Buyer Negotiating Power

Something that doesn’t get discussed much is how poorly designed legal stuff imports cost into a business.The end result? They get a duff deal.

The key thing to understand is that negotiating power is not a constant: it fluctuates during the process of negotiating a contract. In fact, for most contracts there are 3 distinct phases:

Phase 1 – exploring the market, talking to potential suppliers.

Phase 2 – you’ve chosen your preferred supplier and you are negotiating the contract.

Phase 3 – you’ve signed the contract.

During Phase 1, your buying power is at its maximum – let’s call it 100. You don’t have to chase anyone – suppliers are chasing you. In fact, companies pay people to chase you – it’s called Sales.

Phase 2 is negotiating the contract. Phase 2 starts when you tell a supplier that they are the preferred supplier. This is the critical part because, as soon as a supplier knows that he’s the chosen one, your negotiating power shrinks. From 100 units of negotiating power, you are now down to about 15 units of negotiating power.

Phase 3 is life after you’ve signed the contract. The amount of negotiating power you now have depends on what you’ve managed to negotiate into the contract.

The key point for buyers is the transition from Phase 1 to Phase 2. In Phase 1, your negotiating power is at 100. In Phase 2, your negotiating power is at 15. But the contract negotiating phase takes place in Phase 2, when you are your weakest – so how do you make sure that you end up with a decent contract?

The answer: you negotiate in Phase 1. Here’s how it works. You work out the key elements of the contract you are looking for (down to the boring elements like limitations of liability, service levels, service credits) and when you meet suppliers, you say “price to this”. So that, when you tell the supplier that they are now preferred, it’s all (just about) done and dusted.

It’s just a question of converting to the long form.

This approach gives you 3 main wins:

1. You get a much better deal.

2. Contract negotiating time and aggravation is minimised.

3. You prevent slippage.

Slippage is where a supplier leads you to believe that, if you sign up, you will get X, but having signed, you get something that’s a lot worse than X. (And believe me, I've seen some shockers).