Foundational Contracts Part 3 - Price To This!

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

Last week I talked about the 3 phases of negotiating power and I pointed out that most buyers start the contract negotiation in Phase 2 (when they’ve selected the preferred vendor) even though this means that their negotiating power is at its weakest.

Why do buyers wait for Phase 2 to start contract negotiation? There are two possible reasons:

1.    they don’t know any better, or

2.    they think it will save time on contract negotiation.

In fact, they are wrong: negotiating the contract in Phase 2 takes the longest.

If you want to end up with a decent contract, and spend the minimum time on negotiation, you have to negotiate in Phase 1, when your negotiating power is at its strongest – 100.

Here’s how it works.

You work out the key elements of the contract you are looking for (especially the argued-over elements like limitations of liability, indemnities, service levels, service credits, etc) and when you meet vendors, you say: “price to this”. So that, once you have received all the proposals, and you tell a vendor that they are now the preferred vendor, it’s all (just about) done and dusted.

There are two main ways of doing this.

Option A. You prepare a long form contract (i.e. the document that will eventually get signed) and, as above, you say “price to this”. In the UK, this is how the public sector approaches procurement.

Option B. You put together a document which sets out the key terms in non-legalese (but, again, including all the argued-over elements). You can usually do this on 2 or 3 sides of A4. And, again, you say to vendors: “price to this”. Then it’s a question of converting the key terms document to the long form contact. The conversion to long form contract is not pain-free, but it’s a lot less painful than negotiating the long form from a position of weakness. 

This Negotiate-In-Phase-1 approach gives you 2 main wins:

1.    You get a much better deal because you’ve negotiated when your negotiating power is at 100.

2.    You minimise time spent on contract negotiation. Because your negotiating power is at 100, and vendors are scared that you will go to a competitor, (remember: you haven’t selected your preferred supplier), they will agree your terms much more quickly.

It’s a double whammy.

Of course, this Negotiate-In-Phase-1 approach only works if you have already worked out what your key terms are.

And that’s what I will be talking about next week.

4 February 2025