By Liz Busch
Many of the public sector’s contracts for ongoing needs are multi-year, with options to renew or extend. These contract renewals offer a significant opportunity to negotiate cost savings, improve on terms and extract optimum value from long-term contracts.
Changing suppliers for ongoing contractual needs can be difficult, which makes adding options to renew for long-term contracts attractive to public sector buyers. The time-to-award a new contract can be quite lengthy due to the inclusion of many stakeholders and the complexities of the bid process. This may have suppliers believing they have a leg up when it comes to contract renewal negotiations.
However, by adopting these 7 key negotiating strategies often used in the private sector, public procurement professionals can find cost savings and improvements, despite the challenges.
1. Extract further value from current contracts.
Suppliers tend to stick to the status quo unless challenged by clients or competitive pressures. Contract extensions represent a significant opportunity to introduce cost reductions, negotiate service improvements or refine / clarify the scope. When it comes time to renew or extend contracts, stop and negotiate further value before plowing ahead.
2. Create a more competitive landscape by engaging with other suppliers.
a. Suppliers will expect the public sector to negotiate the renewals in their contracts unless the goods / services are no longer needed (e.g. the budget is cut or the work is moved in-house), performance issues have occurred that the supplier promised to rectify but did not, or the scope has significantly changed. Competition is healthy, but aren’t usually part of options to renew. However, there’s nothing stopping a public sector buyer from issuing a market-sounding tool, such as a Request for Information, to see what’s changed in the marketplace that might motivate the buyer to make significant scope changes and reprocure. By asking new suppliers to provide this information, you pressure the incumbent to put their best foot forward and provide extra value to avoid losing revenue. Although time constraints may be a challenge, this approach can open the door to more creative options that ultimately deliver better value.
b. Although we encourage you to get a little creative when it comes to your negotiation tactics, remember, both parties hold a duty to act honestly and are obligated to negotiate in good faith. You should be clear that this market sounding is intended for significant improvements to the current approach and a subsequent solicitation is not guaranteed.
3. Get creative and add competitive pressure on sole-sourced suppliers.
a.You may have options to renew in a sole source contract (i.e. where only one vendor was known at the time the contract was originally negotiated). There are creative approaches that can add pressure by indirectly letting your sole-source suppliers know you have alternative options, particularly if the market has changed and competition now exists.
b. Dropping a comment in passing about visiting a competitor’s headquarters or even just mentioning a visit to the city may be enough to raise their suspicions. Requesting data that would be required for analyzing alternatives may bring further concern. The point is to make sure they’re aware you have viable options.
c. However, the trick is to ensure that the options considered are truly viable and not a ploy or tactic, and for the supplier to see this. Remember that how you discuss the management of the process, what you communicate to whom, and who you involve in the process all play into a supplier’s perceptions.
4. Leverage supplier data for informed negotiating.
a. Supplier data can be leveraged to the buyer’s advantage for more strategic negotiating. By determining what is likely to motivate a supplier, buyers can set a strategy that pinpoints effective incentives. For instance, supplier financials or public earnings records may help you identify if a supplier is likely to be motivated by increased profit or revenue, or which products or services are most critical to their growth plans.
b. Knowing how critical your leverage is to their long-term objectives will help you anticipate the terms they’re more likely to strongly defend and where they’re most likely to compromise.
c. The right data is integral to successful negotiation strategies, allowing you to more accurately estimate where to give a little and where to push. For example, if a supplier’s stock price is hyper-sensitive to revenue fluctuations, they’re more likely to compromise on margins over revenue. However, if there’s a cash-flow concern, then the opposite may be true, as the supplier may prioritize maintaining or growing revenue over improved margin.
5. Keep incentive schemes simple and tie them to performance and cost control.
a. The more complicated the incentive scheme, the more opportunity it provides a supplier to maximize their fees. Simple is better.
b. Metrics should be meaningful and aligned with goals. The public sector sometimes uses unnecessary metrics that ultimately do not significantly reflect progress or value. In comparison, the private sector tends to use metrics more clearly aligned with what they want to achieve. Successful, effective incentive schemes should be tied to your output objectives of performance and cost control, prioritizing deliverables such as cost, quality, response time or delivery schedules.
c. For example, in a maintenance contract where the objective is to decrease downtime, you can tie incentives to your asset utilization rates. If on time delivery is of critical importance, introduce a stiff penalty for late deliveries. This should motivate the supplier to deliver as committed, or at the very least, help you claw back some of the costs associated with late deliveries.
d. Ultimately, strategically designed incentives should promote deeper supplier engagement and improved contract outputs.
6. Increase supplier transparency.
a. The more you know about what’s included in a price, the more you can evaluate value and gain leverage for reductions or avoiding increases. Suppliers prefer to keep you in the dark, as the less you know, the more they can justify high costs. For instance, a supplier may charge you the rate for a senior person but have a junior employee executing the job.
b. Any increases should be clearly justified. However, suppliers aren’t likely to offer an explanation on their own. Compare current pricing to tomorrow’s prices and force transparent explanations for the difference.
c. If the supplier does offer transparency, it’s likely buffered and not an exact replica of their actual cost breakdown. Many suppliers work with a secondary contract model in the background that reflects their “real” costs. But by understanding cost drivers you can deploy rational thinking and ensure fair play. For instance, a supplier may simply state increases are due to inflation, but when pushed they may divulge that more specifically, the increases are due to a temporary increase in raw material costs, which means you can negotiate a future decrease in pricing.
7. Negotiate year-over-year continuous improvements.
a. All suppliers should be expected to improve over time. To ensure you don’t miss this opportunity by over-committing without maximum value extraction, contracts should be structured and priced to enforce expected improvements. Be aware — suppliers are likely to push back as they’ll want to avoid being subject to an improvement term.
b. It’s a strong negotiation tactic that can help offset inflation increases and ensure productivity improvements which may not otherwise occur. Even just suggesting contracting in improvement expectations may motivate the supplier to find alternative ways of delivering further cost savings or added value, or to pull back on “inflation” increases that may not have real merit.
c. When it comes to negotiations, remember that knowledge is power; do your research, and know your supplier and the market. Being creative in your approach and aggressive in your demands will pay in dividends.
Author: Liz Busch, The Procurement School
Disclaimer: The views and opinions expressed in this article are those of the Subject Matter Experts and do not necessarily reflect the official policy or position of The Procurement School.