Contract negotiation is about much more than reaching an agreement. Contract negotiation is an opportunity to add to the economic value of the relationship, shore up supply chain vulnerabilities, and protect your organisation against risk.
Unfortunately, companies often still rely on outdated manual contract negotiation processes that detract from these goals.
This article explores how businesses can simplify and speed up the contract negotiation process. It also explains how legal can enable business teams to negotiate contracts confidently, without losing control over the most important provisions.
Learn how in-browser contract negotiation features can help legal and business teams save time and identify more opportunities to create shared value.
If you'd like to find out more about what these in-browser negotiation features are, hit the button below. Otherwise, read on.
Contract negotiation is the process through which two or more parties deliberate over the contents of a contract to reach a legally binding agreement on the terms of their relationship.
The main goal of contract negotiations is for each party to be satisfied with the rights and obligations assigned to them. Business negotiations also help to ensure that the terms set out are as favourable as possible for both parties, with as little risk as possible.
If you're negotiating a contract with a vendor, you'll likely want to advance your company's interests by trying to negotiate more lenient termination rights. However, the vendor will probably want to achieve the opposite.
However, by coming together to negotiate contract terms, both parties can often compromise and reach an agreement on terms that are mutually beneficial.
Why is contract negotiation important?
Contract negotiation is important as it ensures that a contract is mutually beneficial for both parties, and that new business relationships are free from conflict and confusion.
Negotiating also gives all parties the opportunity to establish terms that work for them, rather than one party keeping all of the bargaining power and setting unfair terms in a business contract.
The negotiation stage is a critical stage of the contract lifecycle, as effective negotiation can be the difference between a contract getting signed or not. It's also an opportunity for each business to demonstrate their priorities and outline what they expect from the counterparty.
When to negotiate a contract
The person drafting a contract is responsible for ensuring that the relevant internal stakeholders review and approve a contract before it is sent out for negotiation.
If contracts are created using templates, then this text might be locked down, minimizing the risk of error.
During initial drafting and review stages, each party works toward its own objectives surrounding issues such as risks, liabilities, and potential outcomes. The contract moves to the negotiation phase when a party is unhappy with the terms offered, or if the language doesn’t support all their objectives. Errors, contradictory terms, and outdated clauses also spark negotiations.
Who is responsible for negotiating contracts?
Lawyers often review and negotiate contracts. However, other departments do manage business negotiations on their own, or become involved when requested revisions require their input.
For example, sales teams use order forms and NDAs when closing deals. People and talent teams send employment contracts to new hires and negotiate salary. Finance teams monitor agreements to track spend and forecast revenue.
For more complex and high value contracts, businesses may even consider using a deal desk to involve various departments in negotiations.
When business teams need help interpreting a contract’s language, they turn to the company's legal counsel for guidance. This often happens when they want to approve risk-shifting terms (such as indemnification and limits of liability) or push back on unfavorable language in a draft contract.
This means that negotiating can often involve a lot of different stakeholders. Without a centralized digital contracting platform, in-browser, this can further complicate an already confusing contract negotiation process.
The contract negotiation process
Tracking revisions is critical during contract negotiation. Before the modern era, negotiators wrote revision requests and comments in red ink on paper. In the 1990s, MS Word and email allowed negotiators to swap their red pens for digital “redlines.”
In a process that continues to this day, the contract originator emails a draft contract to a counterparty as a Word document. The counterparty typically saves the document to their local drive and turns on Word’s “track changes” feature. Their suggested revisions then appear in red on the screen, and comments show up in boxes on the side.
Once they've flagged their concerns and suggestions, the counterparty then emails the “redlined” document back to the contract owner. Now there are two versions of the same contract – one saved in the creator's drive and a redlined contract stored in the counterparty’s drive.
The contract creator then responds to the counterparty’s comments and revision requests and makes suggested revisions in a third version of the contract. This copy is then sent to the counterparty once again, who creates the fourth version in response. This back-and-forth negotiation process can drag on for months, particularly when dealing with complex contracts.
