Thursday, October 20, 2011

How do you deal with a situation where the other side insists their standard terms must apply?

That question was posed on a LinkedIN site so I decided that I would discuss it here. There are a number of ways to push back. My favorites are:
1. Legitimacy / competitive benchmark
2. Risk and control.
3. Cost Impact.
4. Problems it creates that need to be solved.
5. Behavior it will drive and
6. Competitive benchmark.

My first approach is legitimacy linked to competitive benchmark. This isn’t a price benchmark it’s a benchmark terms and their competition. In this you explain that for all other suppliers you use your terms showing legitimacy to your terms. If they still insist on using their terms I would make it clear that any differences will need to be offset. I would further make it clear that any differences will also impact sourcing from them each and every time there are competitive products. This sends the message that while we may use your agreement to start from, where we are going to wind up in the negotiation is going to be no different than if you used your terms or they simply will not get business.

Any time you deal with the other party’s standard agreement there are two things you need to do to start. The obvious one is to review it for what it says. The other is to review it against your standard terms to see what is missing and identify what you need to add to the other party’s standard agreement.

When I look at a supplier’s terms the first thing I look at is risk. What risks are their terms the looking for me to assume. If they want me to assume a risk, I want to make sure that I can manage that risk. Most of the time managing the risk will require that you have control over what actions the supplier can take that could create the risk. When you insist on control as part of assuming the risk, most suppliers don’t want that control. So you link those two issues together. If they want you to accept the risk, you must have the control. If they don’t want to give the control to you, its then a risk you can’t manage. I always insist that the party that has the greatest ability to control the risk should be the one responsible for managing it. If that doesn’t get you what you need then you next link it to cost.

Most terms in the agreement will either have a cost or will drive a cost. Risks, if they materialize, create costs. If the Supplier wants me to assume a cost, they are providing me with less value, so I put a price tag on it and want to pay them that much less for their product or service. That’s negotiating terms from a total cost perspective. If they reduce their price to offset the increase in cost I may agree to accept it. If they don’t I will always use that to explain what the impact of that is from a competitive benchmark perspective. In another post I wrote about value equivalence, I used that to show that other suppliers offer better value and what they are selling and any unique features they have is simply not worth the difference in the total cost of doing business with them,

Some terms will clearly create problems for you, so the next thing I would do is explain the problem that their term(s) is creating and look to them to solve my problem as a condition of getting my business. If the supplier provides an alternative that works for both of us I will agree as long as I get the same value. If they can’t or won’t, once again I highlight the cost or risk that their position is creating which means that they either need to solve my problem or I want to pay less because they are adding a cost to me in dealing with the problem. If I can’t live with the problem it will create, I will walk away from the deal.

Many times Supplier terms really aren’t well thought out of in terms of the behavior they will drive. For example if a supplier doesn’t want to give me a firm commitment where I know that I can count on them to deliver product in a high quality manner, on-time, every time, I ask them what type of behavior do they expect that will drive. I then tell them the cold hard facts that 1) I will never single source them. 2. I will never consider them for being a primary source for an item because I simply cannot depend upon them. I want to make it clear than with those terms all they will ever be is a low volume second source at best and the number of times I would use them will be very limited. This is not a message their sales people want to hear. You use the sales person view of the negative impact it will have on their meeting their sales goals and their commissions to have them help drive change.

My next approach is competitive benchmark. This isn’t a price benchmark, it’s a benchmark of both terms and value. You can explain how their terms aren’t simply aren’t competitive with the ones you have from other suppliers, especially their competition.. You can highlight that with their terms they provide less value than the competition. You can them highlight that whatever unique feature they may have that differentiates themselves from the competition is simply not worth the difference in value/cost. This sends the key message that you are prepared to buy another supplier’s product without those features because from a cost/value perspective another product will better meet your needs.

If none of these work and you need the supplier, make the smallest possible commitment you can make. Then develop plans to migrate to another supplier or another solution as soon as possible. If you don’t need the supplier, walk away and make it clear why you are walking away.

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