management agreement has been provided. Value for money Most companies have procurement procedures in place the emphasis on the need for value for money as opposed to taking the easiest, the cheapest or most attractive deal. Tendering This is when numerous companies bid for a piece of work or new contract that usually has a high value upon it. The whole tendering process has to be fair and seen to be fair so there

is usually a whole group of procurement procedures surrounding this activity. They are usually broken down to different rules for each level of contract value. E procurement With paperless purchasing becoming more popular there are usually a slew of procedures that you have to follow, many of them especially deal with security. Ad Hoc purchases These are purchases that are not available from the normal suppliers or purchases that are not normally made. To ensure that the purchasing strategy is adhered to and that the maximum profit is still made, these are very heavily monitored and controlled. As you can see a lot of rules and regulations but all companies need them, most companies have them and everyone knows what they need to and can do. Doesnt that make your company a much more profitable company?

5 key elements in an RFP review

Time spent doing an RFP review and in preparing a good quality and comprehensive Request for Proposal document will yield positive results and eliminate wasted time in the sourcing process. It should be used for high value sourcing projects with a medium to long time frame, the impact on the organization is moderate to high and the types of possible solutions are many and varied. In an RFP review we should see five key sections. These are Introduction This first section must be used to introduce your Company and your industry and provide details of the reason for the Request for Proposal. You need to state what you hope to achieve by this process and approximately, by when. Key dates must be included especially the due date for submissions. Project scope and requirements This section takes the most preparation time. The project definition is fairly easy to describe to a supplier or contractor but defining the detailed scope of work requires collaboration with many internal users. An RFP is often used to source essential services where numerical details of what, where, when and how many? need to be supplied. Process In an RFP review of the process we would ensure that we have explained clearly how each activity will work through from sending out the RFP to awarding the contract. There may be many steps in the process and suppliers need to understand how to manage this. There may be a compulsory briefing meeting, a face to face sales presentation required after closing date, revising of quotes and negotiations on price and contract clauses. Timelines

Here we need to be clear about how long the whole process may take without making a definite date commitment. To be fair to bidders, proposals for complex systems or services should allow up to 4 weeks for submissions. Long RFPs with complicated and detailed responses need time or the quality of the bid will suffer. This is also where you can state where and when you will notify the successful bidder and expected start date of the project. Pricing Pricing is a main component in the RFP review process. The price offers for each of the proposed solutions need to be easily comparable. You need to provide a pricing template in a structured format which states exactly how to present pricing and cost data. It should be set up in such a way that price offers can be compared from several respondents side by side. When doing an RFP review these five elements need to be covered, not in any particular order. Preparation is key to a successful RFP, short cuts will provide poor and fewer responses and the process may have to be repeated.

5 E-procurement advantages
E-procurement advantages are becoming more evident as the wider understanding of its many uses become apparent. The main reason companies have embraced e-procurement is to increase productivity, provide visibility into day-to-day transactions and make it easier for users to get the supplies that they need. It has not been an easy road for e-procurement as implementation has its challenges and it has taken time for business managers and procurement departments to fully accept it. The advantages of e-procurement are slowly being understood:

Reducing costs
Costs can be reduced by leveraging volume, having structured supplier relationships and by using system improvements to reduce external spend while improving quality and supplier performance. E-procurement eliminates paperwork, rework and errors.

Visibility of spend
Centralized tracking of transactions enables full reporting on requisitions, items purchased, orders processes and payments made. E-procurement advantages extend to ensuring compliance with existing and established contracts.

Productivity
Internal customers can obtain the items they want from a catalogue of approved items through an on-line requisition and ordering system. Procurement staff can be released from processing orders and handling low value transactions to concentrate on strategic sourcing and improving supplier relationships.

Controls
Standardized approval processes and formal workflows ensure that the correct level of authorization is applied to each transaction and that spend is directed to draw off existing contracts. Compliance to policy is improved as users can quickly locate products and services from preferred suppliers and are unable to create maverick purchases.

Using technology
E-procurement advantages can only be fully realized when the systems and processes to manage it are in place. Software tools are needed to create the standard procurement documentation: electronic requests for information (e-RFI), requests for proposal (e-RFP) and requests for quotation (e-RFQ). These are proven methods to source goods and make the framework agreements that offer the best prices. An adequate, fully integrated e-procurement approach is needed for overall success. Additional programs provide the framework for the supplier databases and spend management as well as holding key vendor information and being an electronic repository for contracts. All these facilities cost money and a clear business case must be made for eprocurement. In most cases this is fairly clear that cost savings are possible. It pays for companies to spend money on e-procurement technology, this investment will boost efficiency. The longer term reduction in costs will enable companies to direct their resources to more strategic initiatives. E-procurement advantages are significant bottomline benefits, including cost reduction, process efficiencies, spending controls and compliance.