Chapter 24
Dealmaking and Contract MANAGEMENT

IN This Chapter
Three styles of negotiation
The role of power in negotiations
The negotiation process
Your negotiating partners
Contract management

Introduction
Many things are uncertain in business. But one thing you can rely on is that the more you grow, the more you will need excellent negotiation and contract management skills. Entrepreneurs who overlook this fact often find themselves trying to play catch-up at the worst possible time. It’s much better to develop these skills, and the business systems that support them, well before you need them.
Good negotiation skills have always been central to entrepreneurial success. But today, businesses are relying more heavily than ever before on independent contractors and online service providers, while also coordinating more closely with supply chain partners. One result is that the classic relationship between a boss and a team of employees is becoming less common: Instead of simply directing employees to do a job, you may have to negotiate with one or more independent contractors or external businesses to get things done properly, on time and for the right price. Most important, you will be negotiating with suppliers and customers, which is central to business management.
Like any other skill, negotiation can be learned and practiced. Understanding what good negotiators do, and why they do it, will help you achieve the results you want.
Three Styles of Negotiation
Many people see negotiation as a contest of wills that the more aggressive or powerful negotiator always wins.
In reality, the best negotiators are cooperative and flexible. They understand themselves and what they want out of the process, but they also try to find where their own interests and those of their counterparts overlap. They take the other side’s interests and perspectives into account, and use their skills to resolve conflict and achieve a win-win outcome.
We believe that win-win negotiation delivers the best results. However, some negotiators favor a “hard” approach, while others prefer “soft” negotiations. Let’s take a closer look at what these terms mean.
Hard Negotiation
Hard negotiators seek a win-lose outcome at the expense of the business relationship. They’re aggressively competitive and may resort to threats or bluffing in order to “win.” They pursue their own interests and have little or no concern for the interests of the other side. There’s usually little trust between the negotiators and minimal interest in maintaining a relationship.
Soft Negotiation
Soft negotiators seek a positive relationship at any cost. They focus on minimizing differences and points of conflict, and they will readily make concessions.
The danger of being a soft negotiator is that you may not be able to protect your interests and assert your rights. Also, if hard negotiators perceive you as someone who can be bullied or exploited, they may become more aggressive.
Win-Win Negotiation
This approach is neither hard nor soft. Instead, it combines the best of both approaches by being hard on the problem and soft on the participants.
Like kids in a three-legged race, win-win negotiators work together to reach a shared goal. They make every attempt to approach problems cooperatively and to achieve mutual gains through open, honest communication.
In short, they attack problems rather than each other. The win-win approach yields more for everyone: It creates trust and respect between you and your counterpart, maximizes mutual gains, and enhances the prospects for profitable future deals.
When both sides are willing to address issues directly and honestly—instead of wasting time on posturing and bluster—they usually find that a mutually satisfying agreement is easy to reach. Agreements reached in this way tend to last longer and to be more beneficial to both parties. For every deal you hope to close, win-win negotiation is the best course of action.
…
I still remember how excited I was when I got that call from Coppelius & Lothar. The second I got off the phone, I ran into Klara’s office to tell her about it.
It was a small project, but a really big client. All they wanted was a product white sheet for an upcoming trade show. The budget wasn’t huge, but neither was the job. At least, that’s what I thought.
Sarah Templer and Klara Mignon are partners in a graphic design firm called Clear Spot Design, based in Monterey, California. Although they had a steady clientele, they’d been hoping to land larger clients who would provide steadier work and higher visibility. Getting a job from a prestigious marketing firm like Coppelius & Lothar was an unexpected and very welcome development.
Sarah outlined what she knew about the project. It was for a new iPad app that was still in beta testing. There was no copy written yet; that part of the project was being done by the client’s other advertising agency. The project had come via a previous customer’s referral; Sarah had already made a note to herself to send the customer a thank-you card.
Scott Finney, the project manager on the client side, was a new marketing director who had been promoted following a management shuffle and a string of layoffs. He said he’d be in contact with them as soon as...well, Sarah wasn’t sure, exactly. But it had something to do with “ad hoc provisioning,” whatever that was.
All of this sounded very confusing to Klara, but because the project was so small (a four-page, full-color document that was due in two months), she agreed it was a great opportunity for Clear Spot to get access to larger projects down the road.
…
The Role of Power in Negotiations
Although the win-win approach is the most effective one for negotiators, some negotiators achieve their goals primarily through a show of power.
There’s no doubt that this strategy can get results. The balance of power will often determine the outcome of negotiations, regardless of your negotiating style. That said, threats and aggression usually don’t produce the ideal settlement. Agreements made under pressure last only while one party feels weaker. When the weaker party gets the opportunity to back out, the agreement falls apart. Even if it doesn’t, an agreement made under hostile terms will often create problems for the winner.
Although aggressive negotiation can be intimidating, it’s often a sign of weakness. Think about it: If you have something really worthwhile to offer people, you usually don’t need to be aggressive to get their cooperation. And beyond that, how much power do you really have when you can’t hold on to what you’ve won?
Here are a few basic principles of power:
Power is always relative and limited, never absolute.
Using power always involves risk.
Power can change hands suddenly and unexpectedly.
Power can be real or perceived.
Power can be exercised without acting.
Power is only as strong as it is believed to be.
Power exercised out of fear, greed or anger is weakness.
