When Good Deals Go Bad
How to renegotiate a contract. ………………………..
Every company gets stuck in contracts that aren't good for business--the long-term purchasing agreement made before market prices dropped, the lease for too much office space, the sale with an impossible delivery date. Robb Corwin found himself locked into about 600 profit-sucking contracts in 2003, when fuel costs rose dramatically. Corwin's Tempe, Arizona-based company, Gorilla Fuel & Lube, which he founded in 2000, sold diesel and gasoline to businesses through flat-rate contracts. Suddenly, he found himself selling the stuff for far less than he was paying for it. "We were losing money on every single drop," Corwin says.
These were only one-year contracts, but they still could have killed Gorilla Fuel, which was pulling in $1 million in revenue a year. So Corwin started scheduling meetings. For four weeks, he spent 16 hours a day baring his soul to his clients. He told them the contracts were killing his business and often detailed his costs for everyone to see. Then he offered a solution: new contracts with fluctuating rates set to a nationally published fuel cost, plus a margin for Corwin's business. It was no small-time commitment for Corwin, who owns 13 different businesses through Gorilla Companies, which he founded in 1987. Nor did he expect to be warmly received. "I went in knowing that they didn't have to accept what I was offering," Corwin says. "It's like showing your cards. You're not going to win every time."
Renegotiating a contract before its legal end is usually unpleasant and fraught with hurdles. Entrepreneurs risk their reputations when they try to back out of contracts and generally have little leverage to negotiate a change. Sometimes they break contracts (or threaten to), hoping the other party will simply give in to avoid the expense of a lawsuit, says Steven Haas, an attorney with Cozen O'Connor in West Conshohocken, Pennsylvania, who has handled hundreds of contract renegotiations. Or they have their attorneys scour the contract for loopholes, trying to find a way out or a requirement that the other party hasn't met. "Good lawyers can read sentences in a lot of different ways," says Haas--meaning they get paid to come up with interpretations favorable to their clients. But while your lawyer is looking for loopholes, he's also racking up huge fees. And threatening to sue isn't exactly a textbook way to boost business.
Negotiation experts suggest a different approach: treating your business partner like a partner, not an adversary. Look for something to offer the other party, says Marc Freeman, president of consulting firm Marc Freeman & Associates and author of Renegotiate With Integrity: It's Not Business, It's Personal. That's how Freeman cut $3 million off a contract for one of his clients, MyPoints, a company that offers rewards to online shoppers.
MyPoints had locked in rates with its digital storage provider, but the market price had dropped. It was shortly after the dot-com crash, and the storage company had lost many of its clients, so it was desperate to retain MyPoints. But Freeman recognized that a company in distress would appreciate an immediate infusion of cash. MyPoints had already paid about $1 million since the agreement was signed; based on Freeman's advice, it offered another $1 million lump sum payment. The storage provider agreed, releasing MyPoints from its obligations. "The other side would say they sold too cheap and we would say we paid too much," says former MyPoints chief financial officer John Steuart. "But the deal allowed us to move on without litigation, and that's what matters."
With fuel prices soaring, Corwin had little to offer his clients except higher prices. But he did find one thing to sweeten the bitter deal: He told them they could choose the length of their contracts. He also pointed out that in a volatile market, companies might sometimes pay less under the new, floating rate system than with their current fixed prices. And he reminded them of the services his company had provided so far, such as on-time and short-notice deliveries, which they might not get from his competitors. As a last resort, when he thought the client was lost, he asked, "What would you do in my position?" Then he and the client would talk through his options and go over the numbers.
There's a danger to this approach: If negotiations break down, you've given your customer a lot of information he or she could use against you in a legal dispute. "I always tell my clients to think how it's going to play back to you in front of a judge or jury," says Garry W. Johnson, a contract attorney and partner with the Fort Lauderdale, Florida, law firm Tripp Scott. But for Corwin, the potential reward--saving his company--outweighed the legal risks. "You just try to give them all the information so they can make a logical decision," Corwin says. "If they don't understand it, you probably didn't want to have a longer relationship anyway."
At the end of his monthlong pilgrimage, he had profitable floating rate contracts with most of his clients. About a dozen refused to renegotiate; Corwin honored the contracts with most of those clients, but a few found other vendors. None sued. Corwin returned to profitability within six months, and by the end of 2006, fuel sales hit $3.5 million. "It doesn't always work," Corwin says of his bare-all approach. "But you can go to bed knowing you made the right decision."