A long-term agreement may take different forms: fixed price, a yearly adaptation based on market changes, variable compensation based on results, lump sum, revenue sharing, the list goes on… So what works best with what? We asked 10 industry experts…
Sustainable business success is built upon positioning your resources and partnerships to create value that lasts the full mile. If your business wants to stay in the game for the long run, you must forge healthy long-term agreements with suppliers and customers. Easier said than done. New threats, market fluctuations, competitive alternatives constantly test your profitability and success, so we asked a group of 10 sales and procurement experts to provide their guidance as to which type of agreement they prefer under particular circumstances. This was one of the topics at a roundtable event organized by Giuseppe Conti of Conti Advanced Business Learning (CABL), a consulting company that specializes in negotiation and influencing.
i. Know your business model
First and foremost, when approaching long-term agreements, you have to refer back to your business model. Are you a company that is a cost-savings leader that consistently looks to find the cheapest resource? Or does your business model rely on a premium product or service that requires a long-term collaborative approach? Marco Martelli, Vice President Procurement at Tetra Pak, highlights that in his industry the market/customer ultimately determines which way you go, in that customers require you to ultimately build around pricing schemes that are offering stability for the annual budget plan.
ii. Mixing your company’s DNA with theirs
Think abstract and move from a transactional modality to a strategic modality by incorporating them into your business. Laurence Pérot, Head of Global Supply Chain Procurement at Logitech, recommends creating shared programs and goals at the executive level. This helps to position your business unit to set up collective bi-annual business reviews. “You create common ground to identify synergies and priorities between both companies.” When questioned about the level of transparency we should use, Perot responded by suggesting the sharing of supply chain roadmaps or other business roadmaps to integrate both parties into the business as ultimately, a long-term relationship with the right entity can give you the desired results and profits that carry on into the future.
“The key is to build flexibility into the agreement and transparency on the difficulties and risks you may encounter”
iii. Don’t try to offset all the risks onto yourself
The value chain doesn’t stop and start with you, it involves all players. Elisabetta Soana, a Senior Sales & Business Development Executive, uses an example in agribusiness to outline the interconnectedness of risk: “if you are an agricultural business and grow fragile crops that are produced twice a year, only under special conditions, the risks should be offset carried only by yourself. You must construct an agreement that takes into account the unpredictability of the crop yield.” The key is to build flexibility into the agreement and transparency on the difficulties and risks you may encounter.
iv. Create buffers
The benefits of buffers are two-fold. They give you a “cushion” between what you ask for and what you actually want. From the relationship-building side, they demonstrate to the other party your flexibility and commitment to reach an agreement. Regina Roos, a Senior Sales Executive, discloses that “when you have a contract with no room to maneuver, this is not fair… We need to make sure the market sectors are covered in the partnership because they are different from a trade agreement which is based solely on how the price set up”. When negotiating long-term agreements, buffers help mitigate and distribute risk effectively between the two parties. Joerg Steinhaeuser, Vice President Global Sourcing at General Mills, introduces the idea of defining ‘risk thresholds’ within agreements. That is, when external factors affect the inputs and outputs of the business, the agreement adapts accordingly. For example, if a weather event affects product A by X amount then we both agree to make concessions on price, inventory and payment terms accordingly.
v. Take into account cultural differences
According to Giuseppe Conti, Creator of Master Negotiators at CABL, we should take into account the culture of both parties. On average, North American and Europeans insist on detailed contracts, while negotiators in the Far East are happy with a fairly broad agreement that focuses on general principles. The key question is whether the contract is the end of the negotiation or just the starting point of a relationship? Depending on the country, your answer may change. For instance, Americans like detailed contracts and expect people to adhere to them over the contract length. Americans have a strong legal system and therefore rely on written contracts. In other countries, the legal system is less strong and people see the contract as the starting point of a relationship. Since the legal system would not deal quickly and effectively with misbehaviours, it is the relationship that prevents issues. Contracts are therefore seen as something can be adapted with changing circumstances.
These answers were collected by Giuseppe Conti, Founder and Managing Partner of Conti Advanced Business Learning (www.cabl.ch), a consulting firm that specialises in negotiation & influencing.