Contract Negotiation in Procurement: The Keys to Success

What is negotiation in procurement?

Contract negotiation in the procurement process is one of the final stages of an overall procurement project. It’s where representatives from both parties meet to iron out the details of their partnership, including timelines, payment terms, metrics and KPIs, and any other detail that pertains to the success of the project.  

Once you’ve whittled down the suppliers and platforms you’re interested in, the submission of an RFP will trigger the step of negotiating contracts. Through various calls and communications, plus internal and external meetings, key terms will be agreed upon, as a standard SaaS contract or license agreement is almost always up for change and amendments based on a customer’s priorities and needs.

In the world of SaaS licenses, one example of procurement negotiation would be a discussion on end-user numbers and whether there’s capacity to increase this. Platform integrations are another common area of discussion during the negotiating process.

Business representatives should enter discussions with clear procurement negotiation strategies. Without one, organizations risk ending up with disadvantageous contract terms, commitments to unsuitable subscription time frames, and tarnished relationships with vendors.

The benefits of strong procurement contract negotiation

With businesses now requiring more SaaS tools, technology and other non-SaaS services than ever before, negotiation in procurement is of critical importance to a company’s fiscal stability, and can in fact be a catalyst for faster business growth.

Procurement contract negotiation is perhaps the most important step in procurement workflows — it’s the primary opportunity for buyers to establish their objectives, determine the specificities of their arrangement, and work with vendors to achieve these. Get this stage right with robust and data-driven procurement negotiation strategies, and you can bring advantages that extend beyond immediate cost savings, enabling organizations to achieve long-term efficiency and value.

Effective negotiation in procurement leads to:

• Cost savings through favorable terms and pricing.
• Stronger supplier relationships and improved service levels.
• Reduced risks through better contract clauses.

Knowing the correct negotiation levels in procurement to pull at the right time, allied to deep data sets and benchmarks, are key to achieving the best contract outcomes. 

Discover how Vertice helps businesses master procurement negotiation strategies and drive better outcomes.

The benefits of strong contract negotiation in the procurement process are similar to the benefits of a strong procurement process as a whole. Take a look at the key benefits below:

• Establish the Service Level Agreement (SLA) you need — SLAs are bipartisan commitments that define contractual obligations between service providers and customers. It’s in this agreement that both parties agree on the KPIs and metrics that can be used to effectively measure supplier performance, as well as key dates for contract management and potential renewal. SLAs are also crucial in determining the level of customer support available once the product goes live.
• Negotiate lower prices — In any transaction, the underlying aim is to negotiate a lower price. The right negotiated agreement will be the product of discussions with relevant stakeholders who set out the requirements of the partnership from their perspective. In SaaS, this often relates to specific features of software platforms, and negotiation in IT procurement is the means through which you can secure the right deal at the right price. For instance, your customer service team may really like one of the features of a higher Sprinklr pricing tier, but doesn’t require the majority of what’s on offer in the midweight tier; can you negotiate a price that reflects this?
• Rightsized platforms and contracts – One of the advantages of negotiation in procurement is tweaking and changing a service to perfectly suit the requirements of your organization. 

For example, a standard contract may contain far more seats than you actually need. Anyone with good procurement negotiation strategies will be able to realize this, and work to reach different contractual terms that remove a number of seats for a discounted rate. But, more seats may be needed as companies grow over time, so tiers can be agreed upon whereby hitting a certain seat usage rate triggers an automated release of extra seats, and an attached higher price. 

• Develop long-term supplier relationships — Procurement negotiation can be thought of as the first opportunity to develop supplier relationships. Since it’s likely that negotiations represent the first chance for procurement teams to meet with suppliers face-to-face, it’s important to make a good impression. Successful negotiation is about being friendly but firm, knowing what your business needs but showing a willingness to compromise where possible. Remember that suppliers are managing businesses too, and that win-win outcomes help to foster fruitful long-term relationships.

What are the barriers to effective procurement contract negotiation?

Contract negotiations in a procurement process are rarely straightforward. Tricky supplier negotiation tactics, poor decision-making and a lack of relevant information during the prior stages of procurement workflows can lead to issues at the table.

