How to renegotiate your supplier contracts during a recession

by House of Control | Oct 27, 2022 1:05:20 PM

When a recession is looming, you probably need to renegotiate your company’s supplier contracts. These five steps offer a methodology that will help you succeed. 

Is a recession coming? Most likely. What happens during a recession?

 

Demand falls and profits are slashed. How to prepare for a recession? We propose several actions, and one of them is to renegotiate your current supplier contracts. 

There is usually one of two reasons why renegotiations are triggered: either the current contract is imperfect, or the circumstances have changed. According to the research firm Ned Davis, there is a 98% chance that we are headed for a global recession in 2023.

The recession probability has only been this high twice before: in 2008 and 2020. When circumstances change, it might be beneficial or even necessary to renegotiate former agreements to remain profitable or just stay afloat. 

 

How to proceed?

NIC_3112

 

1. Identify unfavorable deals

Once you realize that one or more of your current agreements are unviable, it is time to initiate a renegotiation process. In times of an economic downturn, however, many of your suppliers and customers might also be looking for more favorable terms.

The first thing that you need to do is to evaluate your current deals and assess whether said supplier or customer is already pushed to the limit or if they still have some wiggle room.

During recessions many companies will struggle, and some will thrive. This doesn’t necessarily ensue that it is easier to negotiate with thriving businesses.

They might be in a much stronger negotiation position than a business that is pushed into a corner with little or no leverage on you. This is a complex evaluation and requires tedious work.

 

2. Determine breaking point

When you have identified current contracts that are no longer beneficial to your company, the next step is to identify the breaking point for when a deal is no longer feasible. In some cases, this can be tricky, as not all parameters are numerical or can be quantified, and it is not always easy to compare different parameters. It is crucial to do a thorough job in this phase to avoid making rash decisions once you are at the negotiating table.

The most important part of negotiations are not the negotiations themselves, but the preparations that you do before you initiate talks. First and foremost, you need to define what is an acceptable deal. Negotiations are all about give and take, but you do not want to engage in a deal where you are worse off than you would be without a deal. It is important to identify the most important parameters to your own company, and where you can offer the other party a win.

 

3. Research your counterpart

Once you have evaluated your current contracts and decided which ones should be renegotiated, it is time to look closer at your counterpart. Considering that you have already dealt with the counterpart in previous negotiations, you should already be familiar with most of their strengths and weaknesses. However, past research might have been sloppy, or circumstances might have changed drastically during the recession.

Reliable, up-to-date information about your counterparts needs, demands, possibilities, wishes, threats and so forth is of utmost importance if you wish to make the most of re-negotiations. Some information might be publicly available, some can be attained through contacts and other sources, and some might be hard to access.

A common mistake in negotiations is to enter a mindset where you think that one party will be the winner, and thus the other party will be the loser. When you enter this mindset, you are more likely to offend your counterpart and miss opportunities that otherwise could benefit both parties. Ideal negotiations focus on pleasing both parties so that both companies are better off with the deal than they would be without.

Furthermore, future negotiations will go more smoothly if the other party feels respected and they will be more likely to engage in deals that could benefit you greatly.

In some cases, it can be advantageous to invite your counterpart to a pre-negotiation summit. This is a joint discussion about the current agreement, where both parties can discuss what has worked well, and what has not.

A meeting like this can also be beneficial when business objectives or the market situation have changed. Furthermore, you might also uncover previously unknown interests of the other party.

 

4. Execution

When all preparations are done thoroughly, it is time to sit down at the table and negotiate with your counterpart. Even when you have done thorough research, this can be quite challenging.

Especially high-stakes negotiations tend to produce a lot of anxiety, and there are several measures you can take to ensure the negotiations run as smoothly as possible.

First and foremost, you should consider who you trust to conduct the negotiations. In such cases it is advised that you bring in new negotiators to prevent escalations. Previous negotiations may have failed due to incompetence or bad personal relations.

Negotiation skills vary, and your negotiators should be well informed and trained. Consequently, it is important to evaluate who will be most likely to succeed. 

At the beginning of the main negotiations, it is recommended that you agree on some clear rules of engagement. This will make the negotiations smoother, avoid misunderstandings and prevent escalation. In some cases, especially if previous negotiations have escalated, it might even be necessary to hire a mediator.

 

5. Formalizing

After the negotiations are done and both parties have agreed on the terms, it’s time to wrap up the deal and formalize it in a contract with clear terms. Depending on the complexity of the deal and potential gray areas, it might be necessary to bring in legal counsel to avoid future disputes regarding the terms.

 

Relevant products: Complete Control Contract Management Software

Subscribe Now

Additional Reading