What suppliers can do mid-contract to future-proof their negotiations

By Jeff Cochran, Partner, Shapiro Negotiations Institute

We’ve all been there before. You’re halfway through your initial contract with a new client. Things are going great. Sure, there were some growing pains in the beginning, but you feel you and your firm are adding a lot of value and you’re confident your client feels the same way.

So why is it that most of us always wait until the current contract cycle is about to wind down to engage about an extension?

At Shapiro Negotiations Institute, we coach the principle that the best negotiation occurs when you have leverage. This article discusses what you, as a supplier, can do mid-contract to make your upcoming negotiations more successful.

Step 1: Get your team on the same page

One common challenge for renewing or upselling business at the point of a contract extension is simple: alignment. Typically, coordination among departments and team members is never as tight as it is during the initial pitch exercises for that first deal. Once the work is won, however, the contract begins to take on a life of its own. This can become a challenge down the road when it’s time to re-negotiate.

In some cases, we’ve seen companies do a complete “hand-off” at various stages of the project. From winning the deal to kicking off, or from moving a project into a new stage of development, suppliers can become distanced from the actual work and, therefore, from the relationship with the customer. This is usually where an oversight role — like that of a strategic account manager, who’s responsible for the overall corporate relationship with the customer — can be helpful to coordinate everything from start to finish.

Even in working relationships that involve a SAM at some level, it is still critical to keep the team aligned. Especially in larger projects, we commonly see senior partners or directors forming the arrangements but more junior associates or managers doing the day-to-day work. Over the life of the contract, this sometimes results in providing extra services at cost for the good of the relationship or the “leaking” of various intel from your team to the clients. 

In any case, we recommend having consistent communications and team check-ins at multiple stages through the life cycle of the project. Establish priorities, discuss future opportunities and even determine talking points around critical internal issues. A united front is imperative to successful (and smooth) renegotiations and extensions. 

Step 2: Manage expectations

Negotiations are about promises and clear terms to create a value exchange. Misunderstandings can be catastrophic. Therefore, you should manage your client’s expectations at all times. We’ve coined this essential tenet “Cochran’s Law” after – you guessed it – Yours Truly. 

Cochran’s Law boils down to the idea that satisfaction = reality ÷ expectations. If expectations rise, then reality – what your client receives from you — has to rise as well if you want to keep them satisfied. If you provide too little, you put your contract renewal or upsell in jeopardy. But if you provide too much, you spoil them for the next agreement and risk a drop in customer satisfaction.

There are a number of ways to manage expectations throughout the negotiation and project, but two of the simplest will never fail:

  1. Work to understand the client’s decision-making process. Do what you need in order to understand which stakeholders are involved, who has final approval and what key performance indicators will determine success. Connect lofty business goals to concrete and measurable objectives so you can align on exact targets. 
  2. Build relationships along the way. Most discovery processes will allow you to create a map or schematic of the key stakeholders, their roles and what they value most. Whenever possible, we recommend building relationships with as many of these stakeholders as possible, leveraging the reach of your full team. Going deeper into key departments will help you gather more intel, while going wider into other departments may offer you different perspectives or insights about the project and its value to the company. Maintaining only one key contact leaves you at risk if they change roles or leave the organization. 

The key is to get credit for the extra value you provide and manage expectations on what you’re expected to deliver. Once you know the client(s) and what they value, you can maintain status quo or scale your value strategically to surprise and delight. For example, small tasks like setting up Google alerts to help your client track media mentions and performance could be highly valuable to your client with minimal extra effort on your part. 

Step 3: Always be selling

Your mindset is key. A trick of the trade – something you’ve probably heard a ton and possibly even scoffed at – is that you need to always be selling. Remember: While you’re delivering your work and building your relationship, you’re also always in a constant cycle of negotiation.

Your work product is part of that negotiation. The rapport you build personally and professionally factors into it, too. Another common mistake we see is people referring to the time before your contract expires as “the renewal cycle.” Many companies fall into this trap of “OK, we’re about one month away from our deal expiring, it’s time to start negotiating again.” If you begin your negotiation weeks before your current deal expires, you’re already on the back foot.

