Applying Quality Principles To Contract Negotiations

Most of the business community regards strategic partnership negotiations as unique events, immune to process improvement analysis and principles. There’s a certain logic to this: there are unique business needs behind each proposed partnership and each potential counter-party has their own considerations.

However, if we take a step backwards, we can generalize the situation into a process of sorts. Each party has a set of interests they want in the contract terms. Some of these are easily reconciled, in a clear zone of “reasonable compromise” which a reasonable person would agreed upon. Others require a some level of haggling and compromise. We can rate the “quality” of a negotiation outcome based on how close the team is able to get to a set of “target” terms. Another quality metric worth tracking is the percentage of deals which utterly collapse in the negotiation process, with one or both parties unable to reach a deal.

Along the same lines, we can establish some metrics for the “efficiency” of the negotiation process. This is particularly important for small and medium sized deals – while we may be able to squeeze additional concessions from these relationships, it may not be worth the incremental time required. You can track the total time spent on a deal’s paperwork, either as clock time or by tracking the number of revisions your attorney needs to review.

The combination of these perspectives yields a process measurement model for contract negotiation. We can measure quality by tracking % of deals closed and % of deals meeting target terms. Process efficiency can be tracked using clock time or legal revision cycles. This gives us a way to start comparing the impact of different approaches to managing the process.

This exercise gets particular interesting when you need to negotiate the same deal multiple times. Your organization probably does this every day within a specific customer segment – walking into similar accounts with the same core program and discussing the same key points. The data from this effort can easily start to add up, especially if you can have the team keep careful notes and do a little split testing.

Some things worth looking at:

  • Negotiation outcomes will vary significantly by lead negotiator and support team. Don’t neglect differences in team size and support roles – strategic negotiations are very much a team sport.
  • The process of how you get interests on the table for discussion. While it may be a time-honored tradition to just chuck your standard agreement at the other team and ask them to red-line it, you may want to consider a more collaborative approach such as white-boarding a joint terms sheet.
  • Organizational rank and “clout” of counter-party leadership. Some of the most effective sessions I’ve seen were “princes against kings” where you had mid-level executives negotiating with the partner’s senior management. There was ample room to reflect and adjust direction as needed.
  • Effectiveness of point-by-point negotiation vs. trading “packages” to resolve differences
  • Ability to control final concessions and “one more thing” negotiators (the Columbo crowd)
  • Negotiator experience also plays a huge role, particularly with that specific type of deal. They will get more confident and effective at addressing questions as they learn the nuances of your offers.

 

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