The ability to negotiate a vendor contract is a skill that every business owner will need at one time or another.
Whether it is the decision to outsource a service, or negotiate the price for new office equipment, business leaders will need to fine-tune their negotiation skills.
Most of us don’t have the natural ability to negotiate so the trick is to use a systematic and unbiased approach to negotiate vendor contracts.
12 Steps to Contract Negotiations
1. Identify a Need
Whether you are looking for help cleaning your building, repairing an HVAC unit, or identifying the right IT company to help with some strategic initiatives, you need to understand what your need is before you can look for a vendor to help you.
Take some time to educate yourself so that you will be able to define the problem with a vendor.
For instance, if you are looking to outsource your cleaning company, spend some time thinking about what types of cleaning you will need, whether you or the vendor will supply the materials and equipment, and estimated square footage.
Vendors always have their own language so make sure you understand what all of the lingo means before you sit down with them!
2. Identify A Team
Identify a team of employees who can help identify the need, research the industry, and interview the vendors.
This team will be your think tank to make sure every aspect of the agreement is thought through and all issues are addressed.
Often you only need a few people for this but it is always beneficial to have several eyes and brains on this type of project.
Once a contract is signed you’re pretty much stuck with what you agreed to. Make sure you know what you want before you sign on the dotted line.
3. Research Vendors
Once you know what the need is, have your team help research vendors that specialize in the particular area you need help with.
Talk to friends and others in your field for referrals.
The internet is a great resource and many organizations have ratings on their services.
Use these resources and read customer comments.
You can learn a lot from just doing a little online research and listening to their customers. Simply do a google search “vendor name reviews”.
4. Use BBB as a Resource
Check with the BBB on the vendors you pick and see if they have any prior unresolved customer issues.
This can also be done online and is a great resource not only for finding a good vendor but also if you make Charity Donations.
You want to do this type of checking before you ask for a proposal so you won’t be wasting your time negotiating a bid only to find out the vendor has unresolved customer issues.
Know who the vendor is, what their reputation is, and what their customers think of their services before you sit at a table with them.
5. Identify Three Vendors
Identify three vendors that look the best to you.
Think about the big-name vendors that do a lot of advertising.
You can expect to pay a little more for them so make sure you list at least one vendor that does not have the big-name recognition.
Smaller vendors that have not been around as long are hungry for business and might be able to do a really good job for you at a lower cost.
6. Request for Proposal
Once you have your three vendors chosen, contact them, describe what your needs are, and ask for a formal proposal or otherwise called a request for proposal (RFP).
Ask the vendor to include a list of customer references with their proposal.
7. Vendor Interview
Once you have all of the proposals it is time to sit at the table and talk.
Ask each vendor to present their proposal to your team.
Allow the team to ask questions and clarify any uncertainties.
Review your criteria and make sure each point is covered in the proposal. If something is missing ask about it.
Questions I like to ask in an interview like this is:
- Describe the kind of training your service employees go through?
- Do you track customer satisfaction?
- If yes, what are your satisfaction scores?
- What is your process to deal with customer complaints?
- What are your internal service standards?
If the service you receive is complex, you don’t want the service technician to be watching YouTube videos to get the job done!
8. Review Terms of Agreement
Review all three proposals side by side to make sure they are comparable.
Call the vendor and get clarification on anything that does not make sense or may need further explanation.
Things to look at are the duration of the agreement, payment cycle, termination clause, liability for both sides, the scope of services, what they will and will not do, etc.
Look at what their approach is to cost control, quality of product or service, and their customer service commitments.
9. Negotiate Differences
Once you have a good understanding of the proposed agreements, go back and negotiate any sticking points that might hold you back.
Everything is negotiable so don’t hesitate to ask if you think it is something important to the agreement.
Ask for add additional no cost add on’s to the scope of their offerings.
10. Check References
Once you are settled on an agreement, start calling the list of references and ask questions like:
- How long have you used this vendor?
- Have there been any issues?
- If yes, how did the vendor address the issues?
- How is the customer service of the vendor?
- How would you rate the vendor employees?
- If there was anything you could improve with the vendor, what would it be?
11. Solicit a Second Opinion on the Agreement
Once you feel comfortable with an agreement, have another set of eyes look at it to see if there are any outstanding things that may be missing.
This should be another person who is familiar with looking at contracts.
Tell them how you came up with the list of vendors, what your criteria was, and why you have chosen this one.
Then let them pick it apart. Don’t take any questions personally, just allow the process to work.
This step may save you from signing something you regret later.
Ok, now is when you sign the agreement and agree on a start date.
Take the agreement and tickle your calendar or the appropriate person’s calendar with anything you may be responsible for in the agreement ie; payment schedule, auditing process, inspections, etc.
Negotiating is a skill that can be learned. The trick is to find a good balance between the needs of the organization and what the vendor can provide.
Keep in mind, vendors are always looking for new business so make sure you give them the opportunity to give you their best offer.
Additionally, cheaper is not always better so be sure you can evaluate the product/service differences so you don’t mistakenly sacrifice quality for cost.
Lastly, try to avoid the mistake many organizations make by signing up with a vendor and simply renewing the contract every year.
Don’t fall into this trap. Go through this process at least every couple of years to ensure that you are getting the most for your money.