Think about your own past negotiation experiences. Did actual power or perceived power play a larger role in the outcome? Chances are, perceived power played a larger role.
No matter how weak you consider your negotiating position to be, you’re likely to have more power than you think. Even if you lack any formal authority or economic clout, you probably have many other forms of power, including:
The power to negotiate fairly and intelligently
The power to say no
The power to point out the consequences of a failed agreement
The power to deflect attacks by refusing to retaliate
The power to demonstrate a way out of the conflict
The power to maintain your personal integrity or the respect of people whose opinions matter to you
The Power of Hope
What each side hopes to achieve by negotiating, and how confident each side is of reaching a favorable settlement, has a huge impact on the outcome:
People with higher hopes achieve better outcomes.
People with lower hopes make more unnecessary concessions.
Skilled negotiators with high hopes earn better outcomes, regardless of the amount of power they possess.
High initial proposals improve the quality of the final settlement.
The Negotiation Process
Anyone who has tried to sell a house or buy a new car knows that negotiation can require a lot of time and patience. It may be a very long journey from your initial talks to the signature that closes the deal.
No matter who you are or what approach you take, the negotiation process generally contains the same phases. These include setting an agenda, voicing demands and offers, working to minimize differences, and closing the deal. Ideally, each of these stages builds on gains made in the previous stages, allowing the two sides to move closer to an equitable agreement.
Identify Your Interests
Before negotiating, you must identify your interests. Having clear goals demonstrates confidence and professionalism, and gives the other side a reason to take you seriously.
Remember that your interests can be very different from your position. Your position is what you say you want (more money, faster turnaround, larger orders). Your interests are what you actually need in order to be successful.
It’s important to understand the difference. Otherwise, you may spend lots of time arguing over positions, only to end up with a deal that doesn’t satisfy your interests.
Start by listing your interests in order of their importance. This is the currency you will be using, so decide how much each is worth in relation to the others.
Next, consider all the options that would satisfy your interests. What are you willing to give up in order to get what you want?
You should also consider all terms of the deal that could satisfy your counterpart’s interests. You’ll enhance your position if you can suggest options your counterpart hasn’t considered.
Identify Your BATNA
In addition to your interests, you must identify your best alternative to a negotiated agreement. This is commonly referred to by the acronym BATNA.
If negotiations don’t work out, what are your options? Do you have offers from other investors if this one falls through? Or would failing to reach an agreement mean that your business would have to shut down? It’s essential to know what’s at stake. Obviously, a deal that would leave you worse off than your BATNA is not worth signing.
It’s also a good idea to identify the BATNA of the other party, if possible.
Identify Your Settlement Range
You probably know what you want out of your negotiations, but you also need to think about what you don’t want. What’s the very least you need to achieve in order to feel good about the deal?
Once you’ve set this bottom line, you’ve created a settlement range. At the top of the range is the best-case scenario, where you get everything you want. At the bottom is the worst-case scenario, where you walk away with the bare necessities.
By “bare necessities,” we don’t mean you got to keep your gold fillings and two pairs of pants. We mean the minimum you need in order to feel that the agreement, though not perfect, is better than your BATNA.
You shouldn’t fixate on achieving your best-case scenario at all costs, but you also shouldn’t make unnecessary concessions. If you end up squarely in the middle of your settlement range after a tough negotiation, consider it a solid win.
Overcoming Obstacles
You’re sitting face-to-face with an investor, distributor or supplier, and things just aren’t working out. Maybe you’re unable to communicate with one another, or maybe you feel intimidated by the other party. Either way, there seems to be no way to reach an agreement. What should you do?
First of all, don’t give up. This is the heart of the negotiation process: getting through the obstacle course to achieve your objectives. The following strategies can help.
Recognize Manipulative Tactics
Whether you bring them to the other person’s attention or not, recognizing manipulative tactics will improve your sense of control and confidence.
Here are several common manipulative negotiating tactics:
Stonewalling. The negotiator refuses to budge from his position, rejects your proposals and is indifferent to your efforts to communicate. In this case, you will usually need to request a different negotiating partner or walk away.
Anchoring. The negotiator starts with an unreasonable offer in order to define the bargaining zone; when the negotiator backs away from this demand, the offer may seem reasonable even if it’s still in your counterpart’s best interests. Attempts at anchoring should be met not with an immediate counteroffer, but with a fact-based challenge to the negotiator’s unrealistic offer. After rejecting the anchor, wait for a new offer or make a counteroffer near the top of your settlement range.
Bullying. The negotiator attempts to intimidate or threaten you into giving in. He may question your credibility, your proposal or your authority. These tactics should be met calmly; controlling your temper is the most effective way of overcoming a bully. One good tactic is to ask your counterpart if he’d like to take a break so he can calm down.
Good cop/bad cop. One of your counterparts is a hard negotiator who refuses to make any concessions, while the other seems to be reasonable and sympathetic. The “concession” the good cop eventually wins from the bad cop on your behalf is basically the deal they planned to give you all along. Naming this tactic may defuse it.
Deception. The negotiator tries to trick you into giving in by providing misleading or false information. This approach should be countered calmly with disconfirming facts or with a request for evidence. The point here is not to call your counterpart a liar, but to show that his tactic won’t work on you.
Open Your Ears!
