The contract negotiation process starts when two or more prospective business partners explore the possibility of working together.
Commercial contracts are critical to establishing a relationship between business partners and the rules that will govern a transaction. However, reaching mutually acceptable terms during contract negotiation can be time-consuming and may require multiple rounds of revisions. Negotiating parties may also struggle with inefficient manual processes and technology limitations.
A modern contract negotiation strategy is critical to success in today’s fast-paced business world, where time is money and data is key. Devise your negotiation strategy by understanding the challenges involved and how technology is changing the way businesses navigate the creation and management of commercial agreements.
What is contract negotiation?
The contract negotiation process starts when two or more prospective business partners explore the possibility of working together. After initial conversations about the business arrangement and each party’s needs, contract negotiations begin with one party preparing a first draft that incorporates what the sides have agreed upon up to that point. A contract can contain virtually any provisions that the parties want to put in it (as long as they’re legal), but standard contract terms include the cost of services rendered, the scope of those services, and the kinds of liability protections available to each party.
In most cases, each party hires legal counsel to evaluate the contract drafts for inequitable obligations, errors, or omissions that could negatively impact the business relationship. All parties need to understand their obligations, including any possible circumstances that might lead to a breach of contract. If a breach of contract occurs, the party at fault may be subject to a lawsuit and held liable for damages incurred by the suing party.
The amount of time it takes to reach terms acceptable to all parties depends on the complexity of the contract and the types of concessions the parties are willing to make.
Being a high-impact negotiator
It’s vital to walk into any negotiation with a clear eye on how the contract could affect your company’s performance, financial health, and long-term growth. Lawyers often spend an inordinate amount of time haggling over legal terms that have a relatively narrow impact and, in many cases, never come up again.
While it’s important to address those concerns thoroughly, what matters most to any business is the bottom line. Carefully consider how both predictable contingencies and unforeseen circumstances could affect your company financially.
However, remember to look beyond worst-case scenarios to see how you can promote an optimal working relationship between the parties. A lawyer must diligently protect the client’s interests, but legal counsel should never hold up a good business deal by nitpicking over immaterial points.
It’s important for your team to internally establish in advance which terms are open for discussion, what parameters are acceptable regarding prices, deadlines, and performance metrics, and what concessions, if any, your company is willing to make. Identifying and addressing concerns early in the negotiation process will help alleviate friction later by clearly laying out your company’s expectations.
The importance of the first draft
The first draft of a contract will set the pace for future discussions, so it’s vital to get it right. To create your best first draft, leverage data points from previous negotiations to guide the direction of present and future deals. Look at what your business needs, what you’ve been able to get in the past in similar situations, and what other counterparties similar to the one currently across the table have requested and accepted.
If you’re on the buy-side, data gathered from both expired and existing vendor contracts can inform negotiations with new vendors. Even when you’re planning to switch providers, it’s likely that many of the terms you’ve negotiated in the past are still relevant to you. Instead of creating provisions from scratch to request from the new vendor, you can pull specific clauses from templates you’ve already created based on your ideal language.
In the same vein, sell-side negotiators can benefit from looking at similarly situated customers to anticipate what the buyer might request. For instance, maybe customers in a specific state tend to request language addressing a state-specific regulatory requirement. If you customarily grant that language, then you can skip the process of negotiating it by proactively including it in the first draft for customers from that state.
This may be easy enough to manage on your own if you have only a few contracts in place, but drafting contracts can get much more complicated when you’re juggling dozens of negotiations at any given time. It doesn’t take long for oversights to occur if you don’t have the tools and resources to stay on top of things. This is where access to robust technology comes into play: a good contract management solution can help you efficiently aggregate this historical data and create standardized agreement and clause templates.
What are the greatest challenges in commercial contract negotiation?
An array of obstacles can impede or complicate the contract negotiation process. Reaching a deal largely depends on each party’s ability to identify and address these issues. Here are some of the greatest challenges when negotiating business contracts:
Agreeing on new contract terms
Agreeing on terms can be challenging if the deal at hand has no historical precedent. In these circumstances, discussions over contracts may require multiple rounds of revisions among a wide group of stakeholders affiliated with each party.
