Negotiating Long-Term Contracts Requires Strategic and Tactical Thinking

Don’t be fooled by Lear CIO and Vice President of IT John Crary’s simple "Why don’t I just ask them to let me out of the contract?" approach. Crary has a terrific, well-deserved reputation for direct problem-solving based on his belief that meticulous fact finding, along with solid analysis, will trump gamesmanship every time.

There are two important lessons we can learn from Crary’s case. One is strategic; the other tactical.

The first lesson is that strategies need to be flexible and linked to outcomes. Crary doesn’t have an outsourcing strategy; he has a sourcing strategy. He believes in sourcing based on gap analysis and resource analysis. In gap analysis, Crary looks at what he has versus what he needs and adjusts accordingly. In this case, the gap was not a deficiency but an excess of capability: HP’s expensive, high-level security. Crary then looked at his resources and concluded that he had the capability to bring the services HP was providing in-house.

Forget core-versus-context discussions. The auto industry typically outsources core functions to trusted suppliers. As a whole, the industry uses a gaps-and-resources strategy. It is therefore not surprising that Crary applied those same principles to IT.

On the tactical side, Crary employed two negotiating concepts: personal impact and shadow-of-the-future. Personal impact concerns the effect the deal has on the people conducting the negotiation. Shadow-of-the-future simply means first understanding the impact?either short or long term?that the transaction on the table will have on future business dealings.

If Crary were offering business to HP, then dealing with a salesman?someone whose personal impact is high (meaning he profits personally from the transaction) and whose shadow-of-the-future is short (meaning that right now this deal is more important to him than any deal down the road)?makes good sense. The salesman will be highly motivated to close the deal, and therefore Crary can easily maximize the value he derives from it.

Taking business away is trickier. For that reason, Crary wanted to negotiate with someone whose personal impact is low (that is, abrogating the contract won’t affect his compensation or career) and whose shadow-of-the-future is long (meaning he’s invested in the ongoing relationship between the two companies). A manager with a portfolio of customers can be expected to be less concerned with a single, smaller transaction. Add to that a longer shadow-of-the-future (the business a $14 billion company such as Lear can be expected to generate) and you have a pretty good opportunity to get the outcome you want.

Tactically, Crary needed to find someone at HP whose interests would be aligned with his own. He did his homework to find the right person, laid out his proposition and got his deal.

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Copyright © 2004 IDG Communications, Inc.

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