Is it time to RE-negotiate your contracts?

In this economic climate, what do you think about re-negotiating your contract terms? Have you been asked to do this or have you approached those you're in contract with? If so, what types of issues are being re-negotiated, with what outcome? What impact, if any, has the re-negotiation process had on your relationships?

Finally, what advice would you give others who are about to embark on the re-negotiation process? -sfrenkel

I have been renegotiating all of our contracts with sellers to adjust for the drop in market prices and it is making an obvious difference. -Houston

I think a person needs to have the confidence in the business relationships that has been formed contractually, that they can at least have a genuine, candid discussion with the other side about: (1) current economic climate (2) objective of potentially reworking the agreement.

It's not the issue of anticipating having to hold renegotiation discussions that seems to frighten people (although they do)... it's a larger issue at play psychologically of having the confidence that the business relationship is strong enough to withstand such discussions, and that you won't damage the relationship.

Go for it. -MaxReferrals

Thanks to you both for your comments.

MaxReferrals, I agree with you that people often feel stressed about the conversation and only raise the issue if they feel the relationship is strong enough.

In my view, that's unfortunate. The skills and the ability to raise these types of issues are exactly the tools that will lead to a stronger relationship. Avoiding these essential conversations because the relationship isn't "strong enough" will lead to the follow through of an agreement that one side (or both!) are no longer happy with and, therefore, a relationship that suffers and a failed partnership.

It's precisely the goal of having a strong relationship that should drive these conversations if they need to be had. Something simple as stating "the economic climate has changed significantly since we came to our original agreement. I'd still like you to maintain your expected margins, but not see greater winfalls at my expense. I realize we're still under contract, but can we revisit those terms in the hopes of maintaining a stable, long-term relationship with one another?"

Of course, some of this language may change - if neither of you can maintain your margins (which is highly likely), discuss that you want to share the burden in an effort to maintain your long-term partnership with a commitment to returning to status quo as soon as possible.

Let's keep the conversation going!
Stephen -sfrenkel

This is a great topic you brought up, Stephen, and I agree with your thoughts. I want to offer my view, and it is based on recent personal experience as well as some deep discussions with others I am close to.

The question asks "Is it time..?" and is referenced in your opening post as related to "this economic climate." which, strategically could be called a Dynamic Inferiority. However, the very nature of business is dynamic, not static. That said, in my view it is ALWAYS time to assess and consider CHANGING the arrangements, contractual or otherwise, of a business relationship.

When the commissions on many products decreased in recent years, many of the best financial planners went to fee-based arrangements with their clients, to supplement the profit on the products.

When you said "It's precisely the goal of having a strong relationship that should drive these conversations if they need to be had.", it was referring to exactly what these people had that enabled them to stay profitable and reduce the risk of losing many clients.

In my own work, I recently renegotiated a contract with an increase of 22% to ensure my ability to perform at a profitable level. I had to sell that to an entire board in a parliamentary procedure setting, and I won approval on the spot. It was because of the relationships I had with key members of that board. The contract has been drawn and is being signed this afternoon. -Ace Coldiron

Ace,

Thanks for chiming in. Congratulations on your successful re-negotiation!

I agree with you that the dynamic business world calls for constant evaluation of business terms and relationships. I brought the topic up now simply due to collective circumstance.

It's also important to mention that, though "smaller" shifts occur regularly (in good times and in bad), one may not want to engage in the re-negotiation process as a habit. Along with our interests in profitable business deals, we also want strong reputations (that we stick to our word, follow through with agreements and come to well thought out terms). Often, the cost of absorbing a "micro" hit is worth it for the sake of the relationship and your reputation. It should also be noted that the process of regularly evaluating business terms is a good one, even if you choose not to re-negotiate, so that you'll make better deals next time.

However, in times like these - when everyone feels the strain and that strain is greater than usual, it's important to be able to have these challenging conversations, and have them well.

It's also important to note that not having these conversations for "micro" shifts probably makes your claim that much more credible should you choose to raise the subject at this time (e.g. "I've never done this before and I don't like to revisit my commitments, but in this instance I have no choice and I hope you understand...).

Thanks,
Stephen
www.mwi.org/negotiation -sfrenkel

Everything is renegotiable - it's a fact of life.

Irrespective of times being good or bad, you must be prepared for such eventualities; whether you are making the approach yourself or if you are the one being approached.

Breaking contracts (legitimately) is also an example of renegotiation, and something as consultant negotiators we have dealt with often for our clients.

There is great power to be leveraged from approaching such instances as a negotiator, and not as a lawyer.

People of the 'win-win' school of negotiation theory and practice will naturally 'worry' about their relationships, but I agree with some of the previous comments, and would suggest this may be little more than an illusion, like fear itself.

I don't wish to come over all 'Zen-like' with this posting, but understanding what negotiations are really all about gives you a solid fundamental grounding in approaching and handling all aspects concerning them.

Included within this, is the increased confidence you will gain that you can handle these situations more easily, more effectively, and with more beneficial outcomes.

