Because the ‘setting a precedent’ ploy is both ambiguous and flexible, it is a particularly hard one for customers to rebut or overcome. The essence of the problem is that, as a rule, the customer does not have access to the information necessary to challenge the supplier claim that is at the heart of the ploy.
In effect, the customer is faced with two problems when the supplier’s representative states, “We’ve never given that concession to anyone. If we give it to you in this situation, we’d have to offer it to everyone who asked for it.”
First, there is no way of knowing whether the supplier has or hasn’t granted the same or a similar concession to another customer.
Second, the customer does not know whether the supplier really would have a “precedent” problem if the concession were granted in the present negotiations. (Some suppliers view prior “concessions” as negotiable items in subsequent acquisitions; other suppliers have a policy of viewing a prior concession as having no bearing whatsoever on subsequent transactions.)
Because the customer really doesn’t have the facts, from a negotiating viewpoint the supplier has the upper hand.
The customer must either accept the supplier’s representations as true or reject them as false. There is little or no opportunity for independent verification.
COUNTERING THE PLOY
Despite this basic problem of a lack of information, there are several viable customer strategies to counter the “setting a precedent” ploy. Customers should consider implementing one of the following tactical counterploys.
First, the customer should ask that the supplier provide a list of all other concessions or “precedents” previously granted. In this approach, the customer should show apparent interest in the supplier’s alleged problem which might follow from granting precedent-setting concessions. The customer’s negotiator should ask the supplier’s sales representative, “You mean you actually would have a precedent problem if you granted us this concession? Does your firm really take these special cases so seriously? Do you keep track of this sort of thing?”
Usually, the supplier representative will pick up the challenge and go to great lengths to explain the supplier’s supposed “policy” in this area, perhaps with a few references to previous precedent problems the company has experienced.
At an appropriate point in this explanation, the customer should respond by asking the supplier’s representative for a list of all prior supplier concessions or precedents. In effect, the customer should explain, “Look, you said you keep track of this kind of thing and that your company has a policy of granting any prior concession to a customer that subsequently asks for it. Before we can negotiate further, we’re certainly going to need a list of all your available previous concessions.”
At this point, the supplier’s representative is likely to counter with some sort of denial, expression of disbelief or claim of ignorance. If the supplier rep claims not to see the logic of the customer’s reasoning, it may be beneficial for the customer to press for the original concession. This is based on the grounds that the supplier does not appear to have a precedent problem after all or any specific policies that prevent the granting of such a concession.
If the supplier’s representative claims there is no list of prior concessions, or that the marketing team doesn’t think prior concessions have been granted (a very unlikely event), then the customer should respond by demanding that the supplier produce a knowledgeable representative who has definitive information before negotiations can proceed. Your negotiator might merely observe, “How can you possibly talk about precedents and what you can or can’t do if you don’t even have a list of prior concessions that have been granted?”
The fact is most major equipment suppliers do have pre-approved contract changes and addenda. However, a customer must have a strong negotiating posture to get access to these materials.
Second, the customer should indicate his intention to obtain the precedents from other sources. In a variation on the tactics previously described, the customer simply breaks off the negotiations to do some digging to obtain information from other parties about the supplier’s previous concessions. The most likely sources of information about prior supplier
concessions are other customers, customer groups, specialized publications and professional negotiators and advisers.
Ideally, the customer already will have accessed these resources before the start of negotiations; however, deadlocking the negotiations to examine all sources on an immediate basis can be effective. Moreover, the mere threat to break off negotiations for this purpose often becomes an effective strategy even if the customer does not attempt to collect useful information. Threats of negotiation breakdowns get the supplier’s attention.
Third, if the supplier’s rep insists that the supplier never has granted a particular concession or series of concessions, the customer should consider asking the supplier to include a “most favored
nation” provision in the supplier/customer agreement. This is language that states that if the supplier has granted any customer a better price or broader concession during a specified period
(generally beginning before the execution date and continuing for some stated period thereafter), then the supplier is obligated automatically to provide (or at least offer) the same concession to the customer.
This type of provision can be written to apply to the entire supplier/customer agreement or tightly restricted to designated sections of the agreement. This latter approach is particularly useful in countering supplier claims that a specific provision requested by the customer would create an unacceptable precedent.
BEWARE THE SIDE LETTER
There is one caveat of which the customer representatives should be aware. Supplier sales representatives often suggest that the requested concession be granted through some form of “side letter,” signed by the supplier rep or branch manager, to avoid the supposed precedent problem. Too many customers jump at this opportunity and agree to side letters. As a rule, the supplier employees have good reason for not wanting to put side letter concessions into the formal contract. Usually, the supplier’s contract review group never sees the side letter, and it may have no legal or binding effect on the supplier.
All well-drafted supplier agreements include an “integration” provision that states that the contract itself is the only binding agreement among the parties, and that no other documents or promises will be binding unless formally incorporated into the contract or executed as an amendment to it. If the side letter is not directly incorporated by reference into the contract, it may not have any legal effect.
An even more serious consideration is that most contracts are executed by a supplier vice president or corporate officer rather than by a member of the marketing team. Most supplier side letters are executed by an employee lacking the legal authority to sign such a commitment on behalf of the supplier.
If the side letter approach is the only viable alternative available, the customer should follow two strict rules. First, the side letter must be formally incorporated into and attached to the primary written agreement or written amendment(s) thereof. Second, if at all possible, the side letter should be signed or countersigned by the same supplier officer who signs the supplier/customer agreement or amendment on behalf of the supplier.
Scaling the Wall The “set a precedent” ploy is difficult for most customers to counteract because they lack the necessary information and, further, do not understand how to get what they need. The countervailing tactics outlined here should help customers break through what seems to be a supplier version of the Great Wall of China, erected specifically to avoid making concessions.
Joe Auer is a specialist in high-tech procurement. He is founder and president of International Computer Negotiations Inc. (ICN), Winter Park, Florida. He can be reached at ICN@dobetterdeals.com