Renegotiating Contracts During COVID Is Good Business
The COVID-19 pandemic has had an unprecedented impact on the lives and health of everyone across the globe. Because of the impact of shutdowns, limits on travel, and the move to remote work, many businesses have seen their revenue significantly reduced and have had to quickly reduce their cost structures to remain financially viable. To that end, sourcing organizations have been tasked with going to existing vendors and partners to solicit cost concessions on current business to assist in their cost-cutting efforts.
Though no company wants to reduce the profitability of previously negotiated contracts, helping customers weather their financial crises could pay dividends in customer loyalty and future opportunities once their businesses return to normal. The key is to anticipate which customers might make the request and begin planning a reduction or renegotiation that is viable in light of your current business.
Below are some strategies for when companies approach you to renegotiate pricing and terms mid-contract. Besides improving your relationships overall, they’ll help you receive value for your willingness to participate in your customers’ financial recoveries.
Plan for the request before they ask. Evaluate which of your customers are in the hardest-hit industries and review your current contracts to determine areas where you have room to reasonably reduce pricing. Chances are you might have already been approached by some customers. Some of the most affected industries include airlines, retail chains, and hospitality (especially hotels, restaurants and bars, theaters, and theme parks). Develop a plan for how you would structure a reduction to show your commitment to help.
Attempt to renegotiate contracts that are mutually beneficial. Assisting your customers in cost reduction does not mean that your only option is to lower the price. In your renegotiation, offer a reduced price for an extension in the term. This provides them the immediate reduction they desire and an expansion of your business, albeit at a lower price. Request to remove services that are rarely used to reduce your own cost or amend services or service-level commitments that could be providing premium deliverables that are unnecessary. Offer to provide new services at a lower cost than their current providers to gain economies for you and additional reductions for them. Their request is just that, a request. The goal is to help them cut costs while improving your position in the account both strategically and in terms of commitment to your long-term business.
Place parameters on concessions for solely price reductions. If your customer is only interested in a pure reduction of price, structure the offer to minimize the impact on your contract while still agreeing to participate. Avoid providing broad discounts on the entire contract. Instead, reduce specific services where your profitability can withstand the reduction. Limit the length of price reductions (e.g., six months versus the contract term) to lessen your exposure while accommodating the request. You can also use different lengths or quantities for individual service contract/product price reductions to customize your offers to your best advantage.
Use the request as an opportunity to refine your cost model. To help compensate for reductions, reevaluate your delivery model to see if there are areas where you can cut your costs while still providing the contracted service. Determine if there are more efficient ways to deliver your services or training opportunities where you can consolidate resources. Look for technology advances where you can decrease or eliminate manual operations to improve efficiencies and speed delivery to your customers. Make this a win-win by improving your cost model and your customers’.
Helping customers survive a downturn in business through price reductions does not have to be painful. Through thoughtful contract analysis and offer creation, it can be turned into an excellent opportunity to strengthen your customer relationships and improve your long-term business potential.
Paul Harney (firstname.lastname@example.org) is senior director, sales and marketing, at itsoli, a consulting and professional services firm delivering strategy, transformation, and technology solutions. Its principal consultants are IT practitioners with 20-plus years of real-world experience from the corporate and consulting worlds strategizing and implementing solutions from vendors such as Oracle, SAP, ServiceNow, and Salesforce.