The art of negotiating a contract

MY TAKE:

Effective contract renewal negotiations are critical to keeping costs low for your organization while also acknowledging the potential for rate hikes from vendors.

• Why it matters: Vendors often attempt to raise prices during renewals, sometimes significantly. In an example I share in the Deep Dive for paid subscribers, one vendor I work with presented a mildly upgraded contract with a $37,500 increase - a 167% jump. (I got it down to 33% increase with favorable payment terms.) This underscores the need for effective negotiation strategies to manage costs and preserve valuable partnerships.

Negotiations can be scary and awkward if you’re new to vendor management. Folks in sales can be extremely pushy (to the salespeople reading this newsletter, I love you, but I speak the truth!) and it can be at times extremely difficult to tell someone “no” when they ask enough times.

People take semester-long classes on negotiations in MBA programs, so don’t expect something like this to feel comfortable right at the outset. It’s a lot to learn, but it’s one of the most valuable skills you can build at any position in the company. My CFO knows by now that I don’t need to include him on contract discussions until it’s time to sign—he knows I’ll push for the best deal we can get with favorable payment terms.

Here are six tactics you can apply to negotiate contracts with price increases:

1. Do your homework. Research market rates and competitor pricing. Ideally you start this before your contract is up for renewal. If possible, review the contract performance and evaluate its value delivered.

2. Understand the vendor's position. Ask for justification of the price increase. Don’t just accept their price for an answer. Identify their priorities and make sure the price hike actually makes sense.

3. Leverage your position. This will unfold in two ways: use your role in the company (if you aren’t the owner, you can argue that your hands are tied/your CFO will never accept this rate hike), and highlight the fact that they’re (probably) not the only business in this market and you can move to a competitor.

4. Propose alternatives where applicable. Suggest longer contract terms for price stability if your organization will allow it, and ask for any sort of bundled/loyalty pricing. See if there’s anything you could cut from the budget.

5. Be willing to walk away. Know where your maximum is, and be prepared for alternatives. This is why it’s beneficial to not lock yourself so deeply into any single vendor where it’s impossible to part ways with them.

6. Be firm with your language. This is one of the simplest ones that is often overseen, which is why I’m calling it out last. A simple “We’re not going to agree to these terms” or “We’re not going to pay that amount” can go a long way.

The bottom line: Delegating is tough and feels unnatural, but committing time and energy to the practice will set you apart as a skilled leader. Bon courage!

SOMETHING EXTRA:

🤖 Tetris can help prevent intrusive thoughts associated with PTSD. Yes, Really!

• This is actually a study from 2020, but I just came across the topic on Threads and had to deep dive. (There was also a lot going on in 2020 so, you know, easy to miss the news.)

📚 Does negotiation scare you? Never Split the Difference is the book to read on negotiation. I can’t recommend it enough.

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