Leverage in Contract Negotiations

Many of us are familiar with the concept of leverage in negotiations. Leverage is not just a tool; it’s a mindset. It’s the perceived power of either side that influences the negotiation. Most of us think of it as one party having a strategic advantage, edge, or power over another.  And it is relative — strong or weak.  It is rarely neutral. And it can be as simple as the knowledge that one party has that the other doesn’t have.

When someone holding a gun wants to rob you of your wallet, purse, and smartphone, the robber has leverage.  Blackmail can be leverage, even if it’s illegal and immoral.

For example, suppose the company has incurred an EPA or FinCen fine that must be immediately remediated; who do you think has leverage? What if the company incurred a supply disruption, such as a shipment being held up in a port? Or if there was a natural disaster and the buyer needed immediate assistance rebuilding a warehouse.   Or if the seller had a monopoly on the part the buyer needs. I think it is obvious the seller would have leverage in each instance.

In sales, the buyer typically holds the leverage by default, as the seller is usually more eager to close the deal. The more the seller wants or needs the contract, the less leverage they have.

When assessing your leverage as a seller or buyer, it’s crucial to understand the other party’s desired outcome from the negotiation. The buyer’s ‘Why’ is key-they’re not buying because of the seller’s terrific job in the sales cycle. The seller may have more leverage depending on the buyer’s ‘Why ‘.

The more you want or need the contract, the less leverage you have as a salesperson. The less you want or need it, the more leverage you have.  Walking away from a deal sometimes increases leverage.  When a seller disengages from a deal, it shows the buyer that the seller is unwilling to agree to unreasonable terms, prices, or contract language.

Understand that overusing or unreasonable use of leverage to gain an advantage can cause the buyer to decide to cease negotiations. Do not gloat or brag when you have leverage, and try not to “box the buyer into a corner,” as this will cause resentment and can destroy the trust you built during the sales cycle.

When I joined Nielsen Marketing Research, we had difficulty getting some licensed software to work. It was essential to have the software functional to fulfill a reporting promise to a Fortune 100 food and beverage customer. When I reviewed the contract that the recently acquired company had signed with the software company, it explicitly said that the software was never warranteed to work and that there would be no refunds for the thousands of dollars already spent.

  • WHO HAS LEVERAGE: Nielsen or the software company?

When I met with the software company’s executive VP, I handed him a letter signed by Robert Weissman, then CEO of Dun & Bradstreet, that said if the software company did not make it functional or issue a refund to us, NO Dun & Bradstreet company in the world would ever buy from them.

  • NOW WHO HAS LEVERAGE: Nielsen or the software company?

When I produced the letter, the software company’s executive exited the room and returned with his manager.  They became very conciliatory and were willing to work out a mutually agreeable solution.

This is an example of turning a negotiation where we initially were at a significant disadvantage and the other party had leverage into one where we had the leverage because the software company believed my threat and did not want to lose all of their business with the Dun & Bradstreet companies, which at that time included companies such as Moodys, Dun & Bradstreet Credit, R.H. Donnelly, Official Airline Guides, Funk & Wagnalls, McCormack & Dodge, as well as Nielsen.

If you have been selling based on value throughout the sales cycle, which I highly recommend, and demonstrated a superior return on investment, that will give you leverage because you have already proved to the buyer that their company will be better off by purchasing your product or service.

The lesson is that leverage is an essential consideration in a negotiation. However, just because the other party has leverage does not mean the outcome will always be unfavorable to you. Or vice versa.  You could enter the negotiation thinking you have leverage, and the circumstances can change. You can adjust your strategy to offset the other party’s leverage or bring another consideration into the negotiation.