20 Contract Questions: how should I negotiate a contract?

In the previous post of this 20 Contract Questions series, we talked about understanding how to read a contract and what it means. Before that, we’ve talked about what a contract is, how you get to the contract stage, and how to read and write a contract.  In this post we’re going to discuss some tips for negotiating a contract.

(1) What’s your objective?

What do you really want to achieve from the contract? What are the must haves and what are the nice to haves?  It’s worth thinking through these things before you commit pen to paper (even if you’re just talking about a term sheet) so that you know what direction you want to head in during the negotiations.  Otherwise you can find yourself buffeted around by offer and counter-offer, ending up some distance from your original goal.

(2) Analyse the key factors:

What is the risk to your business if you DON’T get this contract signed? How significant are the legal risks? How long can you afford before you need to sign? Can you afford a lawyer to help you with the contract? Think about the personalities involved- does that influence how you negotiate?

Contract negotiations are fundamentally an exercise in two or more people trying to get what they want in return for something they are willing to give away.  Whether the transaction is straightforward and short or complex and long, it will still therefore involve competing interests vying together.  That’s why it’s a negotiation after all.  One way in which you can try to get your interests ahead (or at least equal) with others’ is to think about the key variables that could come into play during the negotiation.  Of course there’s no magic formula about how to combine all this into the perfect negotiation strategy: all you can do is consider the variables and formulate your approach based on which are the most important to you.

(3) Ask yourself some questions:

Another way of working out your negotiating approach is to ask yourself some questions. Here’s some questions I often ask my clients at the start of a  contract deal and again during the negotiation process:

  1. How important is this contract to your business, on a scale of 1 to 10?
  2. How quickly do you need this contract signed?
  3. How well do you know the other party?
  4. How important is it to start this contract in a positive way, even if that means not getting the best possible deal?
  5. How much do you want to spend on this contract and on this negotiation?
  6. How risky is this contract to your business?
  7. How much negotiating power do you have?
  8. What are you willing to give up in order to get what you really want?

(4) A few war stories

All this so far has been me talking in generalities.  Here’s some examples of real people with whom I’ve worked and found to be pretty effective in very different ways:

The Risk Analyser:

I represented a games studio in a contract negotiation a while ago. Anytime I or anyone else raised particular issues, the CEO would simply ask “what’s my exposure here?” If the response didn’t affect his perception of his “risk profile” for the deal, then he wasn’t interested.  He didn’t care what the other side asked for, and he didn’t care how I drafted the contract or how they redrafted it, unless it affected his perception of the risk to his position.  It didn’t necessarily help him get a better deal financially but it did allow him to focus on what was important to him and to concede on what he felt to be unimportant stuff.

The Goalpost Mover:

A colleague once told me that he negotiated a deal for a software business in which they kept trying to renegotiate the basic terms of a deal after the term sheet was signed, after the main contract was signed, even after the closing ceremony!   They would use the other party’s emotional and financial investment in the contract to get themselves a better deal, regardless of the business etiquette or legal rules they breached. However, no one trusted them by the end of the process.

The Cards on the Table vs the Hoarder:

In another negotiation I worked for a business which walked into the negotiation by explaining exactly what they wanted, without low balling or highballing anything: what they said us what they wanted and not just what they could water down. By contrast, in another deal the exact same business played everything extremely close to their chest and only dribbled out over time what they wanted. They thought they had figured out that the first company they dealt with would appreciate a clean approach, whereas the second company was devious and needed an equally devious stance.

Nice cop and nasty cop:

Ah, the classic businessperson/lawyer combo.  The client gets to be the reasonable one, the  peacemaker and dealmaker. The lawyer is involved to be the bulldog, who pushes home the key points and argues the weak points beyond reasonableness in order to help the nice cop seal the deal. When the client has let the lawyer attack the other side, she can rein him in and gently bring home what she really wants.  (This is probably the most common approach taken where a lawyer is involved on a negotiation.)

I’m not putting any of these forward as an ideal approach of course – they’re simply intended to illustrate that different people have different approaches and there’s a lot that can be learned from speaking with other people in your particular industry about how they approach contracts.  That said, it’s important to be true to oneself – after all, a negotiation is the means to achieving a business relationship with someone else and that will usually only succeed if there is some kind of meeting of minds at the end of the tunnel.

So that’s it – no magic bullet, no secret formula, but a quick guide to some things to think about the next time you have an important contract negotiation coming up and you’re thinking about how to tackle it when you get that first heads of terms or walk into the post-pitch meeting.  I’d welcome any and all suggestions from you kind folks about your top negotiation tips

Next up: how do I change or renew my contract?

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