On the other hand, reaching an agreement is typically more efficient when the parties have closed similar deals with one another in the past. For example, renegotiating a vendor contract that’s up for renewal shouldn’t require much effort if the parties’ needs remain essentially unchanged since they signed the existing contract.
Keeping drafts organized and streamlining the contract creation process helps to maximize the chances of reaching a deal that works for all parties.
Lack of preparation
If you come to the negotiation table with no idea what you can realistically get from the other party, or what they’re likely to want, then you’re starting off on the wrong foot. Knowing your needs and what motivates your counterparties is essential to successful negotiation. Without that knowledge, you won’t have a goal to guide you, or a sense of when it’s time to walk away from the table.
You can overcome many challenges in commercial contract discussions by planning carefully ahead of time. Figure out in advance what sorts of concessions you’re likely to receive and what you’ll probably need to concede to the other party. This preparation will help you negotiate an agreement from a position of confidence and avoid wasting time on pointless haggling.
In order to develop this understanding, look into how negotiations with the other party or similar parties have gone in the past, including common concessions from either side and how long negotiations tend to last. For example, if you tend to grant a certain type of provision to similarly situated counterparties, you might save everyone time and hassle by simply offering it up front when negotiating similar deals.
While preparing for negotiation may be easier said than done when juggling multiple contracts and renewal deadlines, the task is much less daunting if you have a reliable, accessible digital system to keep track of previous contracts and upcoming renewal dates.
Time-consuming contracting process
Time is often a primary obstacle during commercial contract negotiations. Lengthy delays can result in lost revenue for sellers, while lack of time to prepare can result in buyer’s remorse or costly operational disruptions for purchasers.
If you’re a buyer rushing your negotiation preparations to meet an auto-renewing contract’s termination deadline, for example, it’s easy to make oversights that can leave you stuck with a vendor that’s no longer right for your business. If you’re a seller and you don’t quickly put a favorable contract in front of a prospective buyer, you might lose the deal.
It’s essential to implement consistent, efficient workflows and processes for contract drafting, approval, and execution. Perhaps even more importantly, you need to give yourself time to review your existing commercial agreements and learn more about what your business needs and how to approach existing or potential partners or customers.
Efficiently managing contract negotiations requires constant communication between all parties. Multiple stakeholders will offer suggestions and make edits every step of the way.
Parallel conversations can lead to confusion and misunderstandings, making it difficult to draft a contract that meets everyone’s expectations. You can alleviate this difficulty by establishing a centralized method of communication to organize the stakeholders’ contributions and concerns, and a single source of truth regarding the current version of the contract.
Trying to manage contracts using tools that weren’t designed for contract management can bog down or even scuttle negotiations. Issues including insecure file sharing, confusing email chains, and local file storage limitations are just a few of the challenges.
Using email to send documents between businesses can create confusion about the definitive version of the contract — and open windows for security breaches. Navigating the commercial contract process can be relatively simple, however, with the right digital tools and software.
How technology impacts the business contract negotiation process
Digital tools for contract creation and review streamline the negotiation process for teams that manage large volumes of commercial agreements. Here’s a look at some of the benefits:
Empowers negotiators with data-backed insights
Advances in artificial intelligence (AI) allow AI-powered contract management software to synthesize data into actionable insights, turning a contract repository into a trove of valuable information about your business and the commercial agreements you’ve made in the past. Machine learning algorithms can quickly evaluate years of accumulated contracts to identify relevant patterns in language or terms, making it easier to draft new contracts that adhere to your stakeholders’ expectations. Ultimately, effective use of legal technology can help ensure that each side of the negotiation table walks away from a deal with its concerns addressed.
Streamlines and standardizes workflows
Before the advent of contract lifecycle management (CLM) software, coordinating contract negotiations entailed long email chains and disorderly exchanges of edits and requests. Unfortunately, this situation remains the status quo for many, making contract negotiation and management more complicated than necessary.