If you really listen to what the other person is saying, you may find that an obvious solution has been in front of you all along. Don’t be tempted to use the time when your counterpart is speaking to formulate a clever response or to plan your next entrepreneurial venture. Being a careful listener is the best advantage you can have.
To be a better listener, frequently summarize what the other person says and ask for more information. Take notes, if possible. Above all, be patient; realize that the payoff for listening is the ability to understand where interests intersect. This is how enduring agreements are made.
Offer Information
Being open and offering information can lead your counterpart to do the same. You don’t need to reveal any trade secrets; just talking about everyday issues can defuse tense negotiations and foster trust.
Get in the Other Person’s Shoes
Rather than getting frustrated with your counterpart’s tactics, try stepping into her shoes for a moment. Without making any concessions, try to understand and appreciate her point of view. Ask for the reasoning behind her position.
When you consider another person’s opinion, you have an opportunity to identify issues on which you agree. You may find that you have the same time pressures, cost considerations or even the same personal dislike for negotiating. Whatever it is, recognize it and use it to form a bond.
This approach is beneficial to you, and it may also disarm your counterpart. In some cases, it may even provide support for your own position. For example, if your counterpart justifies his position with cost concerns, you can note that the same concerns justify your position.
Stick to the Facts
When emotions are running high and threats or scare tactics are being used, try to bring the conversation back to objective facts. You can say something like, “I think this discussion is getting very speculative. Let’s get back to the facts and look for areas where we agree.” Relevant facts might include deadlines, legal requirements, product specifications, professional standards or a previously agreed-upon timeline or scope for negotiations.
Lighten Up and Laugh!
The way you approach negotiations can have a big effect on the results, so why not have a positive, easygoing outlook?
Humor can disarm even the most adversarial opponent. Take the opportunity to lighten up the discussion when possible. This can build trust and create a more relaxed environment. Even if your counterpart doesn’t enjoy the experience, you can!
Slow Down and Regroup
When negotiations get tense, people often retreat to their positions instead of refocusing on their interests. They simply react, without thinking or listening to the other side. Many negotiations fall apart at this stage.
You have the power to break this deadlock. Step back, put aside your assumptions and emotions, and take some time to look at the negotiation as an outside observer would. Having cleared your head, you’ll be ready to engage more effectively than ever.
Remember: You have as much right to set the pace of negotiations as your counterpart does. Exercise this right whenever you feel the need. Calm yourself, reflect and decompress. This will give your counterpart a chance to do the same.
One way to buy yourself some time is to say nothing. Silence is one of the most powerful tools a negotiator can use; it gives the other person nothing to argue with and may throw off her momentum. This consolidates your power, and forces the other side to adapt to your pace.
Another valuable way to slow down the process is to review the progress you’ve made up to that point. Taking notes is an excellent tactic; it gives you a chance to pause periodically while showing that you take the process seriously.
Get Off the Hot Seat
No matter what the other person says, never make an important decision on the spot. Smart negotiators always disengage and go to a safe location to make their decisions. In this context, “safe” means a place where you’re under no direct pressure to agree to a specific settlement.
If pressured, try responding, “You’ve obviously put a lot of thought into this, and I’d like to do the same before I answer.” Or “I always get a good night’s sleep before I sign a contract.”
Even if you only have a few minutes to make a decision, you should still allow yourself some space and time to review your options. If possible, contact a trusted advisor or family member and ask for feedback.
Never let yourself be pressured into a decision by a deadline imposed by the other side. If you feel this happening, test the deadline—you’ll soon find out how serious it is. Never forget: A decision made under pressure may be one you regret later.
Walking Away from the Table
No matter how committed you are to making a deal, you may reach a point where your best course of action is to stand up calmly and walk away. Knowing your walk-away point in advance strengthens your position and gives you a solid footing from which to judge the other side’s proposals.
Usually, it’s time to think seriously about walking away from negotiations when:
A counterpart’s ethics clash with yours.
You’re being told to accept a deadline you can’t meet.
Your counterpart is greedy and will make no compromises whatsoever.
You believe your counterpart is unwilling or unable to follow through on the deal.
You can achieve better results elsewhere.
You strongly dislike or distrust your counterpart.
You have evidence that your counterpart is dishonest or the deal is illegal.
Economic conditions lower the value of the deal to your business.
Some negotiators try to use walking away as a tactic, but this is a bad idea. If you’re not serious, or not in a position to follow through, your position will be greatly weakened when negotiations resume.
…
When Scott finally contacted me, I assumed that whatever confusion I had about the project would get cleared up. But if anything, it got worse.
At the same time, I felt like there was already a lot of pressure to perform, right off the bat. In theory, that’s fine. I work well under pressure. But only if I understand what I’m supposed to do. Trying to figure out what Scott wanted was like trying to catch a ghost with a fishing net. The only thing that was really clear was the budget and timeline; the actual content was totally vague.
I have to take the blame for some of it. I didn’t want to lose the job by seeming clueless, so I just acted like I understood. I figured everything would be clearer when we got the content.
In her earliest conversations with Scott Finney, Sarah realized that the budgeting and timing were going to be very tight for this project. It was clear that Scott was trying to get a lot of work for as little money as possible. Sarah did her best to align Scott’s expectations with his budget, but that was difficult when the scope of the job remained unclear.
