Four Steps to Effective Contract Negotiation

Two businessmen shaking hands

Contract negotiation is a common and essential process for nearly every business. But that doesn’t mean it’s easy. In fact, recent Docusign research found contract negotiation was ranked as the second most frustrating step of contract management, and the least efficient and most time-consuming part of the process.

Even for experienced executives, contract negotiation is tricky. Sometimes it can feel like a battle of wills. That’s why it’s so important that you develop the right approach before contract negotiations even begin.

Let’s dive into how contracts are negotiated and how negotiation can be done most effectively.

What is contract negotiation? 

Contract negotiation is the process of reaching mutually agreeable terms and conditions between two or more parties, usually in a business or legal context. The process involves discussions, offers, counteroffers, and adjustments until all parties are satisfied with the entire contract.

The goal of contract negotiation is to minimize the potential for disputes or misunderstandings down the road. Contract negotiation requires skilled communication, collaboration, and legal expertise to arrive at an agreement that serves the interests of all parties.

How to negotiate contracts

The main issue making contract negotiation difficult: too often people enter the process thinking the goal is to beat the other person, to “win” the negotiation. But that’s not the case; your goal is to satisfy both parties’ interests.

One of the best guides to effective negotiation is the pioneering book Getting to Yes by Roger Fisher and William Ury. First published in 1981, the advice it offers is as effective today as it was 40 years ago:

  1. Maintain healthy, long-term business relationships
  2. Focus on the interests of all parties, not positions
  3. Establish multiple options and alternatives
  4. Use metrics and objective measures

What’s more, Docusign research concurs. Below we lay out how you can put Fisher and Ury’s proven methods into practice, step by step..

Step one: Think long-term

Even before you begin contract negotiations, you can prepare yourself to negotiate effectively by considering your own frame of mind around the negotiation process. To Fisher and Ury, this is called “Separating people from problems.”

Just because your counterparty has different interests doesn’t mean that they’re your enemy. If you see your relationship with your counterparty as adversarial—that is, if you think there can only be one winner—you’re setting yourself up for poor negotiation that doesn’t satisfy you or your counterparty. Strong negotiators try to maintain healthy, long-term business relationships with their counterparties, which leads them to take an even-handed approach. They recognize that their counterparty is not a problem, but a collaborator they’re working with to solve a problem.

Aim for the win-win

For instance, if BizEaze is negotiating to sell LabPlus 400 units of office equipment with a 10% discount, but LabPlus wants an 18% discount, neither side is likely to get what they want if they both plant a flag in the sand and refuse to budge, engaging in a war where neither feels good at the end. This could lead to a complete rupture of their business relationship.

Instead of a winner-take-all attitude, where you only win if your needs are met at the expense of the counterparty, successful negotiators develop a win-win perspective. They want to ensure that both sides walk away feeling they’ve benefited in some way from the process, and maintain a strong relationship.

As Fisher and Ury write: “People listen better if they feel that you have understood them. They tend to think that those who understand them are intelligent and sympathetic people, whose own opinions may be worth listening to. So if you want the other side to appreciate your interests, begin by demonstrating that you appreciate theirs.”

Step two: Find your underlying interests

“What exactly do I want?” According to Getting to Yes, answering this question entails a good degree of open-mindedness. Fisher and Ury call this technique “Focusing on interests rather than positions.”

What does that mean in practice? To return to the example above, the positions of the BizEaze and buyer LabPlus are in conflict in terms of the size of the discount this order warrants. But zoom out a little bit and you see that their interests are in fact highly compatible. BizEaze’s interest is to meet the demands of his customer for office equipment, and LabPlus’s interest is to get the number of pieces to carry out their company’s operations.

Be upfront about your needs

Getting to Yes suggests that instead of focusing on positions during bargaining (in this case 10% vs 18% discount), it might be better to start by expressing your interests. Ury and Fisher write: “If you want someone to listen and understand your reasoning, give your interests and reasoning first and your conclusions or proposals later.”

This strategy makes your counterparty more receptive to your side of the negotiation, because they have to follow your logic. In our example, it’s an age-old conundrum: the vendor wants to maximize revenue and margins, the buyer wants to minimize expenditures.