The effort you put in in the middle of the agreement is actually often the most valuable for several reasons:

  1. Your client will feel like you are really invested in him or her, rather than just appearing to care when it is time to renew. High-quality partnership will be remembered.
  2. Projects and work streams don’t always follow fiscal cycles. Effective work mid-project will lay foundations for your team that may actually make it more challenging to end the contract than to extend it.
  3. Strategic planning should never be limited to one window. Throughout the project, every task should ideally serve a larger purpose in a strategic plan looking at least three years out. Helping your clients identify long-term priorities both allows you to shape them and gives you a seat at the table as their foundational partner. 
Your Next Contract Negotiation

Be prepared, be engaged and be committed. Those three traits will go a long way in your continued success.

Jeff is a partner at Shapiro Negotiations Institute and a frequent presenter and keynoter for Strategic Account Management Association. Connect with him on LinkedIn: https://www.linkedin.com/in/jeffcochran/

From Your Buyer, with Love: “Dear Supplier, Please Reduce Your Price by 10%!” Or: Five Steps You can Take NOW to Counter Price Reduction Requests

By Jens Hentschel, Founder, THE FIVIS PARTNERSHIP

Many sales teams are being asked by their B2B customers to reduce prices to support them during these difficult economic times, a pattern that is all too familiar for many sales teams. This article proposes an approach on how suppliers can respond to this procurement tactic and how sales organizations can move the dialogue back to a value-adding conversation with the customer and their professional buying team. 

“Never let a good crisis go to waste.” The quip Winston Churchill formulated in the ‘40s has become a business management mantra. Any economic downturn is used as an excuse to optimize company cost structures and to improve inefficiencies. The COVID-19 health crisis turned economic crisis is no exception.

The resulting actions by many companies and their respective procurement functions will make many B2B suppliers feel like they’re living through “Groundhog Day,” receiving yet another request to support their customer during these unprecedented and extremely difficult times.

If you are in B2B sales, you either have been – or soon will be – contacted by your customer’s procurement team asking for help or – to put it more bluntly – for money.

Why your customer asks for money

Let me be clear: This time around, we are indeed in an extreme situation with end-consumer demand tumbling fast, corporate investments on hold and world trade under extreme scrutiny. Value chains and supply chains are disrupted, and “cash is king” more than ever before. In these circumstances reducing costs fast is for some businesses a matter of life or death. Every stone needs to be overturned to see how the cash burn rate can be contained and how cost can be reduced fast.

Such price reduction requests from your buyers will follow a standard trajectory, namely:

(1) Savings and cash-flow targets will be defined by your customer’s CFO and passed onto his or her procurement function for execution.

(2) The existing supply base will be grouped into categories depending on their contractual value to the business.

(3) Suppliers will then be approached and asked to lower prices immediately by a certain percentage and/or to increase payment terms by X number of days.

The size of these requests will be based on the classification category the supplier falls into and will often be accompanied by direct or indirect threats to reduce contracted volumes or contract lengths, as well as suggestions to restrict access to future business opportunities in case the supplier does not swiftly support the customer demands. 

While aggressive tactics like these might be merited under certain circumstances, they more often risk causing serious harm to customer-supplier relationships by destroying trust that’s been carefully developed over the course of years. This can endanger supplier collaboration on new product development, on supporting future market expansion plans or mitigating tight supply situations, leaving the buyer’s business at a competitive disadvantage and resulting in lost sales and lost market share in a worst-case scenario.

Despite these significant risks, the approach has become a regular occurrence of many procurement organizations, who apply these tactics on a regular cadence – crisis or not.

How you should respond to the requests to cut prices.

So how should your sales team react to these cost-cutting requests by your customers and their buying teams? These aren’t easy conversations to have, but there are ways to manage these exchanges that can actually allow you to benefit from this buying tactic.

First and foremost, maintain an open dialogue with your customer – even if they have decided to engage in these rough cost-cutting tactics. Your instinct will be to respond tactically. Resist this temptation in favor of maintaining an open and consultative posture vis-à-vis your customer.

Equally important: Before you respond to your customer’s request for “help,” map out how you will structure your response. In these situations, it is crucial that your communications be clear and concise. The following five steps are designed to help engage your customer in discussions that divert their attention away from pricing and toward discussions about how and where you can offer meaningful help to your customer in these difficult times.

Step 1: Care about your customer.