She also consulted with Klara to figure out if they could reasonably hope to produce the sheet for the budget he was proposing. After several negotiations with Scott—during which he was aggressively and unpleasantly firm about the budget— Sarah and Klara agreed to do the project for less money than they’d initially estimated. With some reluctance, they decided to gamble that the smaller profit on the job would be offset by access to future jobs with the firm.
The contract was signed, finally, but the tense budget discussions with Scott left Sarah with a bad feeling. Was this a sign of things to come?
…
Your Negotiating Partners
In the course of running your business, you’re likely to enter into negotiations with each of the following types of people. The information presented here will help you to be confident and well prepared.
Lawyers
When hiring a lawyer, negotiations usually revolve around fees, expenses and billing intervals. Always collect fee information from several lawyers before negotiating. Smaller or newer firms may be more open to negotiations. On the other hand, they may be less reliable or effective than an established firm.
Make sure to check references, and remember that it’s important to like and trust your lawyer.
Lawyers typically charge an hourly fee, a contingency fee or a flat fee. Each type of fee can be negotiable.
Hourly Fees
The amount a lawyer charges per hour may vary by the type of case, the lawyer’s location and level of experience, and (in some cases) the client’s income level.
Often, you must weigh the hourly rate against the lawyer’s level of expertise; a relatively inexperienced lawyer may charge less than a highly experienced one, but end up billing you for twice as many hours. Also, remember that you are paying in part for security and peace of mind. A skilled, established lawyer with years of expertise in your field can be a literal lifesaver. As stressful as a high legal bill can be, it’s usually not as stressful—or as expensive—as substandard legal representation.
When researching fees, always ask how the office bills for staff services (e.g., from clerks and paralegals) as well as for routine incidental costs like typing, mailing, photocopying and filing. These costs can add up rapidly, and they are usually not included in the lawyer’s hourly rate. You may be able to reduce hourly fees somewhat by using standard legal forms or software and having your lawyer review them.
You can also reduce fees by negotiating your lawyer’s billing intervals. For example, if your attorney bills in 15-minute intervals, you will pay considerably more than if your lawyer bills in six-minute intervals. To understand this, suppose your lawyer charges $200 per hour. If she bills in 15-minute intervals, a five-minute phone consultation will cost you $50. If she charges in six-minute intervals, five minutes will cost you $20.
Note that some lawyers who bill in smaller increments may still have a minimum billing increment for certain activities; for instance, they may automatically charge two six-minute increments for a single phone call, even if it’s only a minute or two long.
Practices like these can add significantly to your costs, so make sure you understand how small services are billed before you hire a lawyer. It’s also wise to get a written estimate of billable hours for your case.
Contingency Fees
Here, the lawyer’s payment is based on a percentage of the damages or settlement you win in a lawsuit. Usually, potential damages must be substantial for lawyers to work on contingency; fees will usually amount to roughly one-third of the damages awarded.
Lawyers are more likely to negotiate a lower fee in cases where a larger amount of money is at stake and the odds of winning are very high. If you lose a contingency case, you will not owe attorney’s fees, but you will still have to cover the attorney’s expenses. Also, note that the point at which expenses are calculated can affect the total amount you owe. If your attorney calculates the fee before deducting expenses, you will pay more than if they are deducted after the fee is calculated.
Flat Fees
Lawyers usually charge a flat fee only for routine legal tasks such as filing real estate or incorporation documents. Shopping around can often get you a lower price. But if you intend to maintain a long-term relationship with your attorney, it may be false economy to choose by price alone. As with hourly rates, always ask whether the flat fee includes incidental expenses. In most cases, these costs will be charged in addition to the flat fee.
Bankers
Negotiating with bankers tends to be difficult, as they will inevitably have a lot more power and leverage than you. In order to make their loans as risk-free as possible, they will usually seek tough restrictions on commercial clients, including prepayment penalties, financial covenants that specify what the client must do to avoid default, and unlimited guarantees by principals and affiliated companies.
Negotiations are also limited by professional factors. For example, bankers must:
Ask for collateral to secure loans
Perform balance-sheet tests
Avoid long-term debt
Charge higher rates for riskier loans
Generally, it’s best to negotiate from a position of relative power. High profits and a strong balance sheet will put you in a better position to earn concessions from your banker. Knowing what kind of rates you can get from other banks may also put you in a stronger negotiating position.
The major negotiating points tend to be interest rates and loan processing fees. You may also negotiate prepayment penalties, credit card processing fees, and events of default. A strong financial outlook, excellent credit, and a longstanding relationship with a banker who is familiar with your business will usually improve your chances of negotiating favorable terms.
Venture Capitalists and Investors
Negotiating with VCs and investors requires expert legal help. Here are some issues you will encounter:
Share of equity. This refers to the percentage of ownership the investor will have in your business.
Mix of straight versus convertible debt. Convertible debt can be exchanged for equity (stock) in the company. Straight debt is simply money the business owes to a lender, and grants no rights of ownership to the business.
Consulting agreement. This obligates the business to “buy” a given amount of consulting time from the investor.
At the core of VC negotiations is the term sheet, which is a brief, non-binding summary of the terms and conditions of the proposed financing deal. The primary issue in term sheets is usually valuation; this is the amount that VCs feel your company is worth before their investment. Getting a good valuation requires you to make a strong case for the profitability of your business, based on realistic sales projections and recent valuations of similar businesses.
