Tag Archives: Negotiate

What’s the Best Way to Renegotiate a Lease? Four Strategies

Situation: A company in a competitive real estate market has about 50% more space than they need at $2.80/sq. ft. per month – full service. The lease is up in 5 months with an option to renew for 2 years on the same terms. The company wants to both reduce its space and to reduce the cost per sq. ft. by about 25%. What’s the best way to renegotiate a lease?

Advice from the CEOs:

  • Gather information from multiple sources on current and forecasted cost of space in your market. Sources may include: other tenants, real estate agents, similar buildings, and walking the neighborhood to evaluate conditions. Look at newspaper ads and Craig’s List for both space & furniture.
  • Ask other tenants in your building whether have excess space that they would offer to you under favorable terms, or whether they are interested in your excess space. In either case ask for both price and terms.
  • Be careful with the information that you gain from real estate agents. They have more incentive to keep prices up than to find you the best deal. Balance their information with information that you gather from other sources.
  • Success in negation often is a matter of which side is best informed. Line up all of your options. Present these to your landlord and see if you can get what you need without having to move. For many landlords, a good tenant at a lower price is better than no tenant.

How Do You Assess the Value of a Consultant? Four Thoughts

Situation: A company has relationship with a consultant. The consultant has approached the company for additional work with a higher dollar value. How do you assess the value of the services that are being offered? How do you assess the value of a consultant?

Advice from the CEOs:

  • Consulting is a competitive market. Look at the work being offered and tell the consultant that while you appreciate the value of her services and the relationship that she has with the company, you want to talk to others to understand the market rate for the additional services being offered.
  • Are consultants or contractors really much different from employees? How do you determine value when you are hiring? You determine this based on skills and market pay rate for skills. You’ll need to some homework to determine appropriate rates, but otherwise do the same here.
  • Look at your budget and upcoming expenses. If the proposed work is more important than other planned expenses, decide on a dollar figure and tell the consultant that this is what you’re willing to spend. If the consultant can convincingly pitch a higher value, you’ll listen.
  • Is the relationship with the consultant important to you? Is the proposed work important? If both are the case, sit down with the consultant and help them to craft a better offer.

How Do You Optimize Your Supply Chain? Six Suggestions

Situation: A company wants to improve the efficiency of its supply chain. The company produces a custom product, for which there are few qualified materials suppliers. From the CEO’s standpoint, this presents challenges, particularly when there are delays in materials and parts supply. How do you optimize your supply chain?

Advice from the CEOs:

  • In supplier negotiations, know your BATNA – Best Alternative To No Agreement. Put this in dollars and cents so that you know your negotiating limits.
  • A recessionary or slow growth environment is the perfect time to negotiate! This gives you the opportunity to work with an outstanding order on terms that either your supplier or customer needs. For example, if you are experiencing delays in shipments from your supplier, offer a purchase commitment of “x” terms for “y” years at “z” price in exchange for higher priority on their production schedule. You can work the same way with your customers.
  • If you supply a custom product, especially on a sole-source basis, tie yourself to the hip of the engineering organizations of both your supplier and your customer. This gives you leverage when either the purchasing department or a contract manufacturer intermediary tries to push you on price and terms.
  • Be a squeaky wheel on shipments or payments due – but not in an irritating way with too much pressure.
  • Europe Union RoHS and REACH regulations make it imperative that manufacturers and service companies be aware of hazardous substances in products that they design and manufacture. The list of hazardous substances being monitored and/or restricted is expected to grow to 3,000 in coming years.
  • Contracts serve two purposes: a legal tool, and a way to drive behavior. They are an opportunity to assure that both parties are on the same page and under the best circumstances serve as process documents.

Special thanks to Bijan Dastmalchi of Symphony Consulting for his contribution to this discussion.

How Much Inventory Should You Carry? Six Considerations

Situation: A company has been offered the opportunity to buy a container of raw material from China at what may be a favorable price compared to local supply. This raw material will last 6-12 months at current and anticipated production rates. Does it make sense to purchase 6-12 months of raw material inventory in advance? How much inventory should you carry?