To answer the original poster's final question, the advice I would give to anyone embarking on any negotiation (not just a renegotiation) is to employ a process-based approach to all their negotiating dealings. This would contravene conventional wisdom (see Wikipedia for an excellent definition of this) and the predominant schools of 'streetwise' (Karrass, Ringer, Camp et al) 'tough guy' approaches, or their opposite numbers in the principled 'win-win' school of negotiation theory & practice. I've made some other references to these paradigms in some of my other posts.

My question is, why differentiate between re-negotiation and negotiation in general?

Surely you would always wish to optimise in all your dealings?

(kindly excuse my British spellings) -ThirdForceNegotiator

Hi ThirdForce,

Of course one would wish to optimize all of their dealings, regardless of initial negotiations or renegotiations. The differentiation is drawn because:

a) A lot of our clients are looking to now re-negotiate terms that were established prior to the economic downturn and, therefore, need to change previously accepted terms and

b) Renegotiations can be more difficult and complex (especially if attempted in the middle of a current contract term). This is because many relationships unfortunately but frequently carry "baggage" from misunderstandings/misinterpretations of the agreement as it stood and, therefore, aspects of blame, contribution, or resentment where they didn't previously exist.

It's kind of like re-asking my wife to marry me. This time around, I bet she'd have more questions, though I'd hope she'd still say yes :) .

No matter how much I agree with what I anticipate responses will say - "get it right the first time", "it's your own fault", etc., the fact remains that many are in this position currently and are looking for helpful advice.

Stephen -sfrenkel

Yes Stephen, you are correct in pointing out these differences between what you might expect in a 'first time' negotiation, and what you may subsequently meet the second or third time around.

However, I would suggest two things:-

(i) You can never step twice into the same stream

(all negotiations are like this, all are fundamentally different and unique in themselves, so no two are ever the same anyway)

and

(ii) No matter whether you are 'negotiating' or 'renegotiating', your process approach to a negotiation is always going to be the same.

As an aside, knowing or understanding a particular client may give further insights into how best you can help equip them to handle the tasks at hand.

Does that make sense? -ThirdForceNegotiator

I agree. All situations change. The process (assuming it's helpful and enables you to be successful) should remain the same.

I also agree that knowing your "partner" better could be a benefit.

All I can say is that many of our clients are coming to us for help with these circumstances. There's something challenging for them and it's important to be sensitive to those sensitivities and aware of the dynamics and differences in re-negotiations.

Stephen -sfrenkel

like this?

-ThirdForceNegotiator

My issue stems from two assumptions you're making:

1. That "win-win" is "soft." This is not true AT ALL. In fact, it's a hard, selfish approach to negotiation. The "soft" feel comes, I believe, from the underlying notion that we should remember the long-term nature of relationships and we should understand that greater value can be achieved over the long-term if all parties are pleased with the outcome and the relationship.

A "soft" connotation implies that the "win-win" negotiator gives up more than he/she wants in order to maintain the relationship and that's just not true. It simply advocates for more effective communication and clarification of false assumptions so that the negotiator can achieve their goals while at the same time building a long-term durable and sustainable partnership.

2. That a "win-win" approach does not include a consistent and systematic process for preparing for, reviewing and conducting negotiations. This couldn't be farther from the truth.

Stephen -sfrenkel

First of all, the main criticisms of the principled school or "win-win" interested-based paradigm of negotiation theory, practice & training I have outlined in this thread:-

What do you think about collaborative negotiation?

So I shall not repeat them again here.

Did you read the 9864 thread?

My comments in there were addressed primarily to you since you asked me to expand on matters over there. You were also inviting people to comment in general and share their views on ‘collaborative’ negotiation.

These views and the defects of principled (or as you call it ‘collaborative’) negotiation have absolutely nothing to do with any single arbitrary adjective, like 'soft' (and please note my quotes every time I use such in any case).

Perceptions have very little to do with assessing a system or paradigm; it is only efficacy and results that count.

If you'll carefully re-read everything I have written, both over here and over there, you'll see there is absolutely no evidence for anything that you're claiming at the top of this posting, other than I’m guilty of using the word ‘soft’ in quotation marks.

The defects of principled negotiation are well known and researched, as are the problems of the old school ‘ploys & tactics’ paradigm. In so far as both these approaches run counter to each other, you can envisage them as being on a continuum, and sitting at opposite ends of it. One may be ‘hard’ and the other may be ‘soft’. Just as equally you may call one ‘dark’ and the other ‘light’, or ‘yang’ versus ‘yin’.

Granted, the ‘win-win’ approach of principled, collaborative, or interest-based negotiation does attempt to utilise the same machinery in going through the motions of handling negotiations – and issuing prescriptions to be followed for practitioners.

However, these are the same models that Lax and Sebenius (2006) termed ‘one-dimensional’, and very forthrightly dismissed people employing them as ‘often pay[ing] a steep price for their very limited approach. They, or the people whom they represent, are the losers.’ -ThirdForceNegotiator