Term sheets also specify equally crucial issues like the composition of the board, voting rights, rights of first refusal on the sale of management stock, and the amount VCs will receive in the event of liquidation. All of these terms are negotiable, and all of them have very serious implications for you and your business. It should go without saying, but you should never agree to a term sheet until you’ve reviewed it with an expert attorney. Do your research, check references carefully and get the best help you can possibly afford; this is definitely not a time to scrimp on legal fees.
It’s often wise to write up your own terms before negotiating—with your lawyer’s help, of course—so that you’ll have them clearly in mind. Once you’ve drafted them, don’t restructure them in negotiations without a very good reason. If you’re seeking multiple investors, explain that you have non-negotiable standard terms. If you negotiate individual terms with each investor, you may regret it when it’s time to repay them.
Knowing your BATNA is especially important in this scenario. Having an alternative source of financing, even if it’s not ideal, will give you more leverage.
Suppliers
Since you’ll probably rely heavily on your suppliers, it’s wise to choose a supplier who shares your values and standards, and with whom you’ll enjoy working. For more information on managing contractual relationships with your suppliers, see Chapter 24 Supply Chain Management.
If you’re just starting out, you may have a hard time negotiating favorable payment terms or enforcing strict quality standards. One possible solution is to negotiate a long-term agreement. For instance, once you’re comfortable with your sales forecasts, you might try ordering several months’ worth of supplies, instead of a one-month supply. Of course, you’ll need to spread out the payments over the life of the contract and include an enforceable termination clause.
Before approaching a supplier, research the company thoroughly. How many competitors do they have? How long have they been in business? What regulatory burdens do they face? Issues like these can give you an idea of how important your business is to the supplier and the amount of bargaining power this gives you.
Understanding your supplier can also present you with opportunities for win-win negotiations. For example, you may figure out a way to improve their efficiency, provide a valuable referral, or lower their shipping costs. This can earn you goodwill, as well as lower costs and better terms.
It’s always good to have a backup supplier in mind, just in case negotiations break down. You should also reexamine your supplier contracts annually and renegotiate them where necessary. Although a longer contract may result in a lower price, the loss of flexibility is rarely worth it. You don’t want to be locked down if a better option comes along. Even if you intend to stay with your supplier, the ability to switch suppliers will give you more leverage in negotiations.
Customers and Buyers
Customers are the final consumers of your product, while buyers purchase it to resell.
Negotiations with customers should be guided primarily by your interest in cultivating a long-term relationship, and secondarily by cash flow considerations. If you’re in a service business, you’ll probably be negotiating contracts that include price, delivery time and project terms.
Negotiations with buyers are identical to those with suppliers; major issues include payment terms, late payment options, specification changes, contract changes and termination.
Shipping Companies
Small-business owners often don’t realize that shipping companies base their pricing on volume. Shipping more items, or items of a certain size or shape, can earn you lower rates. If you ship a moderate to large number of parcels each month, you should definitely consider negotiating a lower rate.
In negotiations, shipping companies usually have the advantage of knowing much more about costs and logistics than you do. Although you probably won’t become an expert overnight, you should know how much you ship, the average weight and dimension of your packages, what regulations apply to the contents, and any other laws and regulations that apply in the United States and in any foreign destinations. Among other things, you can use this information to compare prices from a variety of carriers. This will help you to identify areas where terms may be flexible.
When negotiating lower prices or better service, always be prepared to make concessions. For example, look for ways to boost your shipping volume, or to adapt your shipping patterns, pickup and delivery, or packaging to the carrier’s preferences.
If you have growth plans that entail a higher shipping volume, this can be a good time to ask for a lower rate. (Note that you can also increase your shipping volume by having suppliers ship to you with your own shipping number; in addition to supporting your request for a better rate, this can prevent suppliers from overcharging you.)
Depending on your industry, you may also be able to secure lower prices through membership in a professional association or chamber of commerce. Alternatively, you may want to consider hiring a third-party negotiator or shipping consultant to review your billing and terms. You can easily find these firms online; the best ones work on contingency, charging a fee only when they reduce your costs.
Employees
In negotiations with employees, the major issues are compensation, benefits, duties, and the goodwill you hope to maintain between you and your employee. For this reason, it’s best to know as much as possible about the person’s interests, goals and ambitions before entering into negotiations.
When cash is tight and your employees want raises, it’s important to understand that the request for a raise is sometimes a reflexive response to stress or dissatisfaction. Perhaps your employee doesn’t need more money so much as a more flexible schedule, more recognition, more autonomy, more cooperation from coworkers, or even just a longer lunch break. You may need to ask some polite, probing questions to find out what’s on the employee’s mind, so you can work together on a win-win solution.
Independent Contractors
Negotiations with independent contractors typically focus on cost, scope, deliverables, quality standards, intellectual property rights, and deadlines. As with other negotiating counterparts, you should have as much information as possible about prospective contractors before negotiating.
Quality can be a complicated issue for independent contractors. Because they work for various clients, they will often want to maintain consistently high quality standards, partly to use their professional skills to the fullest, and partly to ensure that completed jobs meet the standards of any prospective employees who review them. Thus, a contractor’s resistance to performing cut-rate work may not simply be about accepting a lower wage on a single job; it may be about protecting professional standards and future earning power.
For this reason, negotiations should focus first on identifying a quality standard and scope of work with which the contractor is comfortable, and then agreeing on a price and timeline.