Advice from the CEOs:

  • This is a fairly straightforward economic question. What are the risks and costs of purchasing this large lot of inventory vs. purchasing month-to-month? Here are the factors to include in your evaluation:

o    What is the cost difference of a container versus local supply?

o    Another option is to commit in advance to 6-12 months’ supply from the current supplier. What pricing will the local supplier offer for committed regular purchases?

o    How many months of inventory are required if you need to change suppliers?

o    What is the viability of the local vs. the foreign supplier? If you cease purchasing from the current supplier for 6-12 months will they remain a viable supplier? Similarly, can you count on the foreign supplier long-term?

o    What is your cost of capital, and what is the tax effect of significant inventory at the end of the tax year?

o    If you purchase a container, what is the exposure to overstock of certain sizes of product? What is the carrying cost of this overstock?

  • Do the numbers and negotiate between the two suppliers.

Category: Manufacturing & Operations

Key Words: Inventory, Purchase, Advance, Container, Carry, Cost, Commit, Supplier, Tax, Negotiate

How Do You Respond to a Regulatory Wild Card? Seven Suggestions

Situation: A company that has been in business for several generations has been approached by a government official with an unexpected regulatory requirement and a stringent timeline for compliance. This was completely unexpected and it will be disruptive to comply. How do you respond to a regulatory wild card?

  • Approach the agency and negotiate an extension of the deadline, or a series of steps that will bring you into compliance but under conditions so that compliance does not disrupt your business and workload.
  • Dig to determine the ultimate reason behind this development. Is it a neighborhood evolution issue where new neighbors want you or your business out of the way? If so, is there a win-win alternative that gives you a new or better location in exchange for moving.
  • Seek legal assistance – local lawyers may be knowledgeable of the officials involved or their superiors, and will know the language to use to ask for the leeway that you require.
  • Circle the problem from every angle – look for other city contacts that can assist.
  • Trade a tax concession for compliance – particularly if the issue is a long-standing situation that has just now been brought forward.
  • Look for a way to turn the problem into an opportunity by solving the problem uniquely in a way that favors you.
  • Consider asking them to help solve the problem.
  • Do NOT respond with an attack. Local officials can be in place for a long time and may hold a grudge.

How Do You Communicate Benefits Changes Following an Acquisition? Four Thoughts

Situation:  A company was recently acquired. The acquirer wants to merge benefit structures between the two entities. Both contribute a similar amount toward benefits; however the distribution of benefits between retirement and health plans, and other benefits varies considerably. How do you approach the staff to communicate changes in benefits following an acquisition?

Advice from the CEOs:

  • Ideally, you want to gather employee input on what benefits are important to them before the overall package is finalized. This will help you to negotiate in your employees’ interest.
  • Make sure that the acquiring entity is aware of state regulatory requirements that may force them to retain state-specific benefits.
  • National companies often employ a cafeteria benefit strategy that allows the employees to make choices among benefit options, and fund these choices either at a company-paid base level or allow employees to supplement their choices through pre- or post-tax payroll deductions. There are numerous providers who offer cafeteria plans.
  • What’s the best way to have a conversation with employees once the new benefit package has been finalized?
    • Emphasize that the company is offering and funding this benefit and specify the amount that the company is funding as a percent of salary.
    • Create a grid mapping the full program:
      • Amount of company contribution
      • Old Program and benefits
      • New Program and benefits
      • Changes in allocation and changes in the total value of benefits offered.
    • If you have access to industry or regional comparisons for like-sized companies, and those comparisons put your company in a favorable light, share these as part of the communications package.
    • If you know that a highly valued benefit is being reduced, consider a short-term subsidy to ease the shift.
    • Be sure that you are clear and concise in your communications of the new plan and changes to the employees. You may want to have an outside consultant on hand to cover specific questions.
    • Be sure that any decisions your employees must make in the new program are fully and clearly explained.

