Monday, April 11, 2011

Agreements To Agree In The Future

Frequently during a negotiation the parties will encounter an issue where there is not enough experience or history to establish a term at that point in time. This is especially true if the item is new, and has no real history of costs, yields, or other performance. Some people may address this is by including language that the parties will meet to mutually agree to certain terms or changes in the future. While you can include certain basic standards such as both parties must agree to negotiate in good faith, the problem is the dynamics of leverage will change in the interim, and the longer the time period it takes to come to agreement, the greater the potential risk because the more you have invested.

How you feel about postponing agreement to the future really depends upon the circumstances. For example, if you were a buyer and felt that the market may be becoming more competitive over the period, planning to agree in the future may be to your advantage as you may have more leverage at that point based upon the leverage from the marketplace.

Agreeing to agree in the future also has strong potential for problems when general business conditions change, competitive positions change, the supplier’s management changes; the supplier’s focus changes; the demand or capacity changes; or even the motivation for entering into the agreement changes. The leverage that you had when you initially started the agreement may be gone because of commitment to the specific direction you have taken. Leverage may also have shifted to the other party, especially in situations where your transition to another Supplier will be lengthy, expensive or difficult or where it’s not worth investing your internal resources to make the change.

If you want to be protected against being taken advantage of because the potential leverage shift to the other party, its important to set parameters regarding what may be agreed in terms of either upper or lower control levels. For example in 6 months the parties will meet to mutually agree upon pricing, which shall not be (less than) or (greater than) X. Or the parties will meet to agree upon yield numbers, which shall not be less than X.

It can be extremely difficult to prove that the other party is really not negotiating in good faith, so the more you can bound your commitment to agree in the future with parameters and the tighter the parameters are, the better off you’ll be. For example if you didn’t know how much time it would take to test something, there is nothing to prevent you from establishing in advance what the amount of time assumed was at the beginning, the skills of the individual performing the test and the rate that is attributable to the individuals doing the testing. That way when the negotiation in the future occurs, you established the benchmark to measure from in terms of the amount of time, people and rate, so the only thing left to negotiate is the difference in the actual time spend at the agreed rate. The key is to significantly limit what’s open to be negotiated.

If you don’t establish parameters you may find that “An agreement to agree in the future is no agreement at all” and the supplier who you thought would be reasonable has turned this into an opportunity to use the shift in leverage against you.

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