Legal Process Outsourcing

Effective Procurement: How to Negotiate Contracts that Deliver Value

In these days of tough and competitive business environments, organisations are constantly looking to optimise their supply chain performance and processes and improve efficiency.  Procurement is a critical and foundational phase in supply chain operations. Procuring the right products at the right price is of paramount importance, so negotiating good contracts with suppliers during the procurement process is not just a good-to-have step but an absolute must-have one.

A successful negotiation or contract is not about one party winning, it is about creating a win-win situation for both parties.

It is also not about cutting costs; it is more about fostering a strong relationship with vendors and delivering long-term value and aligning the vendors with your organisation’s goals.

While getting into negotiations and contracts, there are several points to be kept in mind by the parties involved in the negotiations. Let’s look at a few of those and examine them in detail.

• Have clarity on the big picture – What is the reason for getting into this contract? How does this procurement support the company’s objectives? Before framing the contracts, you must have a big-picture perspective of the long-term value of signing the contract. For example, if you are procuring raw materials for your factory, consider the vendor’s capability to scale up, if needed, for the future.


• Carry out adequate research –  It is imperative to research the supplier and their proposed solution thoroughly. Knowledge is power when it comes to negotiating great contracts. Gain an understanding of the company and the individuals involved in the negotiations. Research the market landscape and gain a good understanding of the same. What are the pricing trends like? Are there important questions we need to ask the supplier? What are the supplier’s capabilities like? Are there any customers who can vouch for their efficiency, effectiveness and reputation? 
  You also need to be clear about the budget limit for the purchase. What are the alternatives available in case the negotiations fail? Even if the negotiations go well, explore alternatives. Over-reliance on a single vendor could spell doom if there are any unforeseen hurdles that come up.


• Establish clear objectives and metrics – Set clear goals and objectives while entering into a contract with vendors. For example, timely deliveries and minimum acceptable quality standards are a given while entering into a contract. Any other specifications such as sales volume, and energy efficiency specifications should also be documented clearly in the contract. This ensures that both parties have a shared understanding of the end goals, which minimises any ambiguities and disputes that could crop up later.
  
  Early in 2024, A consumer advocacy organisation filed a lawsuit against Starbucks, the global leader in the coffee industry, for allegedly engaging in deceptive advertising. The lawsuit claimed that Starbucks sourced coffee and tea from farms with documented human rights and labor abuses, despite publicly promoting its dedication to ethical sourcing practices. This case highlights the importance of due diligence to check whether the supplier's ethics match that of the buyer. If differences in these matters crop up, then business with the supplier should be ceased without causing further damage.


• Build strong relationships with vendors – While starting negotiations, express the plan for a long-term partnership with vendors, instead of just a one-time procurement. The aim of negotiating a good contract is also to build strong relationships with your suppliers. Align your suppliers with your goals and share what your organisation’s roadmap looks like. This ensures that suppliers feel they are a vital part of your ecosystem and they go above and beyond to make sure that the contract with your organisation is honoured. Consider them as partners who play an integral role in your growth.


•  Consider pricing-related matters carefully

“You must never try to make all the money that’s in a deal. Let the other fellow make some money too, because if you have a reputation for always making all the money, you won’t have many deals.” -

 — J. Paul Getty, American-born British petroleum industrialist

Price is only one aspect of a contract. Ensure the contract is fair and mutually beneficial for both parties. Be very clear about the payment terms for the contract. While you negotiate favourable payment schedules, payment terms and penalties for non-compliance should be added for clarity and accountability.

• Ensure a positive atmosphere – Negotiating contracts does not have to be a stressful activity. Do not get emotional during the process – this is a business transaction that needs to be worked out in a manner that is best for both parties involved.  Keep emotions out of it to get the best deal and also earn the goodwill of the different parties involved. It is important to respect the other side and be cognizant of what the other party wants.
Keep all these points in mind as you head out to negotiate a well-researched contract with your suppliers. A contract life cycle management solution that has been thought through thoroughly is key to a rewarding engagement for all the parties involved and can become the basis for a successful relationship that ensures reliability, and aligns vendor capabilities with organisational goals.

 How can Infosys BPM help?

Our contract lifecycle management services are designed to help you achieve your objectives while ensuring compliance, capitalising on volume discounts, efficiently managing obligations, minimising contract risks and litigation exposure, and shortening time-to-contract. We also enable the optimal use of your LPO contracts, unlocking the value of business-critical information embedded within them.