Crash course in: Renegotiating supply contracts

Your business and markets have seen massive upheaval and some of the supply contracts you struck a couple of years ago no longer look such a good deal. What can you do?

by Alexander Garrett
Last Updated: 09 Oct 2013

What's the position? There are three contexts for renegotiating a contract, according to Roger Sparks, UK managing director of outsourcing specialist TPI. 'These are the three Rs: remediation - where there are specific issues to be addressed; restructuring, typically in mid-term, where you want to change the scope, say, or support a change in business strategy; and renewal, when the contract period expires.' The key is to write your initial contracts with maximum flexibility, says Sparks.

Don't drag your heels. You should start over a year before the agreement is due to end, depending on the deal, says Paul Carter Hemlin, founding director of Contract Management Direct. 'You also have to decide whether to retender with other suppliers, or just renegotiate with the incumbent. You need time to put together a Plan B if the other party doesn't want to renegotiate,' he adds.

Bring them to the table. Use whatever levers you have to persuade the other party to renegotiate. 'That might typically involve the customer offering an extension to the term or increased scope,' says Duncan Pithouse, partner at lawyers DLA Piper. If you have an option to terminate or instigate a break clause, your position is all the stronger.

It takes two to tango. Your supplier - or service provider - might also want to renegotiate your contract and you should be prepared to listen. 'If the supplier isn't making money it may need to keep submitting claims,' says Hemlin. 'At worst, if it goes bust, who will provide the service for you?'

Do your prep. Look at the strengths and weaknesses of the relationship; review the financial data against the original business case; benchmark pricing against the market; understand the original contract; and assess your risks in renegotiating, says Sparks.

Be clear what you want. 'There has to be a point to negotiations, so it's clear what's being asked for,' says Pithouse. 'It's key to understand those objectives before discussions start and to track progress against them.'

Be ready to walk. 'Having an alternative is your most effective lever,' says Sparks. 'So you must be prepared to act on that, which may mean finding another partner.'

Set the rules of engagement. 'It's important to make the renegotiation as "punchy" as possible, so rules of engagement that reflect how quickly it proceeds, etiquette, documentation preparation and review can be very useful to achieve this,' says Pithouse.

Strike the right tone. Avoid being too aggressive - remember the relationship has to continue once the negotiation is over.

Do say: 'We would like to have another look at our contract with a view to achieving a basis that benefits us both.'

Don't say: 'Here are our new terms - take it or leave it.'

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today