One of the biggest problems that we deal with when we are negotiating an agreement with the other side is that the world in which we are living is constantly changing. What this means is that although we’d like to be able to use our negotiation styles and negotiating techniques to create an agreement that would require the other side to do things for us, we’d also like to have some flexibility to deal with changes that might occur in our world. How to go about achieving both of these goals? It turns out that creating an umbrella agreement might just the ticket for you.
The Power Of An Umbrella
Negotiators always want the best of both worlds. When reaching an agreement, they want to pin down parties’ respective rights and responsibilities, but at the same time they also want to retain the flexibility they need to deal with ever changing business conditions. One way that we can get the best of both worlds is to craft what is called an umbrella agreement. So what is an umbrella agreement? An umbrella agreement simply sets out general principles that will apply to more specific give-and-take contracts in the future. An umbrella agreement might include clauses that stipulate whether the parties will share industry knowledge with one another, how to set prices, and whether they will engage in subcontracting and under what terms.
A framework between a tire manufacture and a retail chain, for example, would typically cover issues such as exclusivity, invoicing, confidentiality, termination, and so on. In contrast, subsequent short-term contracts would involve price negotiation and perhaps promotional allowances for specific products. Umbrella agreements are more common between retailers and manufacturers, but sellers and buyers in a wide range of industries could benefit from negotiating such “mega-agreements.” An umbrella agreement can help parties understand each other’s values and how to adapt to changing conditions. An umbrella agreement allows parties to jointly innovate in response to new opportunities.
Understand The Hidden Pitfalls Of Using An Umbrella Agreement
Negotiators believe that working on two different levels – a long-term agreement combined with a shorter term, more detailed contracts – can benefit all parties by allowing customers and suppliers to create stable relationships even when market changes are largely unpredictable. What we need to realize is that many umbrella agreements come with significant risks because they are poorly drafted. Umbrella agreements can include vague language or rules that are impossible for a negotiator to actually enforce. These agreements can also be inflexible, tying parties down to disadvantageous deal terms or, conversely, falling apart during the implementation stage.
It turns out that these is another risk that comes with using umbrella agreements. These types of agreements can provide opportunities for the stronger party to take advantage of the weaker party. How is this done? The stronger party might request favorable terms in the umbrella agreement that limit the weaker party’s ability to come out ahead when they subsequently try to hammer out dollars-and-cents deals. Suppliers often complain that they are held hostage by the general terms imposed by “big box” stores like The Home Depot. Of course, the power imbalance can swing in the opposite direction under certain circumstances.
Umbrella agreements can give parties room to adapt to changing business conditions. If such contracts are one-sided, however, they can tilt the bargaining table in future negotiations. Negotiators need to realize that ground given up in an umbrella agreement may never be regained. The best umbrella agreements articulate a companies’ values and their expectations for firms’ behavior in a language that is binding and enforceable. They can also be flexible, giving parties room to revisit their goals and responsibilities down the line. Another important step both sides might take would be to include a clause in their umbrella agreement that requires them to engage in certain dispute resolution methods, such as mediation and arbitration, in the unfortunate event of a serious conflict.
What All Of This Means For You
Creating a negotiated agreement that can stand the test of time can be a real challenge to do. Agreements that we reach today, may become undesirable as things change over time. In order to deal with situations like this, negotiators can enter into what are called umbrella agreements with the other side. How to go about doing this and what the limitations are have to be well understood.
An umbrella provides flexibility for changing requirements. An umbrella agreement sets out general principles that will apply to give-and-take contracts in the future. An umbrella agreement can help parties understand each other’s values and how to adapt to changing conditions. Many umbrella agreements come with risks because they are poorly drafted. Additionally, the stronger party to take advantage of the weaker party. The best umbrella agreements can be flexible, giving parties room to revisit their goals and responsibilities down the line.
As negotiators, our goal is to find ways to reach an agreement with the other side during a principled negotiation. We need to understand that a deal that works today, may not be a deal that works tomorrow. In order to create an agreement that can work both today and tomorrow, we can make use of agreements that are called umbrella agreements. If we understand when to use these and what limitations they come with, they can be a powerful tool for us to use. Keep this option in mind the next time that you want to create an agreement that will last over time!
– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World Negotiating Skills™
Question For You: How can you make sure that a stronger party is not taking advantage of a weaker party in an umbrella agreement?
Click here to get automatic updates when The Accidental Negotiator Blog is updated.P.S.: Free subscriptions to The Accidental Negotiator Newsletter are now available. Learn what you need to know to do the job. Subscribe now: Click Here!
What We’ll Be Talking About Next Time
When we enter into a negotiation, often we are not thinking about ethics. Yes, yes – we know that ethics are important, but we are focused on getting the best deal and we’ll worry about ethics later on. However, it turns out that this might not the best approach. If we are willing to spend some time thinking about ethics earlier on in our next negotiation, it might help us to use our negotiation styles and negotiating techniques to reach a better deal with the other side. What we need to know is what we have to be considering in order to create an ethical deal that both sides can live with.