Anticipating Renegotiation: How to Proactively Prepare

Spend Matters would like to welcome a guest post from Vantage Partners. See the first post in this series here.

  • It's tempting to... avoid renegotiating for as long as we can
  • But think about... proactively preparing to renegotiate at the sign of common "triggers"

Renegotiations come about because of many different kinds of circumstances. Leaders turn over, strategies evolve, ?nancial situations change, companies merge or divest, and sometimes the current deal just isn't working. When we view renegotiation as a threat -- to margins, stability, or working relationships -- most of us want to avoid it if we can and hope it'll just go away. For example, when new leaders come in with a different vision, we wait until they have set a course in stone before acting. When we know the market has changed and our ?nancials don't make sense, we wait for the other party (or an external one) to force us to take another look at the deal. When the business changes, we hope our current delivery solution will suffice so that we can avoid a painful and prolonged haggle where we have to renegotiate everything from price to limitations of liability.

Unfortunately, we know that many of these circumstances don't just go away, and when we've avoided addressing them for a period of time, we're unprepared to deal with them. As a result, we end up scrambling to react and come up with a poor solution. There is also often a fair bit of resentment, especially on the part of the buyer, who wonders why their "expert" provider had to be pushed to react to a changing marketplace, leadership, or ?nancial situation. This set of circumstances often launches us into one of those self-perpetuating loops shown in Figure 1. We avoid the problem until dealing with it is a nightmare; dealing with it is difficult, and we come up with a poor solution; we remember how difficult it was to deal with, so we want to avoid it again next time.

Figure 1

When renegotiation is leveraged as an opportunity, however, the parties acknowledge at the outset that there are some situations that will necessarily trigger a need to renegotiate. They discuss what some of these "triggers" might be and agree to scan the environment for them on an ongoing basis (independently of one another) and discuss what they mean for the relationship and the deal when they do arise. As a result, both parties are better prepared. They are better able to anticipate circumstances that might require some renegotiating (either formal or informal), which can help to nip problems in the bud before they spiral out of control.

Sometimes this requires one side to propose a new set of terms proactively, rather than waiting until the other demands a change. But often proactively proposing renegotiation is a difficult internal sell. Why "give up" margin or invest the resources it takes to renegotiate when you may be able to avoid it? Certainly some risk analysis is required. The parties need to weigh the costs and bene?ts of renegotiating against "waiting it out." As the story below shows, it might be tempting to hold on to the status quo while you can, but not at the risk of many years of revenue or additional scope you could hopefully gain by keeping your customer satisfied.

The next part of this series will touch on how to build the team of people who will conduct and participate in the renegotiation.

- Sara Enlow, Principal at Vantage Partners

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