HOW TO NEGOTIATE A VENDOR AGREEMENT MID-TERM: A 3-POINT CHECKLIST
INSIGHTS TO THE OFTEN MISSED OPPORTUNITY TO WIN MID-TERM RENEWALS, INCLUDING A 3-POINT CHECKLIST FOR BETTER UNDERSTANDING YOUR RENEWALS.
Brian Bahnsen
Sourcing and Vendor Management Consultant
In case you missed it, in the last blog post we discussed insights covering the missed opportunity hidden in vendor renewals. Channeling Paul Harvey and his famous ‘rest of the story’, there’s more to that story too!
Since we’ve all slept since then (and for some of you that didn’t catch the previous post), it was the end of the year, big table, several people around it, two teams (Seprio and the Client) working together, planning to seize opportunity in 2020 by prioritizing and working vendor strategic sourcing projects.
Vendor renewals were about to be overlooked, but we managed to seize the moment and the opportunity in renewals. As we sat at the table discussing the situation and the 5-point technical checklist (illustrated in the last post), there was a tangible shift in the conversation. In this blog we will cover 3 things you need to consider to engage specific vendors and conduct MID-TERM renewal negotiations.
As is true for new deals, we identified opportunities, stakeholders, risks, etc. As the discussion developed, it became clear that many of the same things need to be considered. However, the one large difference in a mid-term renewal is the relationship. In a way, you may need to ‘sneak-up-on’ your vendor and frame the request for the discussion around the relationship. Since this is a bit out of sequence and untraditional, the vendor may not really expect that you are interested in discussing renewals at this time. Not that you are trying to hide something or be Houdini and magical but, if they think you wish to speak about the agreement directly, they may be less likely to accept your request.
Additionally, if they feel that you want to speak about the agreement outright, it may be met with objection as that is often a bad sign when it seems unexpected. Since it’s easy to get comfortable with initial agreements, and even easier to “set it and forget it”, the success of this approach will be yet another measure of the health of your relationship and shows you have reached a critical milestone with your vendor.
So, you pose to them a discussion around the overall relationship of the two parties and take it from there. Like a standard renewal, in a mid-term renewal, before digging into performing a technical evaluation of whether to negotiate, FIRST it’s important to identify the business reasons why you may choose to proceed. Each vendor relationship is unique, so uncovering the business reasons why you and your team may want to negotiate a renewal ensures a clear purpose.
A quick refresher on some reasons why include:
The organization is struggling financially and needs to improve the P and L.
The business requires additional functionality not currently included.
New leadership has a different philosophy for engaging vendor partners.
And some reasons why not include:
The relationship is simply not strong enough to withstand the discussion.
The idea of ‘opening up’ the agreement mid-term presents too much risk to the organization.
You need to identify the reasons and agree they merit triggering a discussion, which will ultimately result in a request to negotiate out-of-cycle. Then follow this 3-point checklist once you decide your agreement is a strong candidate for a mid-term negotiation.
Identify the drivers. Many times, there is an external factor that drives the efforts of an organization’s desire or need to renegotiate. Take, for example, a financial impact based on merger & acquisition activities or historical events like the housing crisis of 2008, the financial disruption caused by the 911 attacks in 2001, or the now ever prevalent COVID-19 pandemic crossing the globe. All of these equate to negative situations creating real objectives and a need to save money. This may seem less important with a relationship that is going well but may represent a better option than the alternative.
Understand the relationship. When the team is certain that the relationship is strong, there is an on-going interest in growth and collaboration, and there is no downside to approaching the vendor with this ‘idea’, there is a strong likelihood of success. This is exactly what we mean by saying it may represent a better option than the alternative. If your relationship is not strong, you likely have little incentive to consider extensions, new services, etc.
Here’s a real-life event to illustrate what can happen if a mid-term renewal is realized. An organization I was working with had an interest in saving some money. We considered a vendor that was collaborative and represented a good-partner attitude. The team approached this vendor with nothing more than an interest to commit to an extension in exchange for a savings proposal. The client was hopeful that they may see a 5-10% savings but did not negotiate against themselves and let the vendor make the first proposal. Long story short, the net effect was a savings of 18% in exchange for an additional two years on the term. This was an easy decision based on the facts that any change would take 18 months and there is nobody in the market that the client was interested in considering. Bottom line, the client was going to be with this vendor for that long anyway and signing up for two years was inevitable; but the vendor does not need to know that!
Focus on the interests. Many times, there is a tendency to focus on what the positions are of any given organization. There is a lot of literature out there that relates to interests over positions and that is because it is a wise idea and one for which you should take inventory. If you are continually focused on what someone says versus what they want, you may in fact miss that you both want the same thing(s). If you work hard to recognize the end-point is the same for both parties, you will begin to focus on that over what ‘path’ someone thinks is best to achieve the goal. In fact, the path may conflict with the goal so work to understand the intent and then put on your creativity hat and find ways that get both parties where they wish to be. An example may go something like the example I shared above. One party was after some savings while the other saw the extension to recognize more revenue. Guess what, both are correct and, in the end, both parties got what they were after. So the paths were different but the outcome was the same. By being open to the possible, the team was able to realize a positive outcome and strengthened the relationship in the process.
Again, it is worth repeating; If the business whys and the technical evaluation lead you and your team to conclude a renewal is worth the pursuit, and the renewal being mid-term is not a disadvantage or against the greater good of the whole, you will want to activate the same best practices applicable in strategically sourcing an initial engagement. In the end, a mid-term renewal may prove to be another way to generate savings for businesses.
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