3 Contract Negotiation Tactics to Eliminate

by Chris Arlen on July 21, 2015

Print Friendly and PDF

3 Contract Negotiation Tactics to EliminateCaveat emptor: Who hasn’t heard the phrase “let the buyer beware”? It’s a part of our consciousness, we don’t even think about it, it’s just good business to perform due diligence when buying.

However, for every helpful phrase or tactic, there are others whose time has come and gone. And nowhere is that more obvious than in buying contract services; where buyers take suppliers through an RFP process, down select the best qualified, and then begin negotiations.

It’s at this point (negotiations) that buyers often employ antiquated tactics that are down-right counter-productive.

Contract Negotiations in 2015, Not 1965

Remember it’s 2015, not 1965: value and TCO from a negotiated contract isn’t accessible immediately. It takes time, and will be influenced by the relationship begun during the negotiations. And without Supplier Relationship Management (SRM), negotiated savings may not be realized. Why start relationships on the wrong foot?

So let’s look at three tactics used in contract negotiations that would be better off using an alternative approach.

#1 Ridiculous Counter Offers

Ridiculous Counter Offers

A client of mine who runs a facility service firm recently bid on a multi-million dollar contract for a Fortune 50 firm. They submitted their most aggressive pricing and proposal as they were the incumbent on one third of the portfolio in the RFP.

As a result of their valued past performance, they made the buyer’s down select onto the short list and into the pre-award negotiation phase.

And that’s where things got strange. Up until that point, the buyer had worked intelligently and effectively. But then they seemed to unravel. The buyer told this incumbent their pricing was 50%-100% above the #2 qualified bidder – and asked would they match that pricing.

The incumbent, having been to one or two rodeos before, didn’t say what was on his mind, which was:

If our competitor is 50%-100% lower than we are, why don’t they award the entire portfolio to them?

Instead, the incumbent coolly found a couple of small scope concessions for the buyer, but didn’t budge on price, telling the buyer it was their best and final offer.

Later, the buyer came back and awarded the incumbent a substantial portion of the total portfolio, greater than their original share.

Buyers’ Alternative Tactic

Alternative Contract Negotiation Tactic to Ridiculous Counter Offers

Many buyers frequently use the “ridiculous counter offer” tactic in the hope they’ll squeeze more price reductions out of their top one or two suppliers.

Yet experienced suppliers aren’t fooled. This buying tactic is as obvious as watching a middle aged man leading cheers at a high school football game  – and believing he’s fooled the crowd into thinking he’s a teenager.

For buyers to avoid the charade of ridiculous counter offers, and still get the lowest price for the most value, why not ask for it at the beginning?

State it explicitly in RFPs that all supplier submittals are to be their last, best price and final offer.

Why might buyers balk at this alternative?

They may fear that suppliers would withhold their lowest price, gambling that buyers have to choose one of the bidders.

But that’s a fallacy, as buyers can always decide to keep the incumbent and negotiate price against the lowest bidders’ price. And since this language is stated in most RFPs, buyers can stress their option during bid conferences with suppliers.

#2 Misrepresenting Award Intentions

Misrepresenting Award Intentions

Buyers don’t seem to use this tactic as often as the “ridiculous counter offer” but it occasionally shows up. This is what happens.

Before the RFP is released, buyers have already decided to award their portfolio to only one supplier, a winner take all approach.

Yet the RFP is released to suppliers stating they may bid on all or only a portion of the portfolio. This misleads suppliers into thinking they have a shot at a partial award when in reality they don’t.

Buyers use the “misrepresenting award intentions” tactic in the hope one of the partial-bid suppliers will come in with a lower price at a single location. Buyers can then use these low prices to negotiate each location with their #1 preferred supplier bidding the entire portfolio.

The down side for buyers is that the losing-suppliers typically hear about this after the contract award. As a result, they may not bid during the next RFP cycle. Or if they do bid next time, may price overly aggressively and get stung by the winner’s curse.

A worst case scenario would have the losing-suppliers working as subcontractors to the winning-supplier, and who could blame them for being less than enthusiastic towards the buyer.

Buyers’ Alternative Tactic

Misrepresenting Award Intentions

The alternative here is too simple: make the RFP match procurement’s true intent from the start. This transparency and integrity builds the buyer’s reputation among the supplier base, which can be especially important in both the near and long term. Imagine if buyers throw an RFP party and not enough suppliers show up to play.

#3 Apples & Oranges Against Each Other

Apples to Oranges Comparison

After the down-selected suppliers’ presentations, buyers typically identify the top two suppliers to enter into the pre-award negotiation phase. Buyers want to negotiate simultaneously with the top two qualified suppliers.

This enables buyers to still have a backup if their #1 choice exits during negotiations. They’d hate to go through the high visibility, long RFP process and end up with egg on their face if negotiations blow up.

However, suppliers rarely, if ever, offer the same value, TCO, or capabilities. This means when buyers negotiate with the top two suppliers, it can never be apples to apples.

Since suppliers’ value and TCO always differs from one another, how can buyers negotiate price as if they’ll receive the same value at the same TCO?

Buyers’ Alternative Tactic

Alternative Single Selection

Buyers can evaluate suppliers’ RFP responses, shorten the list in a down select for in-person supplier presentations, and then make their final selection after the presentations.

There’s no need for more negotiating with either their #1 choice or #2 as an insurance backup. This alternative tactic doesn’t waste time and avoids harm to the buyer-supplier relationship.

Why might buyers balk at this alternative?

Buyers may fear their top pick will reject their contract’s T&Cs (Terms and Conditions) when they get to that negotiation point.

To eliminate that possibility, most RFPs include the buyer’s T&Cs when released. And suppliers must include their proposed changes within their RFP response by the due date.

Buyers can go through the RFP response evaluation, down select to the top three, and then evaluate those suppliers’ proposed changes.

Should any appear to be a deal breaker, buyers can go back to that individual supplier offline and challenge them to accept/edit/delete their proposed changes to T&Cs as needed.

This means going into the in-person presentations, buyers will have all three top suppliers ready to go contract-wise before the final selection (there may be final tweaks to contract language to finalize the signed version but they shouldn’t be deal breakers).

Summary

OK, buyers may cry foul that true professionals don’t use these negotiation tactics anymore. And if they did, the alternative tactics proposed wouldn’t work because they’ve overly simplified a complex process.

Possibly true, but not mostly true. These negotiation tactics are being used, maybe in a subconscious, knee-jerk response kind of way. No matter, they need to go; to be replaced by something better.

IMAGES: Trash bins by City of Boston Archives, The Sound of Music in the public domain, Bring on the Clowns by Antony, Lincoln and McClellan in the public domain, Card fan by Kyknoord, Old window glass by stanze, Camera comparison by Nikolaj F. Rasmussen, Lincoln Memorial by Kevin Burkett

If you enjoyed this article, get email updates (it's free).


(We respect your privacy.)

Previous post:

Next post: