Commercial contracts and other contractual relationships have been the bedrock of business for centuries. Their terms set the short, medium and long-term framework within which companies operate. It makes total sense then to set these terms on as optimal a basis as possible for the organisation, considering the balance between risk and reward. However achieving an optimal result is not easy. It involves negotiating with a counterparty equally set on securing their optimal balance. Similarly dealing with strain on contracts, like right now in the coronavirus (COVID-19) situation, also requires negotiation with counterparties. Fortunately there are several ways to improve the outcome from negotiations.
COVID-19 is causing havoc to many businesses: few if any are operating within what they might call a ‘normal’ framework. Supply chains and sales channels have changed shape dramatically: speed and routes to market have been hit heavily. Remote working has tested infrastructure in unexpected ways: physical space lies vacant but digital capacity utilisation is at record levels. Social distancing has restricted operational scale and speed. As businesses pivot to a new operating model, make the switch to remote working, settle into the current environment and reconsider their future direction, it is only a matter of time before attention turns to the portfolio of commercial contracts underpinning their ‘old’ business model. There are two situations starting to appear:
Both situations will require skilled negotiation and probably on a significant scale: a scale never experienced before. Very few businesses will be ready.
In our experience of working with clients across all manner of commercial negotiations, my biggest piece of advice would be: prepare, prepare, prepare. Even the strongest operator in face-to-face negotiations will get out-maneuvered by someone who is better prepared. Alexander Graham Bell was not wrong when he said “Before everything else, preparation is the key to success”.
So where do you start? A good place would be to understand that scale of the challenge. If you don’t already know it, you’ll need to collate a list of all your commercial contracts (or at least those you consider key) both as supplier and as customer. Once you’ve got this you can then undertake a review of terms to identify those that may be in breach (so those that could lead to dispute) and perhaps assess the likelihood and quantum of the breach risk.
Once you’ve established the immediate challenge you can then start to develop your overall strategy for negotiation. How do you want to choreograph all the negotiations you might need to have: how will you prioritise? If you have related or linked contracts (such as supply contracts for similar products) will you have bilateral negotiations with each or do you have the opportunity to orchestrate a competitive process? It’s important at this stage that you factor in, where possible, any contractual changes that you anticipate needing as a result of your decision on your ‘new normal’ operating model: we’ve often found that covering as many factors as possible in a single negotiation can be preferable (commercially and time-wise) to having more than one negotiation.
Having decided on the sequencing and form of each negotiation you can start individual negotiation level preparation. Crucial to this is creating a structure to manage the key information flows critical to a negotiation. This will involve establishing processes for gathering, critiquing and analysing information as well as deciding on and approving positions. Managing information flows with counterparties will be an important aspect of this, so as to maximise the information gained compared to what is given. Finally this will help in navigating complex (and sometimes conflicting) stakeholder networks.
Readying the individuals and teams for negotiation execution, the in-the-room experience, is the final part of the preparation process. This includes advising on the overall engagement strategy, as well as the tactics for individual meetings. Having clear meeting plans means that all understand the objectives, how those will be achieved and who will participate. This is also an invaluable tool for building confidence and clarity - and importantly for minimising value leakages.
How successfully a business navigates their way through COVID-19 will depend heavily on their approach to the many commercial negotiations they will face. In the context of these negotiations we firmly believe - above all else - that there is no substitute for thorough planning and preparation. We have seen the proof of this: it really improves outcomes, whether commercially or in time and efficiency. Benjamin Franklin may not have been referencing negotiations when he famously chimed “By failing to prepare, you are preparing to fail”, but he could have been.
If you want to talk through any commercial negotiation matter for your business then please contact Mark Gough or Peter Brook in our negotiations team.
Negotiation Strategy Group Leader, PwC United Kingdom
Tel: +44 (0)7841 563494