Foundational Contracts Part 2 - Negotiating Power

This Oh Lawdy! is the second of a short series on foundational SaaS contracts.

Foundational contracts are contracts which underpin your business, and which aren’t contracts for commodities like Google or Microsoft offerings. For example, if you are starting a bank, the banking software contract is a foundational contract.

In Part 1, we concluded that it’s not a level playing field. The vendors of foundational contracts are much more experienced in selling the foundational service than you are in buying it (they do it all the time, you do it rarely), and their template contracts are stacked in their favour.

So can you level-up the playing field?

Yes, you can, but only if you understand how to use your negotiating power. The key thing about negotiating power is that it’s not a constant: it fluctuates during the process of choosing the supplier. In fact, for most contracts there are 3 distinct phases.

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

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

Phase 3 – you’ve signed the contract. You’re now in the contract management phase.

Phase 1 In this phase, your buying power is at its maximum – let’s call it 100. You don’t have to chase anyone because you’ve got what everyone wants – cash. Vendors are chasing you. In fact, companies pay people to chase you for your cash – they’re called Sales.

Phase 2 is negotiating the contract. Phase 2 starts when you tell a vendor that it’s the preferred vendor. This is the critical part because, as soon as a vendor knows that it’s the chosen one, your negotiating power shrinks. From 100 units of negotiating power, you are now down to 25 units.

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, in particular how easily you can terminate the contract and walk away.

The key point is the transition from Phase 1 to Phase 2.

In Phase 1, your negotiating power is at 100. In Phase 2 – which starts when you tell a vendor that they are the preferred vendor (or, more precisely, when the vendor thinks that they are the preferred vendor) – your negotiating power is down to 25. You’ve lost 75% of your negotiating power.

It’s hard to believe, but most buyers start the contract negotiation in Phase 2, when they are at their weakest!

It’s the surest way to get a bad contract.

Next week I’ll take a look at how you should handle this.

28 January 2025