Unsurprisingly, it becomes almost impossible to track the various versions and determine who made what revisions and why. It’s easy to lose track of essential attachments, and negotiators often lose track of the contract's progress.
This lack of control and visibility can lead companies into lopsided and unfavorable agreements that later cost thousands of dollars in contract leakage and missed opportunities.
In Google Docs
Fortunately, Google Docs offers some improvement. However, the platform allows counterparties to watch your team’s internal dialogue play out live in the comments. This makes it impossible to discuss certain propositions privately without moving to a different platform.
You must also share access to your company’s cloud storage and, as with MS Word and email, you'll need a separate electronic signature tool to get contracts signed.
The more software tools you use to negotiate contracts, the more friction and security risks added.
Because it isn't easy to integrate MS Word, Google, or PDF documents with your CRM software, all contract details such as names, addresses, dollar amounts, and dates must be extracted, entered, and tracked manually. This makes it hard to capture the data contained in your contracts efficiently.
How to negotiate a contract
By comparison, an all-in-one contract automation platform like Juro enables parties to negotiate contracts, in-browser, in one unified workspace. Here's how:
Parties mark up a single document using an intuitive in-browser editor
They can designate comments as “internal” or “external” to ensure confidentiality
Comments can be linked to particular parts of the contract, making it easy to see what's in contention
An uncluttered view helps negotiators immediately focus on critical issues, while the software tracks every revision, aggregates comments and emails them to counterparties
This digital audit trail is securely captured, so you can learn from each negotiation and develop better templates
There's no need to worry about losing track of negotiation rounds, either. Juro's contract timeline delivers an on-demand audit trail that provides a one-click view of prior draft versions at any time.
By providing a more collaborative and transparent negotiation experience for counterparties, you can better understand each other's relative positions. A clearer picture of everyone’s needs helps negotiators determine what to concede, and when to stand firm. This is likely to result in shared gains and help you to increase the contract’s economic value for both parties.
Another benefit is that data is captured at the point of contract creation, rather than gathered manually after the fact. Analysing this contract data can provide insights that help guide future negotiations towards more favorable outcomes.
Your legal team can develop contract templates and company playbooks to steer business colleagues in more strategic contract negotiations.
A playbook identifies negotiable points and provides the company’s preferred fallback positions, including the new language to substitute automatically. Your lawyers maintain playbooks and templates to ensure new contracts always contain the most up-to-date, risk-adjusted language that aligns with your company’s overall business goals.
Juro users can use conditional logic to build these fallback positions into contract templates. This enables business users to self-serve on negotiation, rather than needing the legal team's support each time.
Essential contract negotiation skills
Strong contract negotiation skills support efforts to build long-lasting mutually beneficial relationships. Here are five of the top skills that help negotiators:
Sound legal knowledge 👩⚖️
Contract negotiation used to be reserved solely for lawyers. But automated contract negotiation processes, contract templates, and company playbooks are all designed by lawyers to codify and share sound legal knowledge, making it available to all your business teams.
Awareness of risk appetite 📈
The same self-serve processes, including company playbooks that offer fallback provisions, guide business colleagues to stay within established risk limitations while still enabling them to close deals independently. Easy collaboration supports adherence to guidelines that are critical in light of today’s regulatory uncertainties and data privacy challenges.
Clear, concise communications 💬
Write and edit draft contracts using plain, easy-to-understand language. Parties need to make accurate assessments to fully understand all potential consequences. The less time parties spend trying to decipher a sentence’s meaning, the faster they reach an agreement.
Commercial savvy 💼
Whether you are in legal, HR, sales, or procurement, you need to know which provisions are negotiable and which are not. You also need to know how to offer concessions that still result in favorable outcomes for your business.
A non-adversarial approach 👍
“In more than 50 per cent of today’s negotiations, one or both parties engage in positional tactics, seeking to impose their standard terms on the counterparty, often irrespective of suitability,” according to a World Commerce & Contracting report on the Most Negotiated Terms 2020.
