12/02/2013
Should You Renegotiate A Bad Supplier Contract?
A few years ago, your procurement team signed a contract with
a supplier. It was a good deal at the time. But, since then,
market forces changed. Today, the contract price you are
paying is much higher than the market rate.
Do you renegotiate that contract?
Maybe. But you have to be careful. Here are six tips on how
to appropriately renegotiate a supplier contract.
Tip #1: Approach your supplier carefully. With these types
of situations, you have to approach your supplier
initially as a partner. If you contracted for the
product or service, they are under no obligation to
concede to you. You are essentially asking them for
a favor. You need to approach it like "Look, we are
human and we made a mistake. We'd like to think that
you are a partner that wouldn't take advantage of your
partner's mistake, so we'd like to begin discussions
about restructuring our contract so that our rate is
more in-line with current market prices."
Tip #2: Address specifications and expectations. Be careful
about specifying that you want the same
product/service that you are getting today for a lower
rate. Often, when suppliers agree to renegotiate a
price, they look to cut corners in quality, delivery,
or service or to substitute a cheaper product or
service.
Tip #3: Convince the supplier that a price reduction is fair.
Think about how you would feel if a contracted
supplier approached you and said that they made a
mistake and needed to charge you a higher price.
How would you react? Would you feel they were trying
to rip you off? What could they say or how could they
say it to persuade you that changing the price would
be fair? Now, adapt those persuasion techniques to
your situation when you petition the supplier for a
price decrease.
Tip #4: Consider the possibility that the relationship could
devolve into an opportunistic one. If market prices
went down and you approach the supplier for a price
decrease, what do you think will happen if and when
market prices go up? Do you think that the supplier
will be waiting to use this new leverage to get
revenge and hammer you with a higher price? If so,
do you think that would be fair? Would a request for
a price decrease ruin a relationship that will hurt
your organization in the future?
Tip #5: Consider ethics and cultural norms. Renegotiating a
contracted price may be considered unethical in some
cultures. Are you breaking any established or implied
ethics code by renegotiating?
Tip #6: Put your reasoning into context. Do you have a real
reason for renegotiating a lower price? Will your
organization's margin be deteriorated to a point
where its profitability or competitiveness with be
severely compromised? If so, you can use the
rationale that, if prices aren't adjusted, your
organization's solvency is threatened and it may not
be around to be a long-term customer of the supplier.
If the reason for your request of a price reduction
is simply to pile on to your cost savings statistics,
then the supplier will see less of a reason to grant
your request.
