Sometimes both parties come out of a negotiating a contract feeling like they have won but if you think you won and the other party (your supplier or your customer) feels they lost, then it’s not really a good situation to be in.
If the customer feels they lost, then maybe they might have stuck with you because they need to in the short term, but in most situations, they could well be looking to take their business elsewhere in the future. On the other side if the supplier feels they were the loser in the contract negotiation, then it’s highly likely the customer will suffer. Suppliers will naturally share innovations, opportunities and ideas with those customers they enjoy working with the most. And, of course, they will be better prepared to win the next round of negotiating a contract.
Both sales and procurement who are involved in negotiating a contract have to be strong characters, but in a globally competitive market it should be “collaboration” rather than “competition” on their minds. We discuss in more detail the 7 key elements you should follow to successfully negotiate a contract.
1. Understand the key objectives of each trading partner
Understanding each other’s business plans at the highest levels is obvious, but nonetheless sometimes overlooked when the focus of negotiating a contract is polarised on reducing the price of a particular category or range. Suppose the customer (a large building materials distributor, as an example) wants to expand into new geographical territories. Negotiating a contract on price, taking account of delivering into those new territories might force the supplier to increase their prices, when the customer is looking for a decrease.
We learned of an instance where the procurement consultant examined the expected product requirements at the furthest locations and determined that the supplier could actually simply deliver into their main depots and the customer themselves would take care of onward shipment to outlying regions. The end result was a reduced price for the customer, lower transport costs for the supplier and better use of the vehicles that had been carrying partial loads between depots and outlying regions. A true win-win. The key to negotiating a contract is to be transparent about business objectives and share data that can help create those win-win decisions.
2. Capture objectives and incentives in a joint business plan
We aren’t just talking about the mechanics (the pricing and incentives) of a B2B deal, but the wider agreed goals for both parties. After all, the incentives are only there to help manoeuvre trading in a direction that meets the business goals. And only by monitoring the success at that high level, can both parties really determine the best course of action in the future.
Keeping an eye on the bigger picture is essential to the success of both parties, but all too often the only elements that are systemised are the details of the contractual agreement. Having all information about a deal in one place helps to maintain focus for future contract negotiations.
3. Share the business plan to every department that can impact performance
All too often we have seen examples where procurement negotiates a contract, but because the commercial team isn’t fully aware of the contractual agreement, they create their own deals for the very same products. Suppose a sales person at a timber merchant is approached by a house builder for a large volume of timber. If they don’t have visibility of the procurement team’s contract negotiations, they may circumvent that and go straight to the timber supplier to get a “one off” agreement to suit their immediate opportunity. What happens next is that the volume of timber purchased by the sales person is not counted towards the target for the deal that was struck by procurement, and the rebate margin is in jeopardy.
Similarly, if those chasing up rebate debt don’t have complete visibility of the contract they have negotiated, they may not be claiming all the rebate that is due. We see this a lot at Enable, and the root cause is often the systems that are being used. If the pricing mechanisms and marketing funds in the contract cannot be 100% replicated in the financial control systems, claims are very likely to be missed. The negotiated contract is stored, but essentially forgotten as the team works on the (partial) information that is available to them via their system.
We have found this to be the case when implementing deal management software. Those who take the time to set up all the previous year’s contractual agreements and review what should have been claimed are — in all cases — very surprised by the amount that has been missed.
4. Get on the same page as your trading partner by using a common format
Working towards mutual goals is not easy when you have separate copies of the contractual agreement, different systems for recording deliveries, and other systems for calculating rebate claims.
Instead, what is needed is a single deal management system that:
• Holds the contractual agreement (in a systemised format as well as the actual electronically signed document);
• Provides a common language and data set for all parties;
• Provides an audit trail for the sign off of the document and all activity beyond;
• Holds transactional data at a granular level;
• Provides easy roll-up summary information by branch / category or other;
• Displays appropriate information for each user (finance, commercial, procurement, suppliers).
By sharing transactional detail and summaries, having a single version of the truth with regards to all contractual agreements, and having access to powerful analysis tools, both parties can avoid disputes over rebate claims and instead invest time in negotiating a contract that benefit them both.
5. Track performance frequently: at least monthly, ideally daily
With so much complexity around managing rebate deals, it is no wonder that performance is reported on only at the point where a new contract negotiation is about to take place. But by then it is too late to do anything ab-out the past. Of course, regular reporting is not easy when the information needed is in disparate systems.
It takes time to collate the information and perhaps not all of it is available at the same time.
Yet most would agree that tracking performance only at the end of negotiating a contract is to be avoided. Making sure that goods received, invoices, rebate claims and other information is fed into a single system in a timely accurate fashion (preferably automatic, rather than manually) is the only way to enable more regular reporting.
6. Communicate with trading partners and continuously adjust course
Rather like plotting a course in a yacht, tracking progress and taking action in accordance with your findings means you are much more likely to reach the end goal. Measure only once, at the end of the contract term or annually is simply reporting actual versus target. Monitoring and continual adjustment is what helps to manage progress against targets.
Those who regularly forecast demand, report progress against actuals and jointly determine what action is needed in order to achieve the targets set out in the contractual agreement are generally the ones who take full advantage of rebate opportunities. Suppliers gain too, because they will have reached their sales and revenue targets.
7. Meet up and re-negotiate contracts regularly to achieve joint goals
Rather than negotiating a contract once a year, being agile enough to renegotiate should conditions change is an advantage. Exchange rate changes, raw material availability, other trading conditions and outside factors can turn a good deal into a not so good one.
Of course, thinking about re-negotiating a contract part way through an agreement can be a timely, costly affair and therefore to be avoided. If, however, all the necessary information is available at your fingertips and both parties can easily see the advantage, that willingness and ability to negotiate a contract more frequently could become a competitive advantage.
In conclusion, it’s fair to say that to achieve these 7 points, a single deal management system capturing all elements from deals, goals, transactions, rebate claims and rebates received is needed. Enable, integrates with your core systems and provides a complete solution from negotiating a contract to claiming for your complex trading agreements.