Change Management Requires Cutting Costs by Renegotiating Contracts

Jun 17, 2009

Something good can come out of the recession. We know. During this time of economic woe, it’s hard to think that much good can come. There have been layoffs. Benefits have been slashed. Many of the companies we’ve relied on for years have given up the ghost.

So what’s the good news? Well, there’s something we can all do to get relief this, besides rolling up our pant legs and dipping our toes in a creek; we can seek out ways to save money through renegotiation.

We already know what you’re thinking, “but, OnStrategy, aren’t contracts set in stone?” And our answer is no, they’re not. Yes, we know that this is blowing your mind. Everything you thought about business has dissolved out your ears. We’ll give you a minute to collect yourself and get back to your email.

It turns out, during an economic crisis like the one we’re currently swimming in, all the rules change. Sure, contracts are binding in theory, but right now everyone wants to be around when all the dust settles- and if it means adjusting the terms of a contract in order to help your tight relationships in business, companies are willing to do it.

In fact, according to INC, renegotiation has become quite the trend. A study released from the Small Business Research Board in September reported that renegotiation is becoming a nationwide trend, with 15 percent of more than 1,000 small businesses surveyed reporting that they are renegotiating long-term, fixed-supply contracts.

In a recent BusinessWeek article, Jason Calcanis gave the following advice to entrepreneurs at the helm of failing start-ups:

Call up each vendor and say you need six months free while you figure out your status, and if that’s not possible, ask for suggestions. Then call each of the vendor’s competitors and say you are willing to switch over for the first six months free. If you get one of four vendors to do this, you just saved 25%—I bet you can get two or three.Vendors would rather eat some profits for six months than lose your business. If they can’t support you in your time of need, then you should find someone who will. There is a lot of competition out there and you can negotiate harder than you may think.

The fact is, that many vendors are in the position to negotiate. But how do you go about it? The following steps, inspired by a post from Supply Excellence, give us a basic blueprint.

Steps to Renegotiation:

  1. Bring raw material and market data or you won’t be able to back up what you say.
  2. Reinforce that you’re trying to build upon your long-term relationship and viability- not just cost-cutting.
  3. Explain that your better financial health will likely translate into larger future orders.
  4. Point out the difference between current prices (which have been gradually rising) and true market value (which has seen a quick decline).
  5. Exchange a more favorable rate for a longer contract length.
  6. Find out where you can save your supplier money.

Don’t Take Advantage of Vendors

Make no mistake, though. This list is not meant to be a bunch of tips for taking advantage of your vendors. We rely on those folks, and just as the writers at Network World remind us, we need to be thinking about everyone’s long-term success:

In his blog, CIO senior editor Thomas Wailgum says it’s hard to not feel bad for vendors. “Pity the poor software vendors. The economy is in full meltdown, and buyers… have become even more demanding.”

It’s smart to look out for everyone’s interests. You don’t want to make it out of this economic hole at the expense of those you count on; you want them to make it out intact as well. So make sure that if you’re going to renegotiate your contracts, also make sure that your vendors and suppliers come out of the current crisis just as prosperous.

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