How to Renegotiate a Contract with Your Strategic Partner (in 5 Steps)

By Allan Watton on June 13, 2017

outsourcing renegotiationThere are many reasons as to why one would want to renegotiate a contract with their strategic partner but the thought of the uphill challenge puts many off. In this week’s blog, we will offer up tips for a positive resolution with the kind assistance of David Barrett from PROCURiSOURCE. By following the below steps you can effectively renegotiate an existing contract with a strategic partner in such a way that both parties walk away pleased with the outcome.

Step 1: Diagnose, Prioritise and Delineate the Issues

Before you approach your partner you need to have a very clear idea of what exactly is “wrong” with the relationship. The first thing you should consider is whether the issue is with the partner at all. There are a few different causes for issues within an outsourcing partnership that are internal to the customer, such as:

  • Pressure from stakeholders
  • The service becoming uneconomic (even if the partner is performing as the contract stipulates)
  • Failure(s) within the governance/project management team(s)

If you are satisfied that the issue does involve the partner, ask yourself the following questions:

  1. Is the issue relating to something that the partner is contracted to do?
  2. Is it something not explicitly stated within the contract that you expected the partner to do?
  3. Is it something that you expected the partner to do in light of changed circumstances?

You can no doubt recognise how the answers to the above questions can take you down significantly different paths in terms of your approach to negotiations.

Once you have identified the root cause of the issues at hand (assuming there is more than one issue) you should consider how important each one is and prioritise accordingly. It is all too easy for negotiations to get snarled up in disputes over relatively inconsequential issues — keep your key desired outcome in mind at all times.

Step 2: Analyse Your Partner’s Position Objectively

Your partner may be unlikely to share your own analysis of the situation. This does not mean that you should therefore approach the issue with a ‘take-it-or-leave-it’ attitude — on the contrary, you need to understand why your partner has a different point of view. In order for you to negotiate effectively with your partner you must be able to view the situation from their standpoint and to an extent try to predict how they will respond. Try and answer the following questions:

  • What are your partner’s business objectives?
  • Will the resolution of the issue to your satisfaction affect the profitability of the contract for the partner?
  • Does the partner have its own issues that need resolving?
  • How might the issues with your contract affect the partner’s reputation?

Perhaps the key thing to consider is if your partner actually has valid arguments. Their position regarding the contract may be as strong (or even stronger) than yours and one would be ill-advised not to take that possibility into account. If you can communicate your appreciation and understanding of the partner’s position you are likely to find that negotiations run far more smoothly.

Step 3: Consider Alternative Approaches

If the issue is less to do with the contract and more a matter of culture, engagement or governance, formal renegotiation of the contract may not be the correct approach. You may find that mediation between senior teams on both sides could be far more productive and avoid renegotiation altogether. A good mediator should be able to get the relational dynamics right and suggest a process and ambience that allows “business issues” to be addressed effectively.

In fact, mediation might still be the best option even if the issue is contract-related. At BPG we often recommend bringing in a mediator at an early stage in the dispute in order to avoid the development of an adversarial environment. The mediator can assess the situation objectively and look to broker a sensible and fair solution that might not otherwise arise.

It is possible that even mediation may not be necessary. If there is no specific “dispute” then you will almost certainly be better off by levelling your thoughts with your partner – if you feel you have a strong relationship and trust is strong — explain your issues and what you want to achieve and see if there is a way in which both parties can reach a win/win solution.

Step 4: Avoid Legal Wrangling

In the majority of scenarios we advise against any sort of legal confrontation unless it is absolutely necessary, and in most cases it is not.

Your lawyers will almost always be able to find something that your partner is in breach of, but then your partner’s lawyers will probably be able to do exactly the same. Trading blows in this manner will get you nowhere but closer to expensive litigation.

Instead, focus on a practical outcome and be aware that it will not necessarily align perfectly with what your lawyers tell you may be possible in the best case scenario. Legal advice can sometimes set out a position that is formally accurate but not practically possible within negotiation.

Furthermore, you should certainly go to great lengths to avoid any kind of escalation process that might be contained within your contract — these more often lead to two parties entrenched in their own positions rather than cooperating to find a mutually beneficial outcome. The key to effective negotiation is to promote open dialogue — imposing a contractual escalation process is hardly a friendly move.

Step 5: Assemble Your Team and Commence the Process

Once it is clear that the path of renegotiation is the best one for you to take, the next step is to establish a plan of action and form your team. Consider all of the following:

  • Your strategic business objectives (this will help you sanity check the prioritisation of your issues)
  • The area(s) in which you have leverage
  • The role of external advisors
  • Governance for the renegotiation process itself
  • The time and resources that will be necessary for the renegotiation
  • Who, within the partner’s organisation, has the appropriate authority
  • Your strategy for achieving your desired outcomes

All of this should be carefully considered before you approach your partner. In fact, on the assumption that you will be relying upon external advisors, you should consider their counsel very carefully in ascertaining what the outcome is likely to be. Recognise that if your own organisation has little experience of tackling these types of issues, the external advisors will know more about the process and the likely outcome than you. If this is the case, then be mindful of how you progress in renegotiating with your partner any further.

If you do decide to proceed with renegotiation then your attention should turn to the anticipated style and culture of setting up the discussion. Furthermore, you should pay attention to ‘softer’ points such as the venue, meeting room dynamics, communication processes and so on. It is extremely important to keep a handle on the style of the negotiation in order to make the most of it.

Finally, do not forget to keep your key desired outcomes in mind and always strive to maintain an element of practicality in considering matters. Whilst you may not be able to achieve your ideal outcome, a positive renegotiation may result in an outcome that is beneficial to both parties. You may also be interested in our article on how to renegotiate a PFI contract.

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