These disorganized approaches open the door to security concerns and drag out contract negotiations. Decentralization makes version control difficult, which often leads to confusion about which changes have been made and which haven’t, and where to find the most up-to-date draft of the contract.
Today, advances in technology allow you to manage all aspects of the contract negotiation process from a single, secure, cloud-based platform. This software makes it simple to review the status of all of your contracts at a glance, including any pending approvals or requested edits holding up an agreement. Instead of emailing copies of the contract to each party and manually reconciling scattered markups, rewrites, and proposed additions, advanced contracting software helps you organize your workflows within one user-friendly interface.
In addition, cloud-based CLM software provides a safer, faster way for you to share the current draft of a contract with stakeholders, bringing transparency to the negotiation process. With features such as version control and role-based access management, it’s also easier to control who sees the contract and track the changes they make.
Once the parties agree on the terms, you can securely share the final draft with the appropriate signatories for execution. Integrated e-signatures eliminate the need to switch to a separate system, or worse yet, to print, sign, and scan or mail physical copies.
Facilitates post-signature tracking and review
A contract’s lifecycle doesn’t end when the parties sign on the dotted line. Each side needs to keep track of its own obligations in order to fulfill them, and its rights so it can enforce them. The right platform can help you accurately keep track not only of contract drafts that require review or execution, but also what’s in your active contracts.
The best contract management software also enables you to scale up your legal operations. If you need to modify a specific clause type across hundreds or thousands of contracts, you can easily apply the change to multiple agreements simultaneously instead of editing each document individually. Automated notifications help you quickly reach your counterparties to get them to sign off on those changes.
Tips for finding the best tool for contract negotiation
There are many contract drafting and management tools on the market today, so it can be a challenge to determine which option is right for your business needs. It’s important to note that different contract management systems don’t all offer the same level of functionality.
Here are some key traits to look for in a digital contracting solution:
The transition to a centralized contract management platform should be simple to implement. It helps to use a flexible system that integrates with popular cloud-based platforms such as Box or Salesforce.
By adopting a solution that works in tandem with your current tools, you can centralize all of your contracts and related documents without having to wait for time-consuming migration. You also won’t have to rely on insecure, manual file sharing, or worry about needing IT intervention or having to constantly reformat contracts.
Ease of use
Beyond implementation, you should choose a digital contracting system that is easy to use and facilitates collaboration across teams and businesses. Tools that aren’t simple to learn might prompt team members to revert to inefficient, unreliable manual processes, wasting time and money you’ve already invested in the platform.
The right solution will make contract creation and management easier by accelerating and augmenting processes that your team already has in place.
Automated analytics and reporting
A high-end contract negotiation tool should provide automated analytics and reporting features. Many sellers advertise this capability but offer platforms that fall short of their promises, so it’s important to test a solution before committing to it so you can see how well it actually performs.
If you gather all of your contracts in one repository but you still have to manually search through and tag them, then you haven’t gained any efficiency from going digital. Automated data extraction and tracking is key.
It’s worth looking for a platform that provides a knowledge center or dedicated client support — ideally both. You can use these resources to resolve issues as they occur. If you’re spending more time troubleshooting your contract management platform than actually using it, chances are it’s not the right fit for your company.
In short, the best contract negotiation tools are user-friendly, adaptable, and easy to implement into your existing digital infrastructure and operational workflows.
How Evisort can help with commercial contract negotiations
Evisort’s sophisticated Contract Intelligence Platform makes it easy for you to create a secure, cloud-based database for all of your company’s contracts. Seamless integrations with all of the most widely used cloud storage and document management providers allow you to quickly centralize your existing documents without having to migrate them.
Once you’ve put your contracts in the system, you can get started right away preparing for new contract negotiations. Evisort’s market-leading AI automates data collection and tracking, allowing you to extract valuable insights from throughout your entire contract portfolio.
Evisort also streamlines contract negotiation with its intuitive workflow tools. Drastically cut down on manual review and editing, email correspondence, and other outdated practices that bog down the process.
Check out our webinar to learn more about how Evisort’s contract workflow tools can help you negotiate business contracts more efficiently and effectively.
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