Leverage, What Leverage?

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[author: Lisa C. Earl]

In negotiating outsourcing agreements, I sit on both sides of the table - obviously not at the same time. I represent customers about half of my time, and I spend the rest of the time representing suppliers.

It's always interesting seeing a transaction from one particular viewpoint, but also knowing the dynamics that are at play for the other side. One thing that strikes me is that, regardless which side of the table I am on, my clients always think that they have little or no leverage, and that the other party in the negotiation holds all the bargaining power.

The customer sees itself pitted against a team of professionals who negotiate outsourcing agreements day in and day out, whereas the customer might have an agreement (or a handful of agreements) that is up for replacement or renegotiation every few years. They may be under time pressure to get the transaction executed, either to meet internal deadlines, to implement new technology, or to give termination notice to an existing supplier.

On the other hand, the supplier sees a customer with choices to move some or all of its business to other suppliers; competitors who may be using balance of trade interests or C-suite relationships to get back in the door; internal targets pushing for faster realization of revenue; and personal sales targets that greatly impact compensation.

So as a customer, what leverage do you have? Here are a couple of things to think about and use when you're next in negotiations:

  • Money: You hold the wallet. The supplier wants to hang on to the share of it that they may already have. They want more. They want to stop their competitors from getting any of it. Don't underestimate how much a supplier wants your business. If the terms of the deal aren't what you need, then don't accept them. The supplier knows you have other choices. Sure, it might be hard (or costly) to change suppliers at some points in your relationship, but it's always possible. You may not be in a position to completely move business away from an incumbent if you are not getting your way in negotiations, but you probably do have the ability to direct new businessto someone else. Make the supplier work for the money you are going to pay them, and give you the terms and conditions that you need.
  • Time: If you're negotiating new or additional business, then the the supplier will be under considerable pressure to get the deal inked as soon as possible. Use that to your advantage. If they will not agree to terms, make no move; make it clear that you're willing to hold out for as long as it takes to get the right terms in your agreement. The supplier will be sweating bullets to get the deal done by the end of quarter, by the end of year, before compensation levels are determined, or before some other date that won't be of any concern to you. Even if you have your own deadlines, act as if you don't. Putting time pressure on the supplier will eventually get some movement. Of course, when that happens, then you may need to be ready to close the deal quickly.
For suppliers, think about these advantages that you have:
  • Terrain: You know who you're up against to win the customer's business. You know your products and services, and how they differentiate you from the competition. You know where your price points sit in the market. Use the advantages you have over other suppliers - the customer doesn't want an inferior product, or to pay a higher price for the same product. You know what you do well, and the customer needs what you have, so leverage that.
  • Experience: This business is your lifeblood, and you know outsourcing transactions. You know what other customers have asked for, and what you have agreed with them. You should have a fairly good idea of what you competitors will agree to as well. If a customer or their lawyer is asking for something that's totally off-market, call them on it. Use your industry knowledge and experience to support the position you're taking in the agreement. Without disclosing confidential information, share how you have resolved issues with other customers. Show that you're there to find a mutually acceptable solution, and that you know how far the envelope can be pushed - in either direction.
Of course, I am not suggesting that every negotiation should be entirely adversarial but each party should make the most of the advantages that it has, even when building strategic or collaborative arrangements.