When To Get To Work On An Expiring Contract
In general, a buyer’s leverage is highest when the threat of lost business looms as a clear and present danger. So, it’s easy to understand why a buyer would assume that the closer they get to the expiration of any particular supplier agreement, the better their chances will be to optimize the next agreement and maximize reportable savings.
However, optimizing negotiating leverage does not require pushing all the way to end-of-term, and sometimes, leverage can be lost completely if a buyer waits too long. The primary reason for this is that in order for the threat of lost business to be used effectively, it must be a plausible threat.
Don’t wait to negotiate
Our firm has specialized in the uniform rental category since 2002. Time and again, we’ve seen procurement departments start RFP or renegotiation processes too late in their existing agreement terms (usually with three to six months remaining). With such little time left, a large organization has no chance to go about a healthy open-market process, select a vendor, reach agreement on terms, arrange to measure employees for new uniforms, and ultimately have those orders processed, fulfilled and installed, all while severing ties with an outgoing supplier.
By this point, with mere months remaining in an agreement, the incumbent supplier knows there is no plausible threat of lost business because the customer does not have enough time to make a transition to a competitor. Almost without fail, customers in this situation wind up signing unfavorable renewals with their incumbents when the open market could have yielded much better results.
Clearly, not all expenses are created equally. An effective buyer must have an understanding of how a supplier transition would look across their full spectrum of expenses. Complex services like uniform rental (or waste and recycling and pest control—our other areas of expertise) require many months of planning in order to ensure a seamless transition. The suppliers in these industries know this, so in order to use the marketplace effectively and avoid lost leverage, a buyer’s market-based processes must begin in advance of these windows.
Planning for what it would look like to terminate a supplier relationship and transition to a new one isn’t something to be done only when looking to change suppliers. Indeed, it’s an important strategy to employ if you want to the best chance to optimize your incumbent relationships as well.