What Is Contract Negotiation?

Contract negotiation hasn’t changed since the advent of email, but new technologies are making contract negotiation faster, smarter and less risky. In this article, we’ll break down what contract negotiation is, why traditional approaches to contract negotiating pose business liabilities, and how new technologies help legal teams negotiate complex agreements at scale.

Contract negotiation is the process of coming to an agreement on a set of legally binding terms (here, we’ll focus on negotiation between two companies). When two companies negotiate, both parties seek to obtain favorable terms and minimize financial, legal and operational risk.

When negotiating contracts with vendors, for example, your company may push for the ability to pay month-to-month rather than annually (or vice versa). In payments, as in many other issues, there is not necessarily a “correct” option so much as an option that makes the most sense for your company. The reason we negotiate contracts in business is to ensure that our agreements set our companies up for long-term success.

Contract negotiation is a very important aspect of contract management. Delays in contract generation or execution can slow a business down, for example, but they are unlikely to have a material impact on that business’s bottom line. A poorly conducted negotiation, on the other hand, can saddle a company with arduous legal obligations for years.

In routine negotiations — a negotiation over a software license, for example — discussions focus on things like governing law, the handling of customer data, information security, and price. Company A might say to Company B, “We’re willing to buy at this price if you include our company’s standard obligations around system uptime, but you’ll have to lower the price if you want to use your company’s language.”

That back-and-forth can happen in real time (in a phone call or an in-person meeting) or over email, but email tends to be more common, and the dynamics in either case are the same. Both sides offer concessions and in the process insert, remove or modify contract clauses — the building blocks of contracts — until the two sides can come to an agreement.

While there are certainly best practices on how to negotiate a contract, the sheer amount of coordination required during contract negotiation makes the process a logistical challenge for all teams. Imagine having to reconcile contract feedback from a number of internal stakeholders (think Finance or Operations) and counterparties across multiple email threads. On top of that, imagine doing this for many different contracts at once.

The keys to contract negotiation are knowledge management and process management: if you don’t know the history and status of each of your contract negotiations, you can’t be sure you’re achieving the best outcome for your business.

Legal teams that lack a central system for contract tracking and negotiation often spend the majority of their time piecing together contract edits from different business teams and tracking down the most recent versions of contracts. For companies that operate on quarterly sales cycles, the situation is even worse — we’ve heard some General Counsel say that the final weeks of any quarter account for 50% of contract volume.

The business importance, operational complexity and uneven volume of contracts make contract negotiation a thorny challenge for legal teams and contract technologies.

Contract negotiation has seen almost no innovation in decades. The last big change in contract negotiation was the widespread adoption of email in the 1990s.

It isn’t just inertia that’s to blame. Apart from being reliable and widely adopted, email and Microsoft Word are in some ways uniquely suited for contract negotiation. Using email and Microsoft Word lets legal teams limit communications to specific parties, preserve a timestamp of every communication, and share documents in a quasi-universal format. Those are the foundational requirements for any negotiation tools.

Think about the alternatives. You wouldn’t want to negotiate a contract over Google Docs, for example, where your counterparty can see your every keystroke. Nor would you want to give your counterparty access to your company’s shared cloud storage (e.g., Dropbox), as that could pose a security risk.

The only way to improve contract negotiation is to adopt tools specifically designed for both contract negotiation with counterparties and contract collaboration with internal stakeholders. Only recently has technology caught up to the problem of contract negotiation.

The three technological barriers to improving contract negotiation have been centralization, ease of use, and enterprise-grade security. In the past, legal teams were forced to choose between convenience and security. But with the arrival of new technology, legal teams no longer have to make serious trade-offs when implementing contract negotiation tools.

Centralization. Legal teams historically had contracts scattered all over the place — in filing cabinets, on local hard drives and elsewhere. This decentralization exposed companies to significant risks. That’s why, in the early days, contract management focused on getting all contracts in one place. With the arrival of contract lifecycle management solutions, centralization is no longer a significant technological barrier.

Adaptability and ease of use. Once, software was built for either non-technical consumers or specialists. Internet browsers fit in the first category; they require little training but aren’t highly configurable. In the second category are industry-specific tools like video-editing software — these tools are powerful and highly customizable, but it is difficult to use them without training.

New legal technologies combine the best features of both approaches. They allow for a high degree of configurability and control (essential for legal teams) while also requiring minimal user training. For example, new contract negotiation tools allow users to quickly comment on online documents and loop in multiple colleagues via online or email notifications, rather than having to send out individual emails with attachments.

Security and universal compatibility. Contract negotiations are most efficient when both parties are able to use the tools they’re familiar with. In the past, tools either took a “walled garden” approach (in which both parties had to share the same online portal) or left both parties in email and Microsoft Word. Today’s tools provide flexibility, giving both parties in a negotiation several different options for editing, redlining and commenting on contracts securely.

So how can you choose a contract management solution that supports negotiation, the most consequential part of the contracting process? Here are the three things to look for:

The ability to track contract negotiations across your business. Look for a tool that allows you to track all contract negotiation statuses, as well as the owners of each contract negotiation task. Your tool should be able to tell you where each contract stands and whether it’s blocking on your team or on a counterparty.

An intuitive, consumer-grade user interface. Look for a tool that has a modern, browser-based user interface. Prioritizing ease of use will make it more likely that your legal team adopts your contracting platform and help you narrow your vendor options significantly, as many negotiation tools are so difficult to use that end-users resort to emailing their legal team rather than operating within the software.

Seamless integration within a contract lifecycle management platform. Look for a contract negotiation tool that is part of a broader contract management suite, preferably one designed to handle document generation, approval routing, eSignature, document storage and reporting. Your goal should be to consolidate as many contract-related tasks as possible in a single system. That ensures data accuracy, reduces costs and minimizes your legal team’s change management burden.

Explore how Ironclad Editor enables contract negotiation and collaboration for companies like Fitbit, Mastercard and L’Oréal. Then download our Evaluating Contract Management guide, which shows how in-house legal teams can leverage digital contracting technology to standardize and streamline processes for shepherding contracts through approvals and systems.

P.S. Check out our new guide to learn how to spend less time negotiating contracts, without exposing your business to unnecessary risk. Get your copy here.