Negotiating supplier contracts
Set objectives for contract negotiation
Setting clear and achievable objectives is essential to a successful contract negotiation.
Defining your negotiation goals early will help inform your negotiation strategy, your tactics and your reservation point - ie the maximum you are prepared to pay the supplier for their goods or services. This, in turn, can help you avoid settling for less favourable terms during the negotiations.
How to set objectives for supplier contract negotiations
Your primary goal in negotiating a contract is to procure products and services that your business needs. Negotiations typically serve to determine things like:
- price and payment terms
- delivery and production times
- quality standards
- levels of service
Depending on your business needs, you may want to set different objectives. For example:
- value for money
- after-sales service
- maintenance arrangements
- length of warranty
- life-time costs of a product or service
- importance of product or service to your business
- length of agreement
- cancellation terms
Before you start to negotiate, draw up a list of the factors that are most important to you. Rank them in order of importance and decide what you are - and aren't - prepared to compromise on.
For example, if you're ordering supplies in bulk you might want to find a supplier that will offer you a discount. Or, if you're investing in a complicated piece of computer software, you might want to make sure that training is provided as part of the deal.
It may help to set the best and the least acceptable target for each of the objectives. See more negotiation tips for dealing with suppliers.
Once you define the objectives of the negotiation, you may also want to plan for scenarios where satisfactory agreement may not be reached.
Find your BATNA
Put simply, BATNA - or the Best Alternative To a Negotiated Agreement - is what you will do if the negotiations don't conclude in a deal. Knowing your best alternative to a deal will help you decide a different course if negotiations fail. It also gives you a greater bargaining power and helps outline your negotiation 'red lines'.
You should know your BATNA before entering negotiations, even if you expect a successful outcome. You don't always have to reveal your BATNA to the potential supplier, but this can sometimes help. For example, if they know that you have a better option, they may be forced to match it or put forward a better offer to win your business.
Find your ZOPA
ZOPA stands for Zone Of Potential Agreement. It is the bargaining range or an area where the negotiating parties tend to find common ground. This is an area where each party's expectations regarding an agreement overlap. In order to reach an agreement successfully, everyone at the negotiating table must understand one another's needs, values and interests.
How can I negotiate a good deal?
The key to negotiations is to establish your preferred outcome. You will naturally want to achieve the best results possible for your business, but hard bargaining isn't always the right way. It's worth considering all the different contract negotiation strategies.
Striking a deal that both parties are happy with is important for the longevity and the success of the partnership. Don't underestimate the importance of goodwill. Find out how to build strong supplier relationships