Covid has changed the way companies should negotiate. Today all traditional deal terms are up for grabs and it behooves negotiators to carefully reevaluate their assumptions, assess their industries, prioritize their asks, and involve key stakeholders more deeply than ever before. Success also depends on understanding how to negotiate virtually, since many negotiations will continue to be performed remotely even after pandemic restrictions have receded. The leader of McKinsey’s negotiation practice shares lessons learned from a year of remote negotiations. His advice includes cashing in on the scheduling advantages of a remote negotiation, tips for how to use virtual tools to simulate in-person negotiation tactics like hallway conversations and backchannels, and how to avoid awkward tech failures that can derail the conversation.
Whether you’re a manufacturer looking to sign a new supplier agreement, a tech company trying to close a big commercial contract, or a retailer wanting to modify its warehousing terms, the Covid-19 pandemic has changed the way you should negotiate.
There are two reasons for this.
First, everything — from what and how much you buy, to who or what you sell, to the length and terms of the contract — is up for grabs. Savvy negotiators will rethink their assumptions and evaluate current and anticipated shifts in their industry, assessing the implications for their own organizations as well as the changing priorities of their partners. The world of buyer-supplier relationships that emerges over the next few months may look very different from the stability, growth, and predictability that prevailed pre-pandemic.
Second, some negotiations will remain virtual even as the world opens up. Based on my experience, client conversations, and analysis while leading our negotiation practice at McKinsey, only 10–15% of negotiations were remote or virtual before the pandemic. I anticipate at least 25% of negotiations will be remote going forward. Those will most likely be less complicated deals but also could include portions of those that are more complex.
In this article, I’ll discuss what these two changes mean for how you should negotiate in the coming months.
Let’s start with what has changed when it comes to deal terms. Many traditional terms are getting torn up just at a time when organizations are renegotiating contracts that won’t expire for several years. It’s critical to get these right.
There are many reasons for this volatility. For one, every industry is now starting from a new position. For example, automotive and aerospace companies have lived through a year of lean demand and are basically restarting for 2021, while the entertainment industry is balancing a surge in demand from streaming services at the same time that virus restrictions made production of new content challenging. Distressed companies in many sectors are likely to merge, potentially reducing the number of buyers or suppliers.
Pricing, too, may be more volatile as supply chain conditions shift rapidly. Because suppliers now may be unable to meet the full demand of their customers, buyers may find it advantageous — though expensive — to get treated as preferred “front-of-the-line” customers in situations where supply is limited. This is quite a shift from bargaining on price or long-term volume as they might have done in the past. Meanwhile, suppliers that can offer more flexibility in payment terms may find a greater number of partners. Another promising approach for buyers and sellers alike is to get creative about non-financial terms such as intellectual property ownership, exclusivity, access to innovation, risk-sharing, investments and resource contributions, and contract flexibility.
The organizations that most effectively navigate these new opportunities can expect to see expanded margins, enhanced supply chain resiliency, improved supplier service levels, and priority access to technology and innovation that is in high demand.
To do so, it will be more important than ever for negotiators to prioritize, conducting more scenario analysis to identify which terms to focus on. They will also need to work more closely with senior leaders: Last year CEOs and CFOs became more immersed than ever in their biggest customer and supplier negotiations in a bid to gain leverage. Negotiators should leverage the credibility they built with these executive leaders to continue to pull them in to the most critical negotiations.
Critically, today’s negotiators also need to use online tools effectively to take advantage of this moment. Here is our advice for enhancing your negotiation prowess in the digital domain:
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