How to Win at Contract Negotiation
By the time you reach contract negotiation, you have typically invested considerable time and resources into moving this prospect through your pipeline. Your sales rep is motivated to close this deal - a return on the time spent, quota attainment, and earned commission are all within reach - and does not want to lose it over terms that may not impact him.
However, the executed contract is crucially important to your company and is not a stage to be glossed over. Poorly negotiated contracts can be costly in terms of resource cost, potential for revenue loss, addition of risk, and future devaluation. A contract playbook:
- Streamlines the contract negotiation process so that deals do not stall in this late stage of the pipeline.
- Sets standards for contract terms and a process for negotiation so that your company does not enter into unacceptable contracts. This aligns the interests of your Sales Reps and your company.
In addition to being the core of your enterprise value, contracts protect your interests and manage your risk. Contracts are vitally important. Well-managed contract execution can assist the scalable, efficient growth of your company and increase your enterprise value.
To maximize the impact of a strong contract on your company’s growth and value, GST recommends working with your legal counsel to assemble a contract playbook. A contract playbook is a document that outlines your standard contractual terms, a short justification for those terms, and any acceptable or unacceptable variations.
Benefits of a Contract Playbook:Showing Your Potential Investors the Value of Your Contract
Having different versions of contracts, especially when they differ in critical ways, is a value killer at your next round of funding. Potential investors or buyers are fundamentally buying your contracts, not your product, and so will want specific terms in your contracts. If there are differences between their needs and the existing contract terms, investors may significantly discount your value.
Preventing Lag During Contract Negotiation It is your goal to create a scalable, efficient sales process. Streamlining the contract process as much as possible prevents lag on your part when the time comes for contract negotiation. You will have a contract template and a set process for term negotiations, reducing the need for executive or outside legal input. Spending less time in contract negotiation prevents stalls in your pipeline. You will also have clear boundaries for what terms are unacceptable for your company and can walk away from prospective deals more quickly if mutually agreeable terms can’t be found.Knowing All Relevant Parties Involved
A contract playbook aligns all players (executive team, sales team, legal counsel). This can be particularly helpful for the sales team; it will save time for them to know upfront what terms are acceptable to your company and which ones will kill a deal so they can negotiate with a prospect more efficiently.Saving Money
Compiling a contract playbook is a financial investment. Even though you will need to pay legal fees to get assistance creating it, having a contract playbook will likely save your company money over time. Many decisions and scenarios will be considered at once in a more thoughtful and efficient approach so that you don’t need to engage your attorney for future one-off questions as often.
Below is an outline for Creating a Contract Playbook:
Analyze Previous Contracts and Create Playbook
This is the section where you answer the who, what, why, and how of your previous contracts.
- What are the key terms most important to our company? In other words, in which areas are we most vulnerable to risk and need to protect? Additionally, which terms affect key revenue drivers and need to be optimized? (Use this information to fill out the Section, Term, and Standard Agreement Language columns.)
- Why did we use this language on the standard agreement? How does this term affect our company? Why is it important? (Use this information to fill out the Justification column.)
- How have prospects responded to our standard language in regards to this term? What portion of prospects raise concerns over it? How serious are the objections? What, specifically, are the objections? Has the sales team found any responses that effectively counter a prospect’s objections? (Use this information to fill out the Common Customer Objections and Response to Objections columns.)
- What alternative language have we used in past contracts in regards to these key terms? In retrospect, would we use those terms again?
- How have those alternative clauses affected our ability to do business, risk, revenue, customer relationship and customer retention?
**Note: It is especially important to get input from the executive and sales team to answer these questions. These are not straightforward answers. Rather, different perspectives, needs and priorities need to be understood and balanced to identify the right approach to balance risks and rewards that align with company objectives.
Use this information to fill out the Acceptable Fallbacks and Unacceptable Fallbacks columns. And rank the Acceptable Fallbacks in terms of company preference. This will set the process for contract negotiation.**Codification and Use
- Set a process around how to use the playbook: does the contract negotiation process need to be documented? When does an altered contract need prior approval?
- Distribute the contract playbook among the executive and sales team.
- Train the sales team on expectations and how to use the playbook.
- Update regularly.
**Side note on contract negotiation strategy: Not all customers will negotiate terms, but enough will that a negotiation strategy should be considered to put your company in a prime spot to get the most beneficial terms. To that end, we recommend putting one blinking, red button term in your contract. This would be one term that stands out from the rest as particularly weighted in your favor. For those customers who need to negotiate, this blinking red button will anchor their criticism. As the negotiation process continues, the customer can focus their attention on that one issue, avoiding negotiation on other terms. Additionally, if the customer raises objections on other terms, you have a lot of room to fallback on the blinking, red button term in return for not moving in regard to additional objections.
Generally, GST believes you can stand by your contract without caving; a customer only negotiates a contract when the ROI you’re offering is not strong. Your contract should leave you and your customer on equal footing. However, if the customer is forcing negotiations, GST recommends never altering your terms without having an ask in return.
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For detailed information about our playbook and insights from our team contact us at firstname.lastname@example.org. Our goal is to help your business come out on top - let us help get you there.