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Renegotiate That Contract

Business owners toss previously-negotiated agreements out the window to bargain for reduced prices.

Todd Jackson, president and CEO of Jackson Design and Remodeling, a home interior remodeling company in San Diego, worked diligently with one of 20 clients for almost one year. He evaluated the client's space, drew up detailed designs, researched building materials, and suggested colors for the design project. But when it was time to sign the construction contract so that work could begin, the customer pulled back.

"I knew I had to make it work--he liked my work but not the price," said Jackson.

Jackson was finally able to woo the person back with a lower price. "We encouraged him that now is the best time to remodel, because costs are lower. With that, he came back." Behind-the-scenes, however, Jackson had to do a flurry of renegotiations with his vendors to get the reduced price. "We brought in all the vendors that [offered estimates for this project] and told them we needed to go back and revisit things. We came in about 11 percent less than we were originally because everyone gave a little bit here and a little bit there."

Jackson isn't alone in this strategy; small business owners looking to cut costs and survive the recession are finding that most contracts are no longer set in stone—and that renegotiating with vendors, landlords, insurance providers, and the like, are saving their companies significant green. On the other hand, these same entrepreneurs are being asked to renegotiate.

According to a study released by the Small Business Research Board in September, renegotiation is becoming a nationwide trend, with 15 percent of more than 1,000 small businesses surveyed reporting that they are renegotiating long-term, fixed-supply contracts.

"Things are tight and companies are facing serious decisions: Do I lay off workers or do I cut operating costs?" says Mike Uretz, executive director of Issaquah, Washington-based EHR Group, an IT consulting firm that helps customers purchase technology and specializes in vendor selection and price and contract negotiation. "The idea is to cut down on operating expenses, especially in the long-term."

Ken Hagerstrom, CEO of Carlsbad, California-based Expense Reduction Analysts, a consulting firm that helps businesses find savings in categories such as insurance and office supplies, agrees. "My observation today is that everything is negotiable," Hagerstrom says. "All companies are being very flexible now."

Of course, renegotiating fixed contracts is never easy and can potentially sour a business relationship…so how do small business owners successfully broach the subject of renegotiation?

In Jackson's case, he looked for ways to engineer deals that were mutually beneficial. "We wanted all parties to be treated fairly, and part of doing that is bringing everybody together as a team," says Jackson. "They're probably experiencing the same kinds of problems you are." He employed this strategy recently with a tile contractor, for example.

"He was probably one of the better-paid tile guys in town, because he always did superior work," Jackson explains. "We got together and we talked about how we needed to get better pricing. We wanted to continue to work together." The contractor agreed to knock $4.50 a foot off his cost. In return, Jackson Design and Remodeling found a way to supply him with better tile materials. "So that was a win-win for both of us," says Jackson.

But before being able to negotiate terms for both parties to save, Hagerstrom says, small business owners need to study a supplier's pricing models. "Companies have to get access to data. If you know what other companies paid for the same goods and services, you'll have a much better chance of lowering costs." The next step, of course, is staying committed to only accepting the lowest prices. "The company has to have the internal discipline to only buy what is offered at the most attractive deal," Hagerstrom says.

William Levine, president of Bronx-based Sarabeth's Kitchen, has become a whiz at negotiating the best prices. "It takes time, but there's always someone out there who will give you a lower price." Levine plans to test his skills on his landlord when he negotiates the terms of his lease. "Landlords these days are hurting, and there's a lot of property out there—depending on where you are. I'll tell him I've been a good tenant; I always paid my rent on time. He can't afford to lose me."

Mike Opdahl, manager of wine importer and distributor Joshua Tree Imports, based in Arcadia, California, also chose to renegotiate some contracts in order to cut costs. "Our HR costs were our No. 1 costs," he explains. "After that it was property leases, fixed costs associated with warehousing, and then insurance. Renegotiating our insurance alone saved us $25,000." Opdahl's best advice is to not be afraid to review every contract. After all, he says, "every penny counts, and going to every single supplier adds up. We cut $45,000 in overhead costs."

Of course, there's the other side to the equation; like Jackson's tile vendor, more and more vendors are being approached by customers pushing for changes to preexisting deals. It can be difficult to decide how flexible to be, but Hagerstrom's best advice remains the same: keep it mutually beneficial. "I'd ask them what sacrifices they are willing to make to help you reduce your costs, so that you can pass the cost reduction back to them," he says.

Shane Nicaud, sales and marketing director for Louisiana-based food service distributor Bell Foods, did just that when customers recently approached him about lowering their costs.

"When the price of fuel rose dramatically, we had to do something to curtail the loss we were sustaining, so we issued a fuel surcharge of $5 per transaction," he explains. "But eventually the fuel price dropped, the economy took a downturn, and quite a few of our customers wanted to remove that fee. We checked their order history, and as long as their order history met our minimum requirements, we removed the fee."

The companies that didn't meet minimum orders were given the opportunity to increase their purchases in order to drop the fuel surcharge. "We used the surcharge as a negotiating tool to offset the loss of profits from the customers we dropped the fee for," explains Nicaud.

Of course, while a mutually-beneficial negotiation is ideal, it's critically important to remember your bottom line. "Even if the company is in trouble and you want to keep that customer, you can't sell below your direct cost," says Portland, Oregon-based business turnaround expert Renee Fellman. "Look very closely at what your costs are, and how much you can really afford to lower prices. Sometimes, all you can do is give it your best shot. That's the reality."

Owner and president of Portland, Maine-based mailing campaign firm Mailings Unlimited, Paul Rogers, agrees. "Some companies can't do it. It's just to the point where they can't cut two pennies- they can't even cut one penny or a half a penny, because there's really no margin there," he explains. In those cases, he says, you have to lose that customer.

"Everyone's in survival mode," he adds.

Bottom line: while it takes communicative skill and business savvy, renegotiation can be a great strategy to cut overhead and strengthen business relationships--whether you're being asked to take another look at a contract or you're asking someone else to take another look. "Hopefully, everyone understands that we're in it for the long-haul and if we have to buckle up for a year or so, then we have to do that."

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