Contract negotiation is a chance to collaborate and add value, not “beat the other side". This is especially important to consider counterparties are strategic business partners whose services and products will help your company maintain competitive advantages.
Contract negotiation strategies 📊
At times, an inbalance of power affects negotiations. For example, when larger vendors force smaller customers to agree to terms that are more favorable to the vendor. Or, a party may say “Agree, or I walk” in a hardline approach. Learning useful negotiation strategies can help you create win-win results in any situation. Helpful tactics include:
Look beyond the individual negotiator and consider the counterparty’s fundamental interests in the relationship.
Ask “Why?” to open up dialogue.
Identify ways to create options to resolve disagreements.
A recent survey found that 88 per cent of those in the contracts and commercial community hope for increased levels of collaboration and a more 'fair and reasonable' approach to negotiations, and 74 per cent believe it can happen. With a non-adversarial approach to negotiation, you can be part of that change for the better.
One of the best ways to prepare for contract negotiations is by reflecting on how previous contracts have worked. What was agreed in similar instances? Where friction points most often occur.?
Contracts will typically vary in content, but most legal teams will be drawn to the same terms and clauses, and they'll be most likely to negotiate these.
If you have a contract automation tool like Juro which offers a data-rich repository and comprehensive audit trail, this information can be extracted quickly and easily. This helps you make informed decisions about which terms to soften and which terms to remain firm on.
Having this insight before you enter a negotiation can empower you to prepare stronger arguments and fallback positions, which is essential to ensuring your company gets the best deal possible.
This kind of information can also be recorded in contract playbooks or automated using conditional logic. Automating it in this way also empowers commercial teams to self-serve on contracts without requiring constant assistance from the legal team.
Contract negotiation tips
Here are a few tips to get started with effective contract negotiation:
When tempted to revise, ask yourself, “Do I even need to bother? Am I adding unnecessary friction?” Don’t make revisions without a strategic goal clearly in mind.
On the other hand, if the counterparty’s language doesn’t make sense, say so. Sometimes contracts are poorly written or based on manually maintained templates that have been revised so much that they contain errors.
Focus on terms that actually matter. Ironically, the terms parties most often negotiate are not the same as those that negotiators say are most important, according to The Most Negotiated Terms 2020 report. Don’t get sidetracked by irrelevant issues or spend too much time on matters of little importance.
Streamline negotiation by emailing a list of key concerns to a counterparty to discuss on the phone. Be sure to incorporate revisions digitally, with comments in your contract automation platform's sidebar, and add notes about the conversation to ensure an accurate and informative audit trail.
Company playbooks benefit organisations of every size. Some contracts will always require scrutiny from legal and leadership teams. But with a contract automation tool like Juro, business users can generate and negotiate many standard agreements independently guided by a company playbook.
Frequently asked questions about contract negotiation
Is negotiation binding on parties?
Terms agreed during negotiations are not legally binding on parties as contract negotiation is an informal process. Only once a contract has been signed and meets the contract requirements will the terms agreed during a negotiation be binding.
How do I track a contract negotiation?
The best way to track the progress of a contract negotiation is to implement a contract management solution that offers a detailed audit trail and dashboard for contract tracking.
What is a contingency contract in a negotiation?
A contingency contract is an agreement created when parties have been unable to reach a final, definite agreement on the terms negotiated.
Unlike regular contracts, a contingent contract's terms will only be enforceable if certain events happen, or specific conditions have been met.
What is the difference between contract negotiation and contract management?
The main difference between contract negotiation and contract management is that contract management involves overseeing the entire contract lifecycle. By comparison, contract negotiation is just a single phase of the contract lifecycle.
Learn more about effective contract negotiation
Here are resources that will help you learn more about contract negotiation:
With Juro you can negotiate business contracts quickly and efficiently, without losing control. As a result, you transform contract negotiation into a seamless process, and a revenue and savings opportunity. If you’re ready to save time and try collaborative, in-browser contract negotiation, fill in the form below to get in touch now.
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