Successful contract negotiation strategies

Successful contract negotiation strategies

Whether you’re new to contract negotiations, or you’re already an experienced negotiator — there is always more to learn to achieve the best possible outcomes.

In this article, we take a look at some of these strategies that might just help you in your next contract negotiation.

Decide on the process

With all the initial enthusiasm for a new project, there can be a temptation to jump straight in and get started with work on a contract. Whilst it’s great to harness that energy, rushing may cost a lot. Take some time at the start to plan out the process you will be following. A profound planning at the beginning will always pay dividends, increasing the chances of getting a successful negotiation outcome.

If it’s a major project, transaction, or contract, the negotiation process could last for an extended period of time. If so, it could be a good idea to agree on an initial term sheet, heads of agreement, or memorandum of understanding. This type of document can even be relatively informal. You can use this initial agreement to:

  • Record any key points about the deal that have already been agreed upon.
  • Agree on details of the negotiation process itself. Examples include confidentiality obligations, a project timetable, and who will prepare the first draft (and by when).
  • Help build goodwill between the parties. The act of working together to solve the early (and less significant) issues in this initial agreement can help build trust. This will pay off when the main negotiations get underway.

Manage carefully the time spent on this initial document. There is a risk of losing momentum if you try to be too detailed and negotiate every minor issue at this early stage. It’s more important to agree on the key issues — and then get moving.

Know your goals

From the outset, it’s important to know why this contract is important to your organization. How does it fit into the organization’s strategy? What are you trying to achieve? Documenting your answer to these questions will help you later when you need to make tough compromises and trade-offs.

Working with your team, list out the objectives you are hoping to achieve from this contract. Identify which are non-negotiable (that is, which ones would cause you not to go ahead with the deal). Try to list your objectives in their order of priority, so everyone on your team knows their relative value. You could also list alternate outcomes that would equally be acceptable.

This exercise can help you overcome another problem that can sometimes arise. This is when two businesses with a common goal agree on their high-level “commercial” or “business” terms (such as the price and structure of a deal). Then, sometimes, as the negotiation team starts to grow (for example, as professional advisers are engaged), new questions and issues start to be raised. These new issues can distract the parties from their original objectives and, in the worst cases, even jeopardize the deal. Having a list of pre-defined objectives can help prevent this from happening.

Assume positive intent

As you negotiate a contract, you start to learn more about what the other party wants and how you might work together. Good communication and a flow of information are essential if you want to keep the negotiation process moving.

When there is a lack of information, it’s easy for mistrust to creep into the process. When that happens, you might start to doubt the information from the other party. You might even think that the other party is being deceptive or has an ulterior motive. A good way to overcome this negativity is to always try to assume the other party has positive intentions and keep asking questions. In turn, be as open and honest as you can in answering the other party’s questions.

This is why some negotiators are taking a different approach and negotiating instead of what is called a relational contract. They recognize that the traditional contracting process — and traditional contract negotiations — tend to be defensive in nature. A contract is effectively the equivalent of a “prenuptial” agreement in a marriage — dealing with what will happen if things go wrong. The problem is that with all the focus on negative issues, there is a risk of damaging the very goodwill that the parties will need if the contract is to be a success.

Still using the marriage analogy, a relational contract is more like working together to agree on the “wedding vows”. The negotiators discuss the types of risk and hurdles that they might have to overcome, and how they will work together to solve them. They recognize they might never predict everything that will happen — but that they can at least agree on the values and principles they will apply, together, to overcome these challenges.

Take a data-driven approach

It’s not always easy to get to an agreed position when negotiating a contract. Your chances are also much lower if the negotiators allow the process to be derailed by personality conflicts.

To keep the emotion out of the negotiation process, try to take a more data-driven approach. Basing your arguments on data can be highly persuasive and difficult to argue against. For example:

  • Negotiators will often try to claim that a particular outcome is the current “market standard” position. Rather than simply trying to assert this is true, you might be able to get hold of industry reports, deal statistics, or other information that proves what outcomes are currently being achieved in the market.
  • Another negotiation tactic is to claim that a requirement is needed (or cannot be agreed) as it’s “company policy”. Again, rather than simply asserting this, try to provide data-based evidence (for example, providing a copy of the policy, or a board paper, or another document that substantiates the position).

If you are able to provide, for example, price or risk data, and able to explain what the data shows and why your position is reasonable, you are much more likely to get a positive result.  

Practice, practice, practice

Before going into a high-stakes negotiation meeting, it’s worth investing the time in practicing negotiating your position.

For example, you could rehearse for the meeting, by getting an experienced colleague (or an external professional adviser) to play the role of the other party. This can help you understand the perspective of the other party. It can also help you identify potential objections, refine your position and even come up with new ideas that will help move the process forward.

Final word

There have been countless books and articles written on the art and skill of contract negotiation. Elite business schools continue to teach it to this day. New theories are still being developed all the time. It can feel hugely overwhelming to try and absorb and put all this advice into action.

It will always be good advice to invest as much time as you can to prepare for an upcoming negotiation. But if you can also try to implement one or two new strategies each time you approach a new contract negotiation, you will quickly learn what works best for you.

In some time, you will start to develop your own personal negotiation style and adapt to different scenarios – making it much more likely that you will get that successful negotiation outcome.

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