Use Informal Escalation to Resolve Disputes

Author: Steven Zolman

Many of NET(net)’s clients are finding that the deals they once negotiated are no longer sustainable and, as a result, they are spending more time renegotiating legacy deals than they are negotiating new deals.  There are many perils of trying to renegotiate a deal.  If there are disproportionate benefits to the supplier, their general view is to try to hold on to those benefits.  Any attempts to try to remedy these inequities usually result in bitter disputes.  Even though most agreements contain language governing disputes, including facilitative mediation, arbitration, and litigation, most disputes are settled with informal escalation that results in clients and suppliers coming together to resolve differences.

Below are four best practices on how to use informal escalation to resolve potentially bitter disputes with your suppliers, while ensuring a smooth renegotiation process.

1. Keep Emotions in Check.  Demands for renegotiation will often inspire hostile responses from your suppliers.  It is important to stay above the fray, avoiding feelings of hostility when dealing with your suppliers.  In many cases, suppliers respond to demands for renegotiations with fiery objections.  To eliminate antagonistic behavior, stay focused on your vital concerns, and the need to protect your interests to ensure the sustainability of the relationship.  Your challenge will be to show your supplier that it is also in their best interest to deal with your vital concerns to resolve the conflict.  If the dispute escalates to formalities, the parties rarely can salvage the relationship.

2. Carefully Consider No Deal Options.  Most suppliers do not fully or accurately evaluate the true cost of failure.  In many cases, the alternative to a successful renegotiation is litigation.  As you approach the renegotiation process, you and your supplier must carefully assess the risks of later facing each other as defendant and plaintiff.  Doing so will allow you to accurately evaluate the worth of various proposals.  Notably, clients are likely to undervalue the risks and costs of litigation, while suppliers generally overvalue a lawsuit’s benefits, not fully considering the possibility of loss, the costs of litigation, the time value of money, and the difficulty in collecting on any judgment.  Therefore, it is important to have realistic expectations of alternatives to a successful renegotiation, and your ability to help a supplier understand that completely can improve your performance.

3. Focus on Future Value.  As difficult as it may seem at the time of the dispute, you must get your supplier thinking objectively about the future value of the relationship.  Willingness to renegotiate an agreement typically corresponds to the value your suppliers attach to a potential future relationship.  If the long-term value of the relationship is worth more than the costs of your demands, suppliers will generally be willing to engage in a renegotiation process.  If, on the other hand, your supplier concludes that the claim is worth more than the benefits from a continuation of the relationship, suppliers may insist that the letter of the agreement is honored, even to the point of resorting to litigation.

4. Offer More Value Now.  One way to encourage your suppliers to renegotiate is to offer more future value as a condition of the renegotiation process.  When you demand renegotiation, you may expect that your supplier will believe that any advantage you gain will guarantee a loss for them.  An unwilling participant in a renegotiation is likely to be intransigent—to quibble over the smallest issues, to voice recriminations, and generally to block proposed changes.  Naturally, such talks are unlikely to lead to joint gains.  The challenge for clients is to create an atmosphere in which problem solving can take place.  Even if your supplier feels forced into a corner to begin with, if you approach renegotiation as an opportunity to raise new issues that will benefit both sides, you are much more likely to improve the performance of your renegotiation.  To the extent you can offer more value to the supplier now, you are much more likely to get their active participation in a renegotiation process that resolves the past and focuses on the future.

Client and supplier renegotiations are often friction filled and unproductive.  In many cases, they result in long-term damage to the relationship and fail to achieve the benefits they originally intended to deliver.  By following these four best practices, clients are generally able to significantly improve renegotiation performance, and are more likely to resolve any current issues with their suppliers, while keeping the discussions productive, and focused on the future value of the relationship.

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