Open any negotiation book, and you'll learn that negotiation hinges on preparation. Typically, this preparation is purely tactical: determining negotiation variables, deciding where to open, what concessions to make, and how to behave. This often results in negotiators beginning their preparation only just before the start of their negotiation. To fully harness the power of preparation, one must start much earlier and consider more than just tactical planning. This article explores various aspects of preparation in the context of an annual price increase.
Timing
For price indexation negotiations to be implemented at the start of the new year, we always advise our clients to begin preparations six months before year-end (June), but no later than early summer. This timing is crucial because it allows the negotiator to influence the other party as well as properly prepare. Most companies begin their annual budgeting cycle just before or after summer, so early preparation enables negotiators to guide and influence their customers’ budget holders what to include in their forecasts.
This early preparation is vital because the negotiation itself will already be challenging. If your counterparty has to renegotiate internally a new budget due to an unexpected price increase, it adds additional complications. They may need to shift budgets to accommodate your price increase or seek more funds from their management, neither of which will make them very happy. By preconditioning them well in advance about what to expect, you provide them with the opportunity to address these issues beforehand.
However, if your products or services are easily replaceable, this approach can pose a risk. Therefore, it's essential to assess your power position carefully.
Segmentation
Starting early allows for a thorough analysis and segmentation of all agreements. Once segmentation is complete, a tailored negotiation approach can be determined for each segment. We often advise our clients to analyze and segment according to the following elements:
Indexation terms: Identify what is contractually agreed upon regarding indexation. Generally, it falls into one of four categories: mutually agreed indexation, indexation according to a specific index, indexation with a percentage cap, or no indexation allowed. Remember, anything can be negotiated, even if the contract states otherwise.
Contract renewal: If a contract is up for renewal, it's an opportunity to address more than just indexation. It's often wiser to adjust pricing based on how you'd price for a new customer, than purely follow the index (which is often easy to execute).
Previous indexation: If you've managed to secure a higher indexation than contractually allowed in previous years, it's wise to adhere to the contract terms the following year to maintain trust and a long-lasting relationship.
Properly understanding the current agreement and possibilities regarding indexation early allows for strategic planning. These insights should be part of any contract management system, enabling negotiators to approach the other party with a tailored strategy geared towards maximizing indexation.
Objective Setting
We frequently encounter clients who lack adequate data to prepare effectively. A critical question we always ask concerns the profitability and margin of an account, whether in euros or percentages. Surprisingly, this information is often not readily available. Without precise profitability insights per account, organizations tend to set general indexation goals for all contracts, which is problematic. This approach risks demanding uniform increases from customers who may already be highly profitable, or insufficient increases from those that are loss-making.
By starting preparations early, negotiators can perform manual assessments and analyses to roughly estimate the profitability of their accounts. This enables them to adopt a bottom-up approach to defining price indexation objectives, tailored to both the best and least acceptable outcomes.
Once the organization outlines its general negotiation objectives, negotiators can then align these with their individual assessments to see how they integrate with the overall company strategy. It's beneficial for negotiators to formulate their own objectives and critically evaluate their assumptions. This engagement leads to greater commitment and effort toward achieving these goals, compared to merely adopting imposed objectives.
Preconditioning and Communication Planning
Starting early also allows for coordinated and aligned messaging towards external parties. Key aspects to consider when planning communication include:
Preconditioning: Influence the other party by informing them early about expected price increases and providing a high-level rationale. This preconditioning helps them account for higher prices in their budgeting cycle without starting the negotiation prematurely.
Questions and Answers: Ensure internal alignment on the justification for the indexation to maintain consistency in messaging.
Stakeholder mapping: Identify who will communicate with the customer and ensure all relevant personnel are informed and prepared to respond to indexation-related questions.
Negotiation is communication. Taking the time and effort to carefully plan all aspects of internal and external communications will lead to a consistent approach to the market as well as equip negotiators with the “right” answer to all challenges they may receive.
Power
By starting negotiation preparations early, negotiators can conduct a power assessment and develop strategies to influence it in their favor. For example, creating a stronger BATNA (Best Alternative to a Negotiated Agreement) requires significant time and effort, as negotiators often need to engage with other parties to validate their alternatives.
Another often overlooked aspect is the cancellation terms. Many agreements have automatic extension clauses that renew the contract for another year under the same commercial terms unless one party notifies the other, usually 3 to 6 months in advance, of their intention not to extend. We've frequently encountered clients who missed this critical detail. Once the notification period has expired, the other party can legally enforce the agreement, significantly diminishing your negotiating power.
Conclusion
Annual price indexation is a recurring exercise for most organizations. In our experience, most organizations start too late. The ideal time to begin is before summer (June). By segmenting agreements, determining objectives, planning communication, and addressing power dynamics, negotiators will be better prepared, leading to better negotiation outcomes.
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