This may sound straightforward, but it is the most commonly neglected area by many sales teams, especially in high pressure and extreme situations. Caring means building a thorough understanding of your customer’s end-to-end value chain, starting with your own supply base all the way up to your customer’s customer and the end consumer. 

Ask yourself: Where in the supply chain is value added or lost? What combined or independent actions by you, your co-suppliers or even your competitors could lead to improved efficiencies for the customer? How can you help realize these efficiencies? What savings could be derived by optimizing your supply chain, e.g. through adapting the minimum-order quantities, by elaborating improved forecasting mechanisms or other creative ideas? What are your customer’s total-cost-in-use elements that you could work on without decreasing your per-unit prices? 

Do not expect your buyer to know the ins and outs of the value chain! For any efficiencies you identify, estimate their value and determine what support you would need to implement them.

The Value Chain in B2B Relationships
Figure 1: A basic value chain map

Step 2: Compete for your business and understand your level of competitiveness.

Many suppliers believe firmly that they are strategic to their customers. Sorry to break it to you, but in many cases this is not the case. In reality, your buyer has specific expectations of you depending on the spend category they’ve put you in, and nothing is more counterproductive than misalignment between you and your customer on this front.

That is why it is of paramount importance that you clearly identify how and where you fit into your customer’s supply chain. A good approach is to self-apply the tools your buyer is using to categorize you – like the Kraljic matrix. .

Kraljic 2x2 Matrix
Figure 2: Example of a Kraljic 2×2 matrix with its four supplier categories and respective buyer assessments and actions

Once you have determined the supplier category you’re in, you will be in a much better position to understand your customer’s needs and expectations – and, as a result, how you can help them with their current predicament. Take your findings and start over at step 1, readjusting your proposal(s) to reflect your competitiveness and strategic position.

Step 3: Continuously improve

It may seem like an obvious point, but it’s an area I found most sales teams underperforming during my procurement career. Simply put: Do not wait for your buyer to request price cuts. Rather, proactively suggest interventions and efficiencies in your supply chain that can anticipate and even mitigate your buyer’s problems. If you regularly showcase an understanding and support for your customer’s business challenges, you will be much less likely to fall under the scope of a tactical cost cutting program in the first place. 

In case you have been lagging behind in this area, take this opportunity to announce (or reiterate) your commitment to continuous improvement in this regard and try to lay out a multiyear plan to contribute to your customer’s competitiveness moving forward. Keep the focus on the measurable value you bring to the partnership. Every crisis will come to an end eventually, and your customer wants to make sure they’re doing business with suppliers who contribute end-to-end value.

Step 4: Communicate clearly, proactively and regularly

Understand your individual buyers’ challenges and how you can contribute to keeping their internal stakeholders happy. During a price-cutting exercise, your customer’s CFO and CEO might be your procurement counterpart’s most important stakeholders. Manage your communication approach with an eye to supporting your buyer’s efforts to communicate internally, e.g. by providing your buyer with valuable market information on your input price developments in a format that their CFO can understand. This will help your buyer to better position opportunities and risks with regards to these cost-cutting efforts.

Map out which stakeholders your buyer and your organization need to influence, and create an action plan that showcases your commitment to helping your customer’s organization. Who is important? Who is influential? Figure 3 shows a simple stakeholder assessment tool that can help clarify your communication approach.

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Figure 3: A simple stakeholder assessment tool

Step 5: Define your goals

This may feel like an obvious point, but in my experience it’s another area suppliers tend to overlook, namely: What do you want to get out of this customer relationship? What does success look like to you? In the absence of clarity, your buyer will just assure you care only about increasing their margins – which, to them, will offer the perfect justification for demanding price concessions. To avoid this, provide them with your short- and long-term vision and seek to get them excited about the future value you plan to co-create together.

In my many years as a procurement professional I did, unfortunately, have to engage in many cost-cutting exercises. And one thing I noticed is that those suppliers that followed these five steps tended to come through these programs much better than the ones that either fell in line and reduced their prices or those that took a more confrontational approach.

Jens Hentschel is founder of THE FIVIS PARTNERSHIP. Before that he served in a variety of senior, buy-side leadership and director roles at companies including Procter & Gamble and KFC. This article originally appeared on LinkedIn on August 17, 2020. Learn more about FIVIS at https://www.fivis.io/ Contact Jens Hentschel at https://www.linkedin.com/in/jenshentschel/