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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.
As a CFO I’ve been involved in many contract negotiations. Over the years I’ve seen what works and what does not. Want to increase the chances of a positive outcome in your next contract negotiation? Here is my advice:
• Start the process early – It always takes longer than you anticipate.
• Be clear about your goals – Before the negotiations begin, be sure your own team has reached a consensus regarding what your goals are, and where your drop-dead point is. Your overriding goal should be to have a contract that leaves everyone feeling good about the relationship while giving you the profit or ROI that you need.
• Do your homework – If you make a claim you must be able to support it. If, for example, you’re saying that the direct cost of operating a warehouse is $X, then you’d better have a cost build-up that you can refer to when challenged (and you will be challenged!) to prove that this figure is real.
• Negotiate in good faith – And be honest. Honesty is always the best policy.
• Be willing to compromise a little – It must be a win/win, or at least a “face saving outcome,” for everyone involved. I recently negotiated a cost-plus contract. When the representative of the other company realized he would have to go along with our proposal, he asked for something he “could take back to his people to show that he had won something.” I said, “of course.” Our long-term goal was to be able to renegotiate another contract with these people, and we had to leave the door open to that.
• Consider including escalations – You’ll have to live with this agreement for the length of the contract. How will this affect you as costs change? Something doable now might not be doable three years from now if you have not worked in some escalations.
• Keep your emotions out of it – Always remember that this is a business deal. Don’t make it personal.
• Take detailed notes – Type up your meeting minutes—including the details of any agreed-upon commitments—within 24 hours of the meeting, and then have all parties sign off on them. You’d be surprised how often people come away from a meeting with completely different understandings of exactly what was said.
• Be careful what you put up on the board – Never put anything up that you don’t want someone taking a picture of. I’ve been in situations where the other side tried to claim they never suggested something…only to discover that we had photographic proof that they did.
• Have all contracts reviewed by your attorney – Never assume that the wording means what you think it means.Need help with your next contract negotiation? Give me a call! As your part-time CFO, I’m here for you.
Need help with your next contract negotiation? Give me a
call! As your part-time CFO, I’m here for you.