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You can use multiple levers to reduce your procurement costs. One commercial lever, often referred to as a "quick win", is to renegotiate your existing contracts.
A renegotiation can yield significant savings through improved contract terms. Nevertheless, maximizing your chances of success requires a structured and systematic approach - learn more about our six tips for a successful renegotiation process.
When applying renegotiation as a strategic lever you also need to consider the following questions:
- Which suppliers (or contracts) to renegotiate with?
- What facts to use in a renegotiation meeting?
- What are the expected results?
Fact-Based Renegotiations Yields the Best Results
For one of our customers, a comprehensive efficiency and improvement program was to be implemented, where procurement was a key part of the program.
Which Suppliers to Renegotiate With?
In the first phase of the procurement project, renegotiation was one of the main levers being utilized to reduce cost and realize savings.
Our spend management solution was used to get a complete overview of spend composition. During the last 12 months, the company had almost 2,000 active suppliers. Although spend was dispersed among several categories and suppliers, we quickly identified multiple renegotiation candidates by using a automatic, built-in potential analysis.
To identify which suppliers, or contracts, you should target for a renegotiation, you need relevant insights, such as spend development, your importance as a customer or contract expirations. You should also consider analyzing spend across departments, business units or categories to identify bundling opportunities.
In this specific project, we ended up selecting 20+ suppliers (or contracts) for a renegotiation process, after enriching the analyzes with qualitative information.
What Facts to Use in a Renegotiation Meeting?
Being well prepared is crucial for the outcome of a renegotiation meeting. Prior to the meeting, you should always conduct thorough analyzes to help you better understand the current situation. We recommend using a mix of both internal and external analyzes for this purpose.
For the customer in question, we prepared several relevant analyzes, such as spend development and supplier financials. All these insights were automatically generated in the spend management solution, and directly exported to Powerpoint prior to the meeting.
In a renegotiation meeting, you should highlight and showcase the most relevant information - both from a business and tactical perspective. For example, if your purchasing volume and spend has increased significantly in recent years, you would expect this to be reflected in better terms or unit prices. If this isn't the case, you need to share these findings with the supplier and ask them to provide additional insights or answers. Please note that if the suppliers aren't able to answer all your questions during the meeting, we recommend assigning them follow-up tasks or "homework" after the meeting.
What Are the Expected Results?
In this project, the procurement costs per supplier (i.e. addressed spend) was reduced by an average of 6% through improved pricing terms - and millions were realized in savings. Note that the savings and cost reductions varied between the different contracts/suppliers and the type of spend/categories. One supplier, for example, lowered its prices with 20% on average after the renegotiation process was completed.
These results illustrate that using renegotiation as a strategic procurement lever can yield significant savings for your business. Furthermore, the process isn't very time-consuming, provided you have the necessary insights while ensuring the appropriate follow-up.
For some of you, a renegotiation meeting might seem damaging to the overall supplier collaboration. Our experience is quite the opposite. More often than not, the process actually strengthens the relationship with your suppliers, contributing to a more sustainable and long-term collaboration. The suppliers are typically "on their toes" to either retain or increase their sales volumes, and also appreciate being invited to the table. Suppliers may also provide you with tips and insights on how to further drive down your procurement costs, e.g. optimize or standardize the product portfolio.