Also, remember that a low price doesn’t always indicate a bargain. If a contractor gives you a low bid, or accepts a low price, he may be underestimating the amount of work involved. If that happens, there are two possible outcomes: He’ll try to do his best under stressful conditions, or he’ll cut whatever corners are necessary to make the hours fit the pay. Either way, you probably won’t get quality work. Bids that seem like a bargain deserve just as much scrutiny as prices that seem high.
Online and Tech Services
Online and tech contracts include Internet service, Web hosting, cloud-based software and infrastructure services, software licenses or subscriptions, and outsourcing contracts for services such as records management.
Although these services vary, one thing they have in common is that you will generally have more negotiating power before you sign a contract than after. Failing to check all terms and conditions before signing an agreement may lock you into an unsatisfactory contract with a high termination penalty.
Online service vendors, in particular, tend to favor multiyear contracts. They may offer substantial savings, but that won’t be a consolation if their service doesn’t meet your needs. It may be better to pay a higher rate for the first year in order to get a clear picture of the vendor’s capabilities. If all goes well, you can consider negotiating a multiyear contract.
Cloud-based services, which include software as a service (SaaS) and infrastructure as a service (IaaS), are a favored solution for many entrepreneurial businesses. Apart from price, the major areas of concern are data retrieval, backup and security. Don’t sign an SaaS or IaaS contract—especially for sensitive information like employee or customer data—until you understand all terms relating to these areas. Who is legally responsible for security and data breaches? How easily and quickly can you retrieve business data stored on a vendor’s server if you cancel a contract? Will it be in a format you can use right away? What is your recourse if something goes wrong with the retrieval process? What will happen to sensitive archived backup data? Will it be destroyed, or will the vendor continue to store it? What happens if the vendor goes out of business or is bought out by a competitor?
Another consideration is the reliability of the service. This is a common problem with ISPs, whose advertised speeds and average uptime may not be experienced by all customers. But it also affects cloud services; a good contract will give you the right to ask for improvements or terminate your contract if the vendor fails to deliver the expected performance. Your contracts should state what your recourse is for inadequate service.
…
Thinking back, the whole thing seems like a bad dream. Morning after morning, I’d just sit in front of my computer waiting for Scott to get us the content we needed. I couldn’t do any other work; we’d already blocked out the time for this project, and we were afraid to accept any more jobs because we had no idea how long this one was going to take. We had a tentative layout ready to go, but we needed content. And it seemed like Scott had dropped off the edge of the earth.
“It’s not here, again,” Sarah told Karla. It was three weeks into the project, and they were still awaiting copy for the white sheet they were designing. Scott had promised they’d have it that morning, nearly five days later than they had agreed to on the project timeline.
“There’s not even an apology from him,” Sarah said. “This is really getting ridiculous.” Indeed, it was the worst project Sarah had ever worked on. Scott was late answering emails and inconsistent in his feedback and directions. It was clear that he lacked the confidence—and perhaps even the authority—to make important decisions about the project. All this combined to make him irritable and unpredictable. As Sarah said, Scott was “a nightmare client.”
According to their time tracking, Sarah and Karla had already used up nearly 75 percent of their allotted hours for the project. And they hadn’t even gotten draft copy yet, let alone begun dealing with reviews, revisions and printing.
Worse still, in their eagerness to cater to Scott’s skittishness about money, they had left out of their contract any reference to delay costs or fees for overruns.
The delays were made worse by the fact that several new projects were due to kick off in the coming week. If the Coppelius & Lothar project dragged on much longer, it would affect all the other projects at Clear Spot. Things were stressful, they were almost certainly going to lose money, and Scott was a real pain. Sarah was beginning to wish they’d written a client nonperformance clause into the contract.
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Contract Management
Contract management means implementing practices that keep your contractual relationships running smoothly, such as scheduling meetings with your partners, setting performance checkpoints, creating a stable operating environment, and establishing a method of achieving goals. Delivering exceptional performance under contract requires continuous, consistent management. Ideally, you and your partner will get to know and trust one another during this process.
A signed contract is a very valuable asset for your business, especially if it’s with a major customer. It’s surprising how many businesspeople neglect deals they’ve closed. Your contracts represent a promise of future deals, but only if you manage them professionally.
For businesses seeking to grow and thrive in today’s globalized world, having an efficient contract management system is not optional. Outsourcing and offshoring, working with freelancers and partners, the shift to simplified e-procurement systems among government and big business, managing online services and subscriptions...all of these things require conscientious attention to contract terms and performance. In addition, most small business have leases, software licenses, maintenance agreements, warranties, website hosting agreements, and dozens of other contracts to manage.
Failing to manage your contracts can have serious financial consequences. It can cause you to miss out on time-sensitive incentives and discounts, and it can also lead to errors, wasted effort and missed deadlines. A study by the International Association for Contract Management found that losses due to inefficient contract management may equal up to 9.2 percent of annual revenues.
More fundamentally, contract management is about survival. As more firms invest in infrastructure and software to help with contract management and compliance, your firm’s contract performance will be under considerable scrutiny and will be held to a strict standard of accountability. This is a consideration no serious entrepreneur can afford to ignore.
