Mike Harvey, a Director at Candour Collaborations, has written a series of blogs focussing on how organisations, as potential Tier2/3 sub-contractors, should negotiate with Tier 1s when agreeing contracts. The blogs, every Monday in October, will cover the different stages of a negotiation, things you should consider, and key points to keep in mind throughout the negotiation process. This week's blog is focussed on preparation....

Negotiating a deal is dependent on finding an overlap between what both parties want, so if there is no overlap then there is no deal!

As I mentioned in my last blog, there are four phases of negotiation: Preparation, Discussion, Proposal, and Bargain & Close. Preparation is the most critical, not least because if you get that wrong you might not make it to the other stages, or worse, you’ll waste a lot of time and energy on something that’s never going to work out.

Benjamin Franklin – a master negotiator – famously said, “By failing to prepare, you are preparing to fail.” Sadly, all too often it’s in exactly this area that people fall down. The starting point of any negotiating strategy is to recognise that it’s a sales process. You, the seller, are trying to get the buyer, either a commissioner or Tier 1, to buy your product or service.

So before you try and sell anything, you need to consider a few things. What do you want from the deal, and what do they want from it? This is often where the first gaps start to appear. In this world of Payment by Results (PbR) the contracts most Tier 2/3 supply chain organisations are looking for are low risk, high value contracts with guaranteed volumes, and limited performance expectations, ideally with little or no PbR element. Tier 1s on the other hand, are generally looking to pass as much of the risk down as possible, pass on any PbR element, and get provision at the lowest possible cost – ideally for free!

Assuming you recognise that neither of you are likely to achieve your dream scenario, the next question is why should they work with you? By now everyone should accept that “because we deliver a great service” isn’t an acceptable answer. Commissioners and Tier 1s want to see robust evidence of performance, a clear understanding of the service requirements in the contract (not necessarily the service users, though of course this is also important), and evidence that you will add value to their supply chain.

You need to consider what your priorities are, and what is valuable to you. You also need to consider their priorities, and what is valuable to them. Remember, as I said in my last blog, you may have very different motivations and reasons for delivering the service. Tier 1s want to successfully deliver the contract and their definition of success may differ from yours so don’t assume that what matters to you means anything to them.

The Work Programme is a great example of that. Numerous voluntary sector organisations put themselves forward as Tier 2/3s providing great support to improve the employability of the hardest to help customers – working with those customers who might otherwise receive little, or inappropriate, support. For those organisations, helping customers make some progress towards becoming employable is success in its own right, but the Work Programme doesn’t pay Tier 1s for improving employability. It only pays for people who sustain employment. Consequently the Tier 1s had little interest in purchasing services which improved the employability of these customers. The fact is the commissioning process and contract will drive the behaviour of the Tier 1s, and subsequently impact on the Tier 2/3 supply chains and the services delivered.

Which leads me onto my next point: how much flexibility does either party have? It’s very rare that neither party has any room for manoeuvre, but you need to recognise where you can be flexible and where you can’t. For instance in Transforming Rehabilitation, the Industry Standard Partnering Agreement (ISPA) – Clinks have written an excellent briefing on the ISPA here - sets a lot of minimum expectations for Tier 1s in the way in which they engage, manage and support their Tier 2/3 organisations. But it also sets a few requirements which the Tier 2/3s need to comply with, and elements of the contract, e.g. security standards, which will apply to the Tier 1s and their entire Tier 2/3 supply chain as well.

Understanding the level of flexibility each side potentially has will help enable you to establish your priorities, which areas you might be able to compromise on, and where your exit points are. A simple way to do this is to write down your priorities in a list, e.g. payment terms; volumes; monitoring; and unit rates. Then split them into categories:

• Essential – high importance – failure to secure means exit.
• Highly desirable – medium importance – nice to have but not critical.
• Desirable – low importance – failure won’t put the deal at risk.

The essential priorities are the deal breakers, where failure to get them means you walk away. All too often organisations either don’t identify these, or do and then ignore or compromise on at least one in order to secure a contract. Compromising isn’t a bad thing, but it should be a two way exchange. If you are giving ground on something, you should be getting something back in return.

Critically, think about the Tier 1’s own priorities, and consider if any of their deal breakers are in conflict with your own. At this stage you will be making a series of assumptions on the Tier 1’s behalf, some of which may be accurate, and some which will almost certainly be wrong, so use the discussion phase (in the next blog) to validate these and consider whether or not a deal can be agreed.