Mid-term Contract Renegotiation: 6 steps to drive better value in your strategic partnership
Byon August 6, 2019
The vast majority of outsourced relationships and complex projects are lengthy entities, often lasting five, ten, twenty years or more. It is likely that what may have suited your strategic partnership in the beginning will have moved on with what’s best for its desired outcomes today.
In some cases, it’s the desired outcomes themselves that are likely to have changed and are no longer aligned to the strategic objectives of your organisation. This is why it’s important to regularly review whether your supplier is working to both the letter and the spirit of the contract you drew up together, and that this contract itself is maintained as a ‘current’ working document, realistic in its expectations and optimised for the best results.
This is why we always recommend that, built into your agreements, should be a regular ‘review and adapt’ process, where you and the vendor sit down, at least once every six months, to sense check your business outcomes and objectives to determine how well aligned they remain to the services/solutions you are having delivered.
Six Primary Reasons why Many Organisations Benefit from Mid-term Contract Renegotiation
Beyond what should be a regular tweak of your written contract, we frequently come across six primary reasons why most organisations benefit from a more significant mid-term contract renegotiation with your strategic supplier.
1. To save your relationship
It might seem dramatic, but working relationships do sometimes turn sour, and once in a while you may even contemplate whether it would be better if you were able to find a replacement for a vendor who seems unable to meet your expectations. But after years of experience and hundreds of strategic relationships that we have worked on to save, recover and replace, we find that full-scale termination can deliver unexpected consequences, so be careful to consider the full ramifications of an early exit before pushing forward with one. It is our experience that agreements rarely need to be terminated early. But if that is what you decide to do, note that early termination can be messy, they can also be costly and can seriously disrupt your project timeline and results. Often it is far simpler, cheaper and less risky to renegotiate your agreement – building into it more realistic consequences for poor performance and more motivating rewards for achievements, adjusting and tweaking the services and contract terms to better suit your relationship so that everyone is better off, happier and more prepared to work together to see the relationship through.
2. To improve management and productivity
Do you give your supplier the encouragement and freedom to flourish or do your contract terms restrict their ability and desire to innovate? How much do you and your supplier really trust one another? And, have you noticed that performance has slipped and it’s tough to put a finger on why?
Effective supplier management is about creating an environment based on commercial trust with the right partner(s), so they can be empowered to ensure that things are done when they should be, by the right people and to the standards agreed in your contract.
If they have earned your confidence, but you believe that the current agreement between you may be restricting their ability to perform, a contract renegotiation may help you to unleash their potential to effectively manage the project and surpass your expectations of them. Having worked with them for a considerable period, you’ll have a better appreciation for their strengths, weaknesses and abilities, so use this knowledge to renegotiate your contract for everyone’s benefit.
3. To chase a reasonable cost reduction
Be careful, renegotiating to try to get a better deal from your supplier, if not handled in the right way, could damage all the hard work you’ve already done to build trust between you for all the project optimising benefits this can offer. Any cost saving reasoning for renegotiating your agreement with your vendor must also have them in mind. Find win-win opportunities, and sensible and fair reasoning to approach your vendor on such a matter. For instance, maybe it has become common knowledge that technological advances, improved processes or commodity/product pricing have changed over the time you have been working together and, therefore, it is possible for costs to be reduced on the project without margins being affected. Whatever your reasoning for deciding to renegotiate to reduce your costs, consider how this will affect your strategic partner, approach it with much consideration.
4. To add value to a project
Encouragement of innovation, as mentioned earlier, is when you unleash your supplier’s true potential to enhance the project’s outcomes, costs or processes. Adding value is something slightly different, as it’s what you as the client can contribute to. Even if the project is going well, there are always ways in which the expertise of your supplier can be utilised to add value. Can the project be extended, can you use the knowledge you now have of your supplier and their skills and expertise to request more from them to broaden your project’s horizons? Always look for ways in which your working relationship can be enhanced to benefit both parties.
5. To realign to your changing needs
Outsourced agreements and major project relationships tend to be played out over a lengthy period of time, and much can happen over the years. If your organisation goes through a restructuring, a merger or acquisition, a change of management, or any other major change, you may wish to adapt your relationships to better suit your organisation’s needs. And, as the needs of the end users of the product or service – be they the public at large or internal users – can also change over time, you may wish to renegotiate your contract so it can be realigned to still achieve the goals of the original project, even if the outcomes adapt over time and through negotiation.
6. To protect you from your supplier and yourself
Contracts are often huge documents, perfect hiding places for errors, manipulative clauses and ambiguity that could be exploited by either side. Now, whether the supplier or client side intended for them to be there or whether they exist simply because of a lack of due diligence, if you recognise their existence and the risk they pose to your project, it would be well worth considering a contract renegotiation on that basis.
It goes without saying that this should be done delicately as you may not know whether the original intent was surreptitious or even if the same people who authorised the offending clauses, or ignored them, are still assigned to the project. Proceed with care, mindful of the commercial trust you could lose if this contract renegotiation is taken the wrong way, but also of the damage that could be caused by their existence in your agreement should you do nothing.
Using Contract Renegotiation to Create Win-Win Advantages
Contract renegotiations are common, and they can, if handled correctly, result in a more innovative team that works more closely with you and achieves better results than you could have hoped for. But always be mindful of the reason for the issues that have necessitated such a renegotiation. Always be aware of the need to protect the commercial trust you have built up with your supplier. And always keep your supplier’s interests in mind when approaching a renegotiation as any true partnership, any productive working relationship, should enter such a delicate period collaboratively and with shared goals in mind.