The risk of focusing too much on positions, rather than interests, is that you fail to see how alternatives could still satisfy your interests. Being open-minded allows both parties to satisfy their objectives. To cite Ury and Fisher again, “The more attention that is paid to positions, the less attention is devoted to meeting the underlying concerns of the parties.”

Even in these early stages, it’s not too soon to start thinking about contract workflows so that everyone who has to weigh in or comment on the agreement has the information they need at their fingertips. Problems can arise from a lack of centralization, poor communication, and undefined roles without end-to-end ownership. These create unnecessary complexity down the line and increase the chance of errors.

Step three: Generate multiple options

Now is the time to put your creativity to work and develop a plan. Or, rather, plans. Fisher and Ury say that you shouldn’t be bound to one solution. That’s why they say “Generate options”—not “Generate an option.”

Some outside the box thinking is extremely important at this stage. If you’ve followed the advice laid out above, you will already have developed the right mindset and begun the process willing to entertain multiple solutions. But now you have to be ready to help generate these potential solutions. Fortunately, you have a collaborator at hand: your counterparty, who is, as we’ve discussed above, also interested in a mutually beneficial agreement.

Negotiate collaboratively 

Your collaboration opens up the possibility of generating further variations and combinations of options you’ve already created. Take a little bit of Plan A, add in an element of Plan B, and you have Plan C, which combines the best of both worlds. Of course this is an optimistic view, but in negotiating, an optimistic view can be one of the best tools you have.

Let’s say that BizEaze and LabPlus begin their contract negotiations. BizEaze suggests, based on the underlying interests established, that they take a longer view. The equipment they sell to LabPlus will have to be serviced and maintained over time.

So they propose a plan along the following lines: BizEaze will provide a Gold level service plan at the same cost of a Silver plan for two years. LabPlus likes the general idea of this plan, but adds in an element of a plan they’d formulated independently: the service plan needs to cover three years.

Generate options with an open mind

As above, openness and originality are indispensable. Fisher and Ury offer this maxim: “Judgment hinders imagination.” Consider new ideas on their merits and their ability to generate mutually beneficial agreements, not on first impressions or by comparison to preconceived positions.

As they establish options and alternatives, negotiators want the ability to track previously agreed-upon details of their established positions, speaking points, and counterparty needs throughout the negotiation process. Doing this on faxed or scanned hard copies, while details and communications remain trapped in emails, can be cumbersome and lead to errors and information loss.

This is where CLM tools are extremely helpful. A best-in-class CLM will offer version comparison and other features that make comparing changes over time with your counterparty (and your own teams, such as legal and procurement) easier. It will also have the ability  to flag particular areas of an agreement to bring them to the attention of certain reviewers. You can keep track of your contract status, comments, and changes from end to end, and review comment and task activity over time—making the whole process transparent.

Step four: Use metrics and objective measures

Fisher and Ury advise that each issue should be framed as a mutual search for objective criteria; that negotiators be both reasonable and open as to which standards should be used and how they should be applied.

As criteria and standards are set down in the agreement, long redlining cycles can be a source of strain. This is a particular pain point for legal professionals, who have to draft the contract, work through multiple redlining cycles, and follow numerous email threads.

Use the right tools

Fortunately, strong CLM tools can make the process easier. You can integrate Docusign CLM with Slack, so that collaborators can be notified immediately when they need to review a portion of a contract.

Docusign also improves the efficiency of contract negotiations with our clause library, which offers pre-approved clauses that can go straight into your contract to eliminate a long back-and-forth between your legal team and your counterparty. What’s more, AI-powered risk scoring automatically identifies non-standard language and flags it for your review.

Contract negotiation should be a win-win

With credit to Fisher and Ury, these four steps to effective contract negotiation make hashing out the details of a contract less stressful and more productive. From the very beginning, developing an open and creative  mindset will put you in the right place to develop options for a mutually beneficial solution. As Fisher and Ury write: “The challenge is not to eliminate conflict but to transform it. It is to change the way we deal with our differences.”

At Docusign our mission is to digitally transform the way the world agrees. Using technology like Docusign CLM enables you to work collaboratively and track details, so that all stakeholders can reach agreement and feel confident at every stage. As you make your way through the contract negotiation process, Docusign CLM helps bring you to “yes” – and signing agreements where everyone wins.

Learn more about how Docusign CLM can help you negotiate contracts effectively.