Nurturing Your Partnerships
Nurturing a contractual partnership means understanding each other’s performance standards, time constraints, business priorities and management culture. How does your partner’s business make decisions? What are its competitive strengths? What does it value in its business dealings? Understand these things, and you’ll be able to meet requirements before they’re requested of you.
The first step is to review the contract terms with your partner. You must agree on how and when each side is to perform its part of the deal, and how each will measure progress. Here are some suggestions:
Review the timetable for successful completion of the contract.
Break the contract into smaller pieces based on the timetable and performance goals (e.g., units to be delivered, deadlines to meet).
Define the responsibilities of each participant.
Determine how and when to communicate.
Identify plans for managing breaches of contract or substandard performance.
Define the margin of error allowed for performance targets.
Establish meeting times and dates to review the status of the contract.
Review payment terms.
Appoint a Contract Manager
It’s an excellent idea to make someone in your business responsible for contract management. On a day-to-day basis, this person will ensure your business’s compliance with the terms of each deal you sign, and become the communication link between your business and your partner.
This doesn’t have to be the employee’s only job, and you don’t have to create a new department or a fancy title. You simply need to formalize responsibility and accountability for managing contracts.
Who you designate depends on the nature of the contract. Does managing the contract require specific technical or legal knowledge, or just good people skills? Does it require daily contact, or only weekly or monthly contact? Who in your business has the skills, attention to detail, and time to do the job well? Usually, a contract manager must coordinate compliance between all departments affected by each contract, so someone with good communication skills is a must. These skills also come in handy when preparing reports.
Hiring a contract manager calls for the same logical steps you used to create your management structures: Identify your needs and goals, allocate responsibility and authority, set standards for performance, and create yardsticks to measure performance. Sound familiar? We hope so!
It’s important that you understand and approve of the system that this employee uses. If the employee goes on vacation or decides to quit, you need to be able to take control of compliance efforts seamlessly. Having a contract oversight system that only one employee understands is a recipe for disaster.
Evaluating Your Contracts
When it’s time to renew a contract, you need to assess how valuable it is to you. If it’s not meeting your expectations, you should either negotiate more favorable terms or cancel it.
Here are some questions to consider:
Do the terms and conditions of the contract still make sense for both partners? Or have they become outdated?
How did the contract benefit your business in the past year?
Has your partner met its contractual obligations? Has performance been timely and satisfactory? How can they better serve your needs?
Does your partner offer better terms or service than its competitors?
Is your partner’s communication prompt, clear and satisfactory? Do messages and questions get a quick response? Do they offer many options for contact, ranging from phone to social media?
How is your relationship with your partner? Is it cooperative, neutral or adversarial?
What problems arose during the contract term, and how were they solved? What costs were associated with the problems and the solutions?
How hard would it be to replicate this contractual relationship? Would your partner be easy or difficult to replace? What costs would replacement entail?
What improvements can you or your partner make?
Even if you intend to renew, you should still review the contract to make sure all information is up to date. Your contact or billing information—or your vendor’s—may have changed since you last looked at the contract, so make sure everything is current before you sign up for another year.
Contract Management Software
Most contracts are paper-based, so unless you revisit them frequently, it can be hard to monitor and enforce compliance. Fortunately, contract management software systems can automate your compliance throughout the contract life cycle. They act as a central repository for all contracts, and integrate the functions of existing procurement and operations applications. They can also speed up procurement by automatically generating supplier contracts and streamlining contract renewal.
Contract management software can track performance, compliance and deliverables, and alert you when it’s time to perform contract management tasks. Most important, it reduces the risk of losing vital documents by creating an digital backup of all your contracts and contract-related data.
Here are some more potential benefits of contract management software:
Instant access to contracts through a searchable central repository
Monitoring contract milestones and deadlines
An automated alert system that tells staff when it’s time to fulfill contractual duties
Standardized processes and terms
Avoiding unwanted automatic renewals
Reducing material and service costs
Validating invoices against contract terms
Compiling supporting documents
Keeping track of rebates and discounts
More efficient workflow and time allocation
Improving organizational control and oversight
Keeping sensitive documents secure with a password-based permission system
Confirming receipt of goods before permitting payment
Capturing system data for accounting programs
A contract management system should send timely alerts, giving you enough time to evaluate contract terms, cost and performance, so you can decide whether to renew, renegotiate or terminate.
As always, software applications don’t solve problems unless your business understands them, adapts to them and uses them. A well-organized, motivated team that is committed to exceptional service can do wonders with contract management software. A team that’s confused or dispirited probably won’t be helped by programs of this type.
Too many firms buy expensive software products to “solve” problems that actually come from low morale, confusion or a lack of management structure.
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In the end, what saved us was Karla’s dedication to recordkeeping. Even when nothing was coming in from Scott, she made sure I was keeping track of emails, linking them clearly to the project timeline, and building a very clear narrative that showed exactly how we were moving—or not moving—through the process.
She told me, “We’re losing money on this job, but the real problem is that our reputation is on the line. If we can’t meet this deadline, we need to be able to show exactly where the failure points were at every stage.” And she was absolutely right about that.
Klara had a way of putting things in perspective for Sarah. But she also had the benefit of distance. She didn’t have to be on the phone with Scott, gently prodding him to provide copy, to schedule review meetings which he then canceled, or to remind him about looming deadlines. Sarah was sick and tired of dealing with it.