Let’s elaborate on the barriers to effective procurement negotiation:

• Lack of negotiation strategy — Procurement negotiation is at its most ineffective when it’s not sufficiently supported by a strategic plan. If your negotiators haven’t been properly briefed on the specificities of the product they’re procuring, it’s likely that negotiations will become muddled, or that the product won’t perform its function to the desired standard. Make sure you give your teams what they need to make informed decisions.
• Lack of relevant internal data and pricing benchmarks – Successful procurement negotiation strategies rely on those doing so having in-depth knowledge of the exact business requirements of the tool, and also comparable prices that others have paid for the same product with similar feature sets. Without these, any advantages of negotiation in procurement are lost. There are no benchmarks to set your particular requirements against, and so you risk overpaying and overprovisioning - resulting in a cumbersome and expensive tool that is not fit for purpose and a drain on your budget. 
• Supplier negotiation skills — Negotiation in procurement is a compromise between two negotiating parties: the supplier and the customer. Both parties want what’s best for their business, which means your representatives will need to match the supplier’s negotiating skills. Failing to do so can result in unfavorable contract terms and SLAs.
• Non-negotiables vs negotiables — It’s important to understand what your non-negotiables are and to stick by them. Equally important is the recognition that other parts of the agreement are up for discussion. A reluctance to allow concessions where you can in procurement contract negotiation has the potential to damage long-term relationships without gaining anything for the bottom line. Vendors will rarely let you have your cake and eat it too, so know where you can, and can’t compromise. The trick is compromising in areas that won’t affect your cost or capabilities - multi-year deals are a great example of this. 
• Miscommunication — Be as open and honest as possible with suppliers before and during negotiations. As with all relationships, good communication is the cornerstone of a healthy business partnership; without it, the possibility for misunderstandings and grievances increases.
• Overthinking power dynamics — Avoid thinking of procurement contract negotiation as a tug of war or a chess match — as soon as one side detects an imbalance, discussions can break down. Instead, simply think of talks as an opportunity to voice your objectives and concerns in a conversation of equals.

Solidify and streamline your procurement contract negotiation process with Vertice. Book a demo today.

Seven steps to improve your procurement negotiation tactics

Take a look at the seven steps below that will help improve procurement negotiation tactics before, during and after the event:

1. Start negotiations early — The more time you have to negotiate with a vendor, the better it is for you in the long run. You as the customer have more time to prep your business case, and work with the vendor to hammer out various terms and conditions within the contract to fully suit your needs. If negotiations start close to the auto-renewal date, the discussions become rushed, important data and information is more likely to be missed, and contracts tend to be ill-fitting and cumbersome. This also affects the vendor, as if the customer spends a year with a poor, expensive tool as a result of procurement contract negotiation, they are more likely to source an alternative upon the next renewal date. 
2. Compile as much internal usage info and industry price data as possible - These form your starting points, red lines and ultimate goals for your procurement negotiation strategies. They inform what negotiation levers in procurement to pull to ensure you end up with the best contract fit for your organization after starting discussions from the correct points. Without this information, you may start pricing discussions far too high, and end up paying for features and usage levels far beyond what you actually need. 
3. Establish your BATNA — An established best alternative to a negotiated agreement (BATNA) will lay out the next steps in the event that no deal can be made. Whilst the vendor may use negotiation tactics to make it seem like they hold the power, with a BATNA you have the ability to walk away if you don’t get a desired result. And a vendor will always want you as a customer more than not, even if that means giving discounts and concessions to keep you. 
4. Build trust — Negotiation in purchasing is a human endeavor. The best way to improve negotiation tactics is to build trust, taking the time to get to know your supplier and its negotiating team by asking the right questions. 
5. Submit multiple offers — Procurement negotiation is about finding a happy mid-point between two parties. By submitting multiple offers — each reflecting a slightly different agreement — you improve the chances of striking this balance.
6. Include binding level-of-service clauses — Commit your supplier to upholding their end of the agreement with contract clauses and warranties (SLAs). If circumstances change and the agreement can no longer be met, these clauses will ensure your business doesn’t suffer.
7. Organize evaluation dates — You’ll want to arrange some dates for evaluating the success of the project — to see what’s working well, what isn’t, and how the overall partnership can be improved. These meetings are an opportunity for honest feedback and a chance to measure success, in line with the KPIs established during negotiations. 

How Vertice can assist contract negotiation in procurement process

Vertice is an essential partner in procurement negotiation. Following a phase of strategic sourcing and supplier vetting, our customer purchasing teams will negotiate the best subscription price on your company’s behalf.

Our procurement experts have unprecedented access to vendor sales records, offering visibility into exactly how much other organizations pay for their subscriptions. With these insights, businesses can maximize value whilst outsourcing vendor management.

And once we’ve secured the right deal for your business, the Vertice platform can further streamline your procurement operations. By highlighting contract expiration dates well in advance, the platform lends additional support to negotiating teams, giving them the time they need to prepare for fresh discussions and scorecard evaluations.

Discover more about how Vertice’s SaaS purchasing platform can support your procurement needs.