In the procurement world, renegotiating or breaking an agreement can have significant consequences, including lost credibility and strained supplier relationships. However, there are times when staying in a bad deal can be equally damaging.

The big news in the negotiation world this week is that US President Donald Trump has withdrawn the US from the Joint Comprehensive Plan of Action.  The JCPOA, often referred to as the “Iran nuclear deal,” was a multi-nation agreement with Iran designed to prevent Iran from developing nuclear weapons.  Though the withdrawal decision might be a final decision, President Trump left the door open to negotiating a new deal, predicting that Iran’s leaders will be compelled to pursue making one, and going on to say “When they do, I am ready, willing, and able [to work out a new deal].”

One of the criticisms of President Trump’s decision is that the US’ credibility will be harmed.  It’s never my intent to be political and I am not sharing an opinion on whether or not the decision is a good one or a bad one.  But, in procurement, renegotiating or breaking an agreement and dealing with the consequence of lost credibility is a legitimate concern.  So, we’ll take the opportunity to discuss that.

In covering President Trump’s decision, USA Today’s editorial board opines that “America’s credibility on the world stage suffered a severe blow” and that it signals that “the United States’ word lasts only as long as its next presidential election.”  Further, the editorial board draws a comparison to a buy/sell contract, writing, “It’s as though you bought a car, decided after the fact that you didn’t like the color or the gas mileage, tore up the sales agreement, and walked away from the remaining payments. Would anyone trust selling you another vehicle?”

It’s actually a legitimate procurement question.

Look, there are undeniable consequences to pulling out of an agreement.  In a procurement agreement, the supplier will not trust you and may refuse to ever do business with you.  Other suppliers may feel the same way if you develop a reputation.  If your organization renegotiates with suppliers every time a new CPO is appointed and new CPO’s are appointed every two to three years, your organization won’t be trusted.

A lack of trust can keep suppliers from offering your organization their best terms.  They may feel like they have to withhold some value to ensure their own profitability in the event the agreement falls apart.

That being said, an organization should not stay in a bad deal.  An organization should weigh the consequences of continuing the agreement versus the cost of lost credibility.  If the consequences of continuing are worse than the cost of lost credibility, then it may be worth the risk to get out of a bad agreement.

Of course, in procurement transactions, there could be legal and financial consequences as well, not just lost credibility.  So, those have to be factored in.

The bottom line is that it is very risky to pull out of an agreement.  Sometimes, it’s actually worth the risk.  Sometimes, it’s not.  Be sure to look at all of the costs, consequences, and benefits and decide appropriately before withdrawing from any agreement.

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Categories: Procurement


Published On: May 9th, 2018Comments Off on Renegotiation and Credibility
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