Client versus vendor negotiations - why it matters

Think about the last time you were a customer in your personal life.  Did you expect to be treated a certain way?  Did you expect certain standards to be met?  Chances are that you did and, if so, you were probably right.  The same is true when negotiating contracts for your company. 

Not every negotiation is the same.  Negotiation tactics vary based on an infinite number of factors, one of which is basic, but too often overlooked:

Are you negotiating with a client or a vendor?  If you’re negotiating with a client, you are serving the client in some way.  If you are negotiating with a vendor, you are being served in some way.  This is a key foundational principle for negotiations and an important early question to ask:

Is this a client or a vendor negotiation?  Numerous companies have separate groups that focus solely on vendor contracts or client contracts.  However, in some companies, an overlap exists, and certain people handle both client- and vendor-facing contracts. 

Understanding some key differences between negotiations with clients versus negotiations with vendors greatly aids your negotiation strategy. Leverage may be the most important difference between negotiations with a client versus a vendor.

You’re the vendor facing the client

Is the customer (client) always right?  Yes and no.  In most circumstances, customers have most of the leverage and sometimes all of it.  When negotiating with a client, you do not want to simply agree to everything, because you can walk away from a client if it’s in your company’s best interest. But, you do have to know your role as the vendor delivering a product, service, or some other value to the client in a client negotiation. 

Assuming the client has a great deal of leverage, you often go through a risk versus reward analysis, usually multiple times, throughout a client-facing negotiation. 

Standard terms  Ideally you will have standard terms for a client to review, making it much easier for your contracts team, subject-matter experts, and decision-makers to review changes to a contract with terms they are already familiar with.  

Whenever possible, use your standard terms as a starting place with clients.  If you do not have a standard agreement, collaborate with the relevant stakeholders to create one.  Sometimes, with clients, you will have to use the client’s terms, but, regardless, it still helps to have a template agreement ready for clients who will use it.

Black and white versus grey decision-making  One helpful way to classify risk and decision-making in client negotiations is to identify the black and white decisions versus the grey decisions.  In other words, what terms can you simply not comply with?  What terms would you breach the moment the contract is signed by all parties? 

An obvious example is insurance terms.  If your limits are not what the client has written in the contract, you cannot comply and you cannot agree to those terms, because you’ll breach the contract immediately.  With regards to any term that you cannot comply with, you have to tell the client that you cannot agree to those terms unless you can comply with them before you execute the contract.

Grey decisions cause negotiations to get a bit tricky because they involve terms that you can technically agree to, but you may not want to.  For example, a client may want unlimited liability and you may want a low ceiling for your company’s liability.  Technically, you can agree to unlimited liability and you would not breach that term the moment the contract is signed, but your agreement is extremely risky for your company. 

So, let’s say you negotiate back and forth a few times and, ultimately, the customer insists on a higher limitation than you’re comfortable with.  You are then forced to decide whether or not the business this client brings to your organization is important enough to agree to a nonstandard obligation and, thus, take on more risk than you usually do.  If the answer is yes, you agree to the client’s demand.  If you say “no,” you risk losing the deal.  It’s not a hard black and white decision.  It takes negotiation, discussions, assessments as to risk, and - ultimately - a decision.

Make or break terms  Every negotiation with a client is different and that’s part of what makes working with contracts interesting and exciting, but some terms are almost universally important to clients, like pricing, obviously.  Additionally, product specifications and service levels are often important to clients because clients want to know that the products and services they are purchasing meet their needs and are worth the price that they are paying. 

Let’s say the client is comfortable with the important basics of the deal, like value (what they are getting for the price).  At that point and beyond, other terms will likely become heavily negotiated. For example, indemnification and limitations of liability provisions are often heavily negotiated, because they are important to clients and create risk for you as the vendor.

For example, if your client wants you to indemnify them for the acts and omissions of a third party that you do not control, that creates risk for you.  It may be important to the client, but you are probably only willing to indemnify your client for your acts or omissions.  Indemnification terms usually involve complicated and important language; thus, they are often heavily negotiated by each party’s legal counsel.