How Do You Negotiate New Shares for the Founders? Five Suggestions

Situation: A company’s founders will be fully vested in their options by the end of the year. Also, the option pool for founders and employees has been exhausted. The CEO has spoken with the Board Chair and Compensation Committee about this in terms of fairness and incentives for future work to both founders and employees, while making it clear that the Founders are not unhappy. The Chair listened sympathetically and promised to get back to the CEO. Is there anything more that the CEO should do to negotiate new shares for founders and employees?

Advice from the CEOs:

  • Seek a letter of understanding from the Board that the founders and employees will have access to future stock incentives, and a timeline as to when this might occur – either in the near future or at the next financing round.
  • Wait a few weeks and have an informal follow-up conversation with the Chair about his current thinking. Ask whether he would like any further supporting information on the issue.
  • So far, your approach has been non-threatening. Keep it this way.
  • Maintain focus on fairness and your tone supportive of the best interests of the company.
  • Don’t press the issue if you sense resistance.

How Do You Respond to an Onerous Contract Clause? Five Options

Situation: A company just received an approved vendor renewal contract from their major customer. Upon review, they found language that potentially holds them liable to cover the customer’s legal costs of enforcing the agreement. If the company does not sign the contract, they potentially lose their major customer. How do you respond to an onerous contract clause?

Advice from the CEOs:

  • Corporate attorneys are paid to protect the corporation and purposely write vendor agreements to their favor. There are two issues here: whether they will negotiate this clause, and the likelihood of enforcement – which may be very small.
  • Double check your previous vendor contract and assure that this language want not present then. If the language is the same as in past agreements all you are doing in updating an expired agreement. Perhaps there is less of an issue than you anticipate.
  • If you find that this is new language, then call your primary contact in the customer company and ask about the new language. It may be something that their lawyers are trying to add to contracts but will forgo if called on the language. However, if your primary contact responds that this is new standard language in their contracts, you still have options.
    • Try pushing the issue to higher levels of the organization or through your advocates in the company and ask them them to modify the language.
    • Call your own company lawyer and ask how they advise you to respond. A letter from your lawyer to the customer’s lawyers may settle the issue.
    • Call other vendors of this customer and find out how they have responded to the new contract language. If several vendors call and complain about the fairness of the language, the customer may determine that the new language is not worth the hassle.

Key Words: Contract, Clause, Vendor, Customer, Liability, Enforcement, Negotiate, Lawyer, Fairness

How Do You Work with Purchasing Agents? Three Approaches

Situation: A company has a long standing relationship providing an exclusive product to a major customer and has a negotiated price and volume contract for this product. The customer changes product design every few years, and the company is the favored supplier of certain components. The customer’s purchasing agent has asked to renegotiate price on the current contract. The company wants to maintain a good supplier relationship with the company, but doesn’t want to lower the price on its product. How should the CEO work with the purchasing agent?

Advice from the CEOs:

  • There are two distinct opinions from the group:
    • You have a contract in place for volume and price. If you yield on price now just to assure the remaining business on the current contract you are saying, in essence, that future pricing contracts are also negotiable even after the contract is negotiated and signed.
    • On the other hand, if you know that there is a model design change in process and want to assure a good ongoing relationship with the company you may choose to yield a bit on price for the remainder of the current contract.
    • The choice between these two will be a gut choice based on your relationship with the customer as well as your past history with the purchasing agent.
  • You might want to try a creative alternative. Check with your own component vendor and inquire about pricing if you place orders for your own remaining components on the current product today versus in several weeks. If there is a discount for placing the order today, call the purchasing agent and tell him that if he orders the remaining product on the current contract today, you will pass on the discount that you receive from your vendor. If you don’t get the order today, then you will lose the discount, and there may be a delay on your being able to deliver the remaining parts under the current contract.

Key Words: Component, Supplier, Vendor, Purchasing Agent, Contract, Relationship, Discount, Delivery, Negotiate