Renegotiating Agreements in a Tough Economy

by Steve Jones

Two behaviours start to become prevalent when the economy becomes difficult: the first is people start to measure the wrong thing - and the second is everybody wants to renegotiate “done" deals.

Suddenly any pretence of collaboration has gone out of the window. Buyers are now quite happy to win at the expense of their suppliers - and some suppliers are now buoying up their margins by putting through unjustified price increases. Can you blame them? As a supplier the best time to negotiate a price increase is when everybody else is, and the buyer is distracted!

There are two behaviours that start to become prevalent when the economy becomes difficult:

  1. People start to measure the wrong thing
  2. Everybody wants to renegotiate “done" deals

So what should you do about it?

Measuring the wrong thing

When times are tough, managers often assume that doing more things delivers more results. Even worse, in sales organisations most people believe that  more calls = more orders. Or buyers believe more meetings with suppliers = better terms. That might be true in door-to-door selling, or when you run a corner shop but there is no proof that this is true in most big ticket sales. What happens when people start to measure efficiency rather than effectiveness?

  • Frequent internal meetings and reports required (e.g. daily briefings) - in one organisation I worked in the meetings and reports outweighed the amount of time available for delivery!
  • Focus is diverted to the number of deals rather than the value of them - this means that the big suppliers that have the resources to batten down the hatches will do better - as will the smaller buyers who are flexible enough to deliver volume to suppliers immediately (however insignificant this volume is in the scheme of things).
  • Any coaching or training goes out of the window - buying directors become buyers, sales directors become account managers. Unfortunately this means that inevitably morale will reduce as people's jobs become less fulfilling and staff attrition is likely to increase.
  • The relationship focus switches to entirely on the here and now.

Coming back to the impact of stopping training, Huthwaite conducted some research during the last recession with one of their clients to see what the impact was. They trained part of the sales force and didn't train the rest of the sales force (the experiments 'control' group).

What happened?

Sales of the untrained (control) group fell by 13%. The trained had a gain of 17%. In terms of gaining new business the trained group performed 79% better than the control group. This highlights not just the importance of training, but of reskilling when the negotiation game changes. Negotiations are conducted differently in many ways in times of bust to times of boom.

Renegotiating Done Deals

It is really frustrating when you have another party attempting to renegotiate a deal that you have already agreed - particularly if it is part of a complex long-term framework. The situation is likely to become emotionally charged because it may feel that one party or the other is now negotiating in bad faith. People start to make statements using "hot" words to describe the other party’s behaviour (e.g. you reneged, we can’t trust you etc.). All this does is makes rational behaviour extremely unlikely. The golden rule as they reminded us in “The Godfather” is “It’s business not personal”.

When you initially make an agreement with somebody, both parties are usually looking at a gain of some sort. When a renegotiation takes place, at least one party will probably end up in a worse position than they were before the renegotiation.

It is very tempting to react emotionally to any attempt at contract renegotiations. This is very dangerous. Under these circumstances people frequently take irrational decisions. The ego kicks in and people start becoming attached to the original deal without realizing - or refusing to acknowledge that the status quo has now changed. This frequently results in deadlock that doesn't help either party.

Two things happen in a renegotiation:

  1. The negotiation is likely to become much more unpleasant and competitive than the original negotiation. In the original negotiation both parties are generally looking at positive outcomes. In a renegotiation somebody will almost certainly come off worse. Research has shown that negative events affect us much more than positive events - and this is likely to affect people's behaviour
  2. Both sides are likely to be less willing to compromise and more likely to end up in a stalemate. Research has shown that negotiators who looked at deals in terms of profits rather than loss are more likely to compromise. What this means is that:
    • As the buyer, if you are trying to renegotiate prices downwards you need to continually talk about how much profit the other party will still make - rather than how much it will cost them.
    • As a supplier: you need to guard against positive “spins” put on the situation by the buyer. If the buyer portrays a situation in a positive convincing way, you're more likely to compromise but you may not need to. Playing hardball may be an option.

One of the most effective ways of dealing with this is to swap out negotiators. This has the benefit of reducing the emotional content of the discussion, and also removes the attachment to the initial deal. John Hammond's research suggests that people continue to throw good money after bad to support their initial position – yet another reason to change the negotiator.

As always, if you need help with your negotiations, from training to coaching or consulting, support in live negotiations, we would be glad to discuss your options without charge or obligation.

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