In addition to the unlimited liability example in the previous section of this article, an example with regards to limitations of liability is a client who wants your breach of information/data security obligations to be a carve-out to the limitation of liability.  This means that the limitation of liability will not apply to information security breaches and could be unlimited.  Of course, that is important to your client and risky for you, especially in 2018 with cyber and other concerns.

While on the topic of information security, it is important to add that it is becoming incredibly important to clients and increasingly risky for vendors.  Consider all of the breaches that are making national news these days!

Every term that becomes a point of negotiation becomes another risk versus reward analysis for deciding what your company can agree to -- if you expect to get and/or keep the client’s business.

You’re the client facing the vendor

In this role you get to call the shots, right? Well, mostly   Your vendor can walk away from you if you demand something that the vendor is not willing to provide just like you could when negotiating with a client.  However, short of that, you have a great deal of opportunity to leverage and you should use it. 

Many companies do use the leverage they are entitled to when negotiating with vendors.  You’re the client, so try to get a better price.  Try to get 45-day payment terms.  Try to get unlimited liability.  Try to get the most favorable terms for your company. 

Don’t negotiate with a vendor as if you’re the one providing a service!  You are paying for a vendor’s service and the vendor wants your business, so push the vendor -- within reason. 

You may even want to court multiple vendors to get the best deal from the one you contract with.  For example, some companies release a bid, then choose two vendors from the responses, and negotiate with each vendor before finally awarding one of the vendors with the contract.  This gives the client a great deal of leverage, because usually the two vendors know they’re competing with each other, so they are more likely to bring their best to the negotiating table.

Standard terms  As is true for client-facing negotiations, using standard terms for a vendor to review is best, specifically the terms most desirable for your company. If you clearly state all terms you want from a vendor, you will make things much easier for your contracts team, subject-matter experts, and decision-makers as they review changes to terms they already know.  Also, as with client-facing negotiations, by using your standard terms to start off, you will increase your opportunity to use your preferred terms with vendors.  Given you are the client and have the upper-hand in the negotiation, push the vendor to use your standard terms.  Be sure to collaborate with relevant stakeholders if you do not have a standard agreement and create one.

Black and white versus grey decisions by vendors  From the start, try to get a sense of what outcomes you will want that the vendor truly cannot comply with.  After all, if it’s important enough to your company and the vendor cannot comply, you want to move on sooner rather than later to avoid wasting time and resources.

What else should I try to get from a vendor?  There are many terms you can fight for or insist upon when negotiating with a vendor.  Often, what you want will depend on the engagement.  For example, if a vendor’s personnel will be on your premises, it’s advisable to draft contract language that requires background checks consisting of criminal checks and drug tests and perhaps other checks.  Additionally:

•  If a vendor needs your confidential information to provide you with a service, you will need to carefully draft confidentiality language.
• If the vendor is providing a product, you’ll want certain warranties.
• If the vendor will have access to your data or your customers’ data, you’ll want carefully drafted data security language. In 2018, this is more important than ever with the numerous technological and human vulnerabilities that exist.
• If the vendor is providing a product, solution, or software that could infringe a party’s intellectual property rights, you’ll want to carefully draft intellectual property indemnification and remedies language.

 Regardless of the engagement, you’ll likely want favorable indemnification terms, at the very least indemnifying you for the vendor’s acts and omissions.

So, what now?  Every single negotiation is different, but going into a negotiation knowing what level of power you have to negotiate terms is extremely helpful.  Are you serving a client?  Are you being served by a vendor?  Asking those questions before beginning a negotiation will make the negotiation much smoother and get your company the best possible results.

Test yourself  Are you considering the following criteria when negotiating client versus vendor contracts?

ABOUT THE AUTHOR

In her role as Corporate Counsel with Konica Minolta Business Solutions U.S.A., Inc., Elizabeth works cross-functionally with the relevant business teams and stakeholders to draft, review, and negotiate commercial transactions of moderate-to-high complexity from the bid phase through contract execution.