Q & A Table of Contents
Requesting A Retroactive Price Reduction
From: Cindy, Northbrook, Illinois
Question: My company entered into a 3 year agreement with a supplier, 2 years ago. The agreement reached was the result of an RFP. We selected the incumbent supplier.
We're now in process of a new RFP for the coming 3 years and the incumbent and a new supplier have been selected as the final candidates. We spoke to the incumbent and advised them that there is nearly a $500,000 difference in costs over three years compared to their nearest competitor. They have sharpened their pencil and reduced their costs by slightly over $400,000. We're close enough in cost and happy enough with the incumbent that we will likely stay with them for the subsequent 3 years.
My question is, my boss has indicated that if the supplier can reduce their costs by over $400,000 for the subsequent contracts 3 year period, she wants me to go back to the supplier and re-negotiate the final year of the current 3 year agreement. In spite of the fact that our company is not making money, this just doesn't feel right. When is a deal a deal and am I being too "fair" for the business I'm in?
Response: Your question focused on how business people can or should respond when it becomes clear they have been overpaying for goods or services. Even if your company had been making terrific profits over the past several years, the question of paying too much for something that could have cost less remains an issue that might lead your company to distrust your incumbent supplier. There’s a question that should be gnawing at you — and which your boss has raised: “Have they been victimizing us with their pricing?”
At first glance it appears that in sharpening their pencils to keep your business they have revealed overcharges in the past. Can you find a justification for your company subsidizing its suppliers? It is perfectly reasonable for your supplier to make a profit; paying to provide them excess profits, on the other hand, is about as pleasant as a poke in the eye with a sharp stick.
It is entirely possible that the high price paid during the current contract can be justified. Perhaps the supplier had to make a capital investment to deliver the goods or services your company has been buying — and since the contract was for three years, the supplier may have had to amortize that capital investment quickly. Unless they can demonstrate the reason for the high costs — capital expense amortization or some other legitimate reason — you should ask yourself “Why should I be paying more for something than I need to?”
Your boss’s direction to you to ask for a retroactive price decrease is based on your company’s interest. In negotiation, one of the critical rules is: Never, never, never say or do anything that is contrary to your interest.verpaying a supplier is contrary to your interest.
Therefore, it is perfectly appropriate to look for a resolution to this question that will serve your company’s interest.
The simplest question you should ask yourself is, “What is the penalty for asking?” Is there any chance the incumbent will withdraw their more attractive proposal for the next three years? Your company does have an option (your BATNA/Best Alternative To a Negotiated Agreement) of accepting the proposal from the incumbent supplier’s competitor — so you’re in a pretty strong place if one is measuring the balance of power.
While business is about producing goods and services as well as making money, generally making money requires wisdom in the purchasing process. If your current RFP asks for exactly the same information as the one that led to the current contract, that raises two issues: Maybe the original RFP didn’t ask the right questions — which opened the door to the current pricing. And maybe the current RFP should pursue information that will tell you whether replacing the incumbent might be a good idea for reasons that go beyond the price differential.
So here are your learning points:
- If things change (in this case you learned something new about pricing from the incumbent) it is perfectly appropriate to go back to the party with whom you have an agreement and say you would like to modify the situation.
- You need to measure your BATNA to understand what choices you can make — both in terms of renegotiating the existing agreement and in terms of how the next contract will be awarded and implemented. It is crucial to take a close look at the BATNA of the incumbent and their competitor: how badly do they need the contract with you?
- Remember, your primary obligation is to pursue your/your company’s interests. You should pay attention to and take your suppliers’ interests seriously — understanding their interests should help get them to buy in to the agreement. But never, never, never say or do anything contrary to your interests.
Good luck,
Steve
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