Over the years I’ve seen that in negotiations, someone always has leverage…and it’s always best when this person is you! While this may be obvious, knowing whether or not you’re the one with the leverage can make a big difference in how you approach a negotiation. This case study is a great illustration of this fact.
One of my clients is a 3PL (Third Party Logistics) provider that offers warehousing and fulfillment services for the fashion apparel industry. Because there’s currently a shortage of warehouse space in their area, my client has a lot of leverage in contract negotiations. Their clients cannot make a credible threat to “take their business elsewhere,” because finding another provider with excess space might not be possible. In fact, even if one of their clients wanted to start handling all of their warehousing and fulfillment in-house, they’d be hard-pressed to find a building in which to do so.
The 3PL firm’s contracts with its two biggest clients—representing 80% of the firm’s revenue— were up for renewal. Since the last negotiation the minimum wage had gone from $8/hour to $12/hour, representing an enormous jump in labor costs. Because of this they needed to negotiate a sizeable increase, as they were losing money on the contracts as they were.
As their part-time CFO, I stepped in to help.
I started by doing the complex financial modeling to determine what rate it would take for us to go from losing money to making a fair return. Then I used our leverage to convince the clients that they would need to pay this rate.
In my negotiations with Client #1 I emphasized that our lease on the warehouse was coming up for renewal, and that absent a contract that enabled us to earn a fair return, we were not going to renew the lease. This put the pressure on them to see if this was their best option. It was.
Client #2, whose warehousing and fulfillment needs varied greatly over the course of the year, was the only tenant in a fully dedicated warehouse. When I explained that they needed to cover all of the costs of that building they said, “But we don’t need the whole building.” “Fine,” I replied, “we’ll simply fence off the portion that you say you need, and bring in another client for the rest. But when your busy season hits and you need more space, it won’t be available.” While they didn’t like this, they ultimately agreed.
Both negotiations ended successfully, and these two contracts are now in place at a rate that allows the 3PL provider to earn a fair rate of return.