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Contract Negotiation Tips from a Non-Legal Perspective

Many managers rate managing and negotiating contracts on the same level as getting a root canal or walking barefoot over hot embers. I don't remember meeting anyone who has said "Contracts--my favorite thing!" But they are a definite fact of life, so here are a few thoughts on things to be aware of when dealing with contracts.

Part 1: Managing Existing Contracts
You should have a way of tracking your existing contracts so that you are not caught by surprise when they expire. Contracts for services can have murky start dates. Sometimes they are based on when the vendor countersigns the contract; other times they may begin when service is delivered or when it is first billed. Often, vendors can't produce a copy of your contract, so if you don't have a copy of the countersigned document, the contract expiration date can't always be determined. Sometimes vendors tell customers what the expiration date is, but when pressed for documentation they have no way to prove the accuracy of their assertions.

In addition to knowing the contract expiration date, you must know whether the contract has an auto-renewal clause. If so, you also need to know the timeframe (usually 60 to 90 days prior to expiration) for notification of cancellation to prevent an auto-renewal.

While auto-renewal clauses typically work to the vendor's advantage in an environment where prices continue to decline (since the contract auto-renews at the older, higher rate), there are times when they can work to a customer's advantage. If a vendor is phasing out a particular type of technology and the customer is not yet ready to change when the contract expires, the auto-renewal clause can be used by the customer to continue the older service. However, depending on how far along the vendor is with the phase-out, there may be billing and service issues to contend with.

In the case where you do not want to auto-renew, you must plan ahead and give yourself adequate time to investigate alternatives, possibly issue an RFP, get competitive quotes, negotiate a new contract and implement a new solution, if needed, before the current contract expires. The bigger the network, the longer this entire process takes.

Understand that, from the perspective of the existing service provider, there is not a lot of incentive to get you onto a new, less expensive contract. The longer they keep you at your current rates, the more money they make. With service provider contracts, in many cases the rates go to full retail (as listed in the service guide or tariff) once your contract expires. Often, the vendor who has the existing service will attempt to stall the process, hoping that you run out of time and have to renew with them at less than optimal rates in order to avoid paying full retail. Their leverage increases as your time until expiration decreases.

So when you are planning how much time your process will take, factor in some extra time for possible stall tactics. Another way to counter stalling by your existing vendor is to begin your negotiations by requiring the new rates be effective upon expiration of the existing contract, regardless of when the new contract is executed. That way, if they delay and your rates go to full retail, they will have to issue credits for the difference in the rates. Of course, this is a huge hassle and motivates vendors to keep negotiations moving.

The best way to re-negotiate an existing contract is to treat it like a new one. You have the opportunity to improve your pricing and/or your terms and conditions without having to go through a network change. However, your existing vendor must believe that you are willing to make a change, or you lose your leverage.

Depending on your size, the most common way to convince them is to issue an RFP for the services (see Do you really need an RFP? Because it's really a pain...). Just getting competitive quotes is typically not enough to convince your existing vendor that you are serious. Most service providers have two types of rates. There are rates that are typically offered, usually based on the expected spend for the services and factoring in location-specific variances. These rates do not require any special approval and can be offered by any salesperson to any prospect; these are the higher rates and not the ones you are after.

You want the custom pricing, also known as ICB (Individual Case Basis) or Special Offer pricing. To get this pricing, the account team must submit a business case to management showing the anticipated revenue from the services offered, the extent of competition for the account, and the pricing they are requesting in order to get the business. Of course, it takes extra effort by the account team to go through this process, and they won't do it unless they believe you are really willing to go through a network change.

While you are negotiating the new pricing, you also have the opportunity, if needed, to improve upon the terms and conditions in your contract. You may want to add new sites to your network later on, but have the services expire at the same time as the rest of your network (co-terminus expiration). You could negotiate the ability to move some network connections or to delete sites. Maybe you want some extra support to deal with billing issues. This is your chance to fix the issues that have irritated you in the previous term.

Of course, these negotiations take time. Are they worth it? We have a client who has been able to negotiate savings of over $600,000 per year, along with improvements in many aspects of the contract language. I'd say that was worth it.

If you don't have the time (or inclination) to take on this type of project, consider hiring a consultant to do it for you. Consultants experienced with market rates and these types of negotiations can help you reach the best agreement. In addition, the consultant can be the "bad cop" during the negotiations, leaving you as the "good cop" who still has a good daily working relationship with the vendor.

In Part 2, I will cover negotiating a new contract.

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