Still, she was very careful to maintain a clear paper trail and to keep her own communications calm and professional. When Scott complained or made aggressive demands, she politely but firmly restated the timeline of events, and repeated her request for Scott to deliver the promised content.
Eventually, the copy arrived from Scott...more than two weeks later than they had expected. Klara worked tirelessly to finish the layout. With only a day left to spare, Sarah sent the finished document to their client. At last, the project was over.
But the headaches weren’t. When they submitted their invoice, Scott tried to hold up payment, arguing that the finished piece wasn’t what he’d contracted for.
Fortunately, Klara’s carefully constructed paper trail showed that Scott had in fact signed off on the relevant stages of the design process. They also submitted email conversations, texts and other documentation that supported their version of events.
A month later, Clear Spot had been paid in full, and Coppelius & Lothar’s communications manager called to say how impressed he was not just with their beautifully crafted document, but also with their attention to detail and grace under pressure. Since then, Clear Spot has done several big jobs for Coppelius & Lothar with no problems. As for Scott...he was out of a job!
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How to Exceed Expectations
Next, let’s focus on managing your performance as the provider. Given the choice between simply meeting the terms of your contract or exceeding them, you should always do more rather than less.
Here are several of the most basic ways to exceed expectations:
Be speedy and professional. All companies should deliver rapid, professional service when and where their customers need it. The better you know your customer, the better you’ll be able to anticipate needs and meet them in advance of being asked. Exceeding expected delivery time is one of the most powerful statements you can make, but you should never sacrifice quality and professionalism for speed.
Follow up on service. Check in with your partner to make sure that all questions or issues have been resolved. Once again, a great deal of your business’s success rides on your ability to look back on your performance with a critical eye and rate how efficient, appropriate and professional it was.
Minimize unnecessary charges. Make sure your invoices aren’t cluttered with petty extra charges for small spare parts or minor service details.
Share your expertise. Just as you want your suppliers to enhance your business’s competitiveness, you should work to make your customers more competitive. Share your knowledge with them, and look for ways to increase its value to them.
Seek ways to achieve mutual gains. Where does synergy exist between your businesses? How can you collaborate to streamline or improve performance? Are there opportunities for your product to enhance or complement theirs?
Stay involved. Your personal commitment to your partner is a strong indicator of professionalism, reliability and the importance you place on the relationship.
Stay in touch. Communication is so important to nurturing your business relationships that it bears special discussion here. When we say “communication,” we’re not talking about the occasional phone call. We’re talking about an ongoing dialogue in which you and your partner coordinate performance, review targets and deadlines, and work to improve your relationship. Every opportunity you have to speak with your partner is an opportunity to improve cooperation and performance.
Review Your Performance
The importance of reviewing your business’s performance can’t be overemphasized. You can only improve by understanding and critiquing your past performance. This applies to all aspects of your business. Reviewing performance entails:
Reviewing actual versus anticipated results
Identifying strong and weak points
Identifying opportunities for change and improvement
Establishing a timetable for the next contract period
Soliciting and listening to feedback from your contract team
Addressing any areas for improvement identified during your performance review
One of the most important components of wise contract management is a built-in potential for change and improvement.
Conclusion
Good negotiators know what they want out of a deal, but they also try to find where their interests and those of their counterparts overlap. They take the other side’s interests, needs and views into account, and use their negotiation skills to resolve conflicts and create win-win solutions.
Ensuring your business’s consistent, high-quality performance of contractual obligations requires allocating specific responsibilities within your business, and encouraging open communication between yourself and your business partners. New and emerging technology can help you achieve this goal with a minimum of confusion, as long as it’s backed up by an organizational culture dedicated to customer service.
By properly negotiating, valuing and managing contractual relationships, you can gain a strong and durable advantage in even the most competitive markets.

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Negotiating Styles and Behaviors
Hard | Win-Win | Soft
Tries to negotiate on home turf | Tries to negotiate on neutral turf | Negotiates on other side’s turf
Focuses debate on own issues | Focuses on both party’s issues | Focuses on other party’s issues
Ignores other party’s demands | Listens to other party’s demands | Concedes to other party’s demands
Low offers and very high demands | Moderate and flexible demands and offers | Low demands and high offers
Requires other party to make first offer | Seeks an interchange of offers | Presents offers on other party’s terms
Demands large concessions from other party | Pursues mutually beneficial settlement | Makes large concessions at outset of process
Exaggerates own priorities, while ignoring the other side | Shares reasons for priorities; asks for other party’s reasons | Adapts to other party’s priorities
Rarely concedes, and only on items of low value or interest | Encourages meaningful concessions from both sides | Concedes immediately to the other party’s demands

| NxLeveL® TECH TIP BUSINESS RESOURCES AND THE WEB
Choosing Contract Management Software As with other software systems, contract management software should be compatible with existing software and workflow, while also allowing for growth. Here are some features that most businesses should have: A user-friendly interface that integrates seamlessly with other applications (e.g., word processing, accounting and email programs) Compatibility with mobile devices and across platforms A secure contract repository with accounting system tie-in and full-content searching that includes optical character recognition (OCR). Fully customizable template, clause and term libraries Automated alerts for contract deliverables, milestones and renewals Military-grade security and full integration of e-signature technology Performance indicators and other analytics to measure compliance, as well as the ability to generate reports Version tracking capabilities to simplify storage, retrieval and comparison of contract revisions and to ensure that the correct version is used.