Much of the art of negotiating is fairly standard and does not vary drastically. Notwithstanding this generalization, certain contracts like real estate leases or insurance policies require the assistance of specialists.
Traditionally, real estate leases are long term (i.e., only negotiated every 10 to 15 years) but are usually a material monthly corporate expenditure. Typically, a smaller enterprise has no internal expertise in negotiating such leases. Therefore, before entering into a real estate lease, heavy reliance should be placed on the enterprise's attorney, broker, accountant, and interior decorator. While the base rent is the major component of the monthly payment at inception, escalations (e.g., real estate taxes, inflation based on a CPI index or the standard porter's wage rate) and other hidden costs can become a large percentage of the monthly payment in future years. An expert's ability to slightly change a definition in the lease could save a company thousands of dollars over the lease term.
In addition, the expert might be very helpful in interpreting the lease's "gray" areas. Generally, landlords will appease contesting tenants and/or their representatives in exchange for the tenants not publicizing the contested discrepancies to other tenants.
Negotiating insurance policies can be unusually technical. Failure to employ an insurance expert knowledgeable in both your company and industry is not a good business practice. The chief financial officer must utilize the insurance specialist to:
* Determine coverage needed;
* Determine policy limits and desired deductible amounts;
* Evaluate the financial soundness and claim settling record of the potential insurers; and
* Negotiate the annual premiums.
A perfect industry to emphasize the need for an insurance specialist is promotional marketing. Companies in this industry manage numerous sweepstakes, and contests which require errors and omissions insurance. When I arrived as the CFO of a full service promotional marketing firm, it had paid $46,000 annually for $1,000,000 of errors and omission coverage with a $50,000 deductible. I utilized an insurance professional more familiar with the risks and nuances of the promotional industry to negotiate a new $1,000,000 errors and omission policy with a $25,000 deductible at an annual cost of $12,500. That was an immediate annual corporate savings of $33,500 or 73%.
Negotiating real estate leases and insurance policies are only two areas which require a high degree of expertise. The company's financial professional should utilize specialists whenever he deems it necessary. Do not be "penny wise and dollar foolish."
Most people will ask the waiter in a restaurant to take back a meal if it is inedible or improperly cooked. The same goes for the products or services purchased. If the goods or services do not meet promised standards or are not received on a timely basis, the company's financial department is perfectly within its right to challenge the billing. Do not pay the billing until you are satisfied because you will lose much of your leverage once the vendor receives payment.
Remember, you are the customer and most vendors aim to please their customers. They rely on repeat business and usually will be amenable to reasonable requests for a billing adjustment or substitute products or services. Should a vendor's billing department not agree to an appropriate adjustment or substitution, do not be afraid to communicate your unhappiness with a top official at the vendor's company. If that attempt fails, maintain your negotiating advantage by withholding payment of the bill. Once the vendor's receivable from your company becomes sufficiently overdue, the pressure to settle the dispute will heighten. Unless the billing and the dispute are extremely large, it will not pay for the vendor to begin a collection suit.
Whenever a company contracts with a vendor to perform a large construction assignment and agrees to pay installments on a percentage of completion basis, the financial officer should make sure that the percentage paid does not greatly exceed the work completed. If there are delays in the work, the company should likewise postpone the contracted payments. Should there be an unforeseen bankruptcy, at least the lost monies can be minimized. Also, the greater the percentage that is owed the vendor, the greater the ability to ensure that the contracted work is completed on a timely basis.
A company's financial profit/losses are measured on a "hard" dollar basis (i.e., based on dollars received less dollars expended). "Soft" dollars are services or products that cost nothing or relatively little but are perceived by the other party as having a high value. Often, a creative financial manager can reduce the outflow of cash by offering to substitute "soft" dollars for all or part of a cash liability.
While CFO of a promotional marketing company, I used my sense of hearing to save my company over one-third of the monthly house-keeping costs. Upon returning from lunch, I overheard a conversation between the building's landlord and a supplier, who was expressing his desire to secure some housekeeping service contracts from the building tenants. Later that afternoon, I contacted the landlord who arranged for me to meet with the housekeeping company. The new housekeeping company agreed to provide the usual daily housekeeping services at $6,000 per month for three years, including materials and bathroom supplies versus the normal going rate of $9,000 excluding materials and supplies. In exchange for these substantial savings (with the costs of the materials, a three year savings of about $125,000), I promised to assist the housekeeping company in obtaining additional contracts by serving as a reference. Subsequently, the housekeeping firm contracted with three other tenants in the building.
Another interesting illustration of a soft dollars/hard dollars swap occurred while I was the Treasurer of a large privately owned indoor/outdoor tennis club. A severe winter storm caused major damage to a pressurized bubble covering four tennis courts. The courts were unusable for three weeks. The courts are rented on a seasonal basis and over $30,000 was owed to the contracted players due to lost court time. Even though the loss of revenue was reimbursed by the Club’s insurance carrier, I explored alternatives to merely returning such monies to the affected players. The players were offered 1 1/2 hours of tennis time at off hours or open hours at the end of the contracted indoor season for each hour of lost time in lieu of a refund. Virtually all members accepted this plan. The Club saved the insurance proceeds and only had to pay for the additional utilities (electric and heat) that were necessary to operate the courts for the extended period of time.
A third example has been effectively used by a leading mail order company for many years. Whenever a customer returns an order from a prior purchase, he or she is given a refund check. In order to induce this customer not to cash the check, the mail order company offers the customer a 10% discount on future purchases that are paid fully or partially with the uncashed refund check. Amazingly, this incentive has resulted in less than 10% of the refund checks being cashed. In addition, the vast majority of the replacement orders exceeded the original credits (i.e. an added revenue source).
From these three situations, you can see how other parties can be enticed to accept items that cost far less but have a high intrinsic value for a hard dollar savings to the business that makes the offer. This area of savings is vast and is limited only by the financial manager's imaginative and creative skills.
Too many times, managers reorder products or renew service agreements without spending time to evaluate whether the supplier is charging a competitive rate. The excuse offered is always something like "Why rock the boat? I have always been satisfied with the vendor's product or service."
Maintaining continuity of product or service is admirable and usually an attainable goal. However, a conscientious manager keeps the vendor "on his toes." Often vendors will charge their best customers list prices because the user never balks and is unaware that others are paying less for the same product or service.
Periodically, the astute manager will solicit bids from competing vendors and will ask current vendors to meet any lower quotes. It is not uncommon for the current vendor to reduce the price to meet a legitimate quote and keep a valued client.
For example, in my early years as a CFO of a promotional marketing company, the Company's air conditioning maintenance contract was up for renewal. The landlord's suggested vendor offered to continue his services at $3,000 per year. By making a few telephone calls, three bids in the $1,800 per year range were received. Almost immediately after being informed of the discrepancy, the current air-conditioning company not only met the other offers but agreed to guarantee that rate for at least the next three years.
When the incumbent supplier will not meet the lower prices, do not be afraid to switch vendors. Besides reducing costs, you may be pleasantly surprised with the quality of the new supplier.
Especially in this economic environment, a financial manager must be prepared to spend a good deal of time soliciting competitive bids and negotiating in a tough but fair manner with all current suppliers.