9 Strategies for Negotiating Customer Requirements and Expectations

November 14, 2018 Customers, Project Management, Technology

How to Negotiate and Manage Customer Requirements

Seven years ago, my company was on the losing end of a $4 Million settlement. I could write a lengthy explanation as to how things got there, but it came down to one very simple thing: we gave our customer what we thought they wanted, not what they said they wanted. It was only after 18 months of delays and handing over a $4 Million check that we realized how badly we had negotiated our customer’s requirements before work began. We went into the project confident we could design, build and deliver the equipment for this customer, just as we had for countless ones before them. But as it turned out, we fell short of the customer’s expectations simply because we did not focus enough attention on the details. In the end, we paid a lot for it – in time, in money and our company’s reputation. Our lesson learned was simple: negotiate customer requirements line by line before finalizing a contract. Now, we have a much different approach managing customer expectations, as we will discuss.

Managing Customer Requirements

Typically, before a deal is signed, you sit down with your customer and haggle through the terms of the contract. Our big mistake, though, was that while we did negotiate the big stuff like schedules, payments and prices, we skimmed the other documents and said “we can work with this.” Truthfully, we were more interested in signing the deal before our competitor did, and did not spend nearly enough time negotiating the detailed technical requirements. We failed to ensure we could adequately meet every aspect of the customer’s needs.

Negotiating with customers is never easy and it takes time for both parties to agree to mutual terms. But as my firm learned the hard way, the time you take to work through the details up-front ensures both parties have a clear understanding of what to expect at the end of the project. As you review every line of your customer’s documents, highlight any issues, questions or concerns you see and discuss them with your customer. Be transparent. Negotiating requirements may very well be the most important investment you make in pursuit of the business.

Following that embarrassing and painful experience, our firm has since taken a number of steps to improve how we handle our customer’s requirements and expectations. This new process starts by negotiating technical requirements and deliverables and asking ourselves the following 9 questions, line by line.

1. Do I Understand the Meaning of this Requirement?

It may sound silly to ask this question, but it is actually a very important one to consider. Often times, the words may make sense and the writing is clear, but the real meaning is poorly understood. Carefully analyze the customer’s specification and technical requirements. Need an example? Here is one from my customer’s initial requirements document:

“All training materials and training aids shall be ready prior to conducting the training.”

Is there a specific list of training materials? How soon before training? What does “ready” mean? Specifics are important. Asking yourself this first question as you review customer requirements can eliminate simple misunderstandings and points of uncertainty. Make it a point to clarify ambiguous and open-ended statements like this one.

2. Does the Requirement’s Intent Align with How It Is Written?

The next question examines the requirement’s intent. Often times, people will say “I know what the customer means.” However, keep in mind that customers often write specifications and requirements that make sense in their world, but may not make sense in yours. Here is another example:

“If a design or production defect is found and attributable to the Vendor, the Vendor must buy back the defective product.”

The intent here is really that the Vendor is responsible for resolving the issue at their cost. But a better way of stating this would be that the Vendor should simply replace defective product at no charge, not necessarily buy it back. It is essential that you define requirements that give you a clear target to achieve, as well as an element of control in how you do it.

3. Is There A Better Way to Define This Requirement?

Sometimes, a customer’s requirement may be achievable, but there is a better way to define the same result. For example, imagine your customer asks you to construct a swimming pool that holds 10,000 gallons of water. You could make a large pool that’s really shallow, or a narrow one that’s really deep and still meet their requirement. But, it might better to have the customer provide the actual dimensions they want so there is no miscommunication or uncertainty in expectations. Again, redefine requirements in a way that makes it easier to confirm you’ve met your obligations when the job is finished.

Negotiating for Better Definition:
Aim for specific measurements.
Define requirements in what you can control.
Focus on the tangible result of your work, not what the customer will do with it.

4. Can I Successfully Meet The Expectation?

The requirement is clear, you know how to do the work and you can produce a result. But will your result meet their expectations? Clearly defining the intended result is only half of your battle. Whether you are negotiating a performance requirement, the schedule, or simply the software that you will use to do the work, you must also do your due diligence and verify that you can produce the result the customer wants. It may sounds obvious from the outside looking in, but if a large company like mine can make the mistake, others can as well: do not sign up for something you cannot achieve. Always apply a realistic context to your negotiations.

Tips For Negotiating Away Requirements You Cannot Meet:
Ask the Customer why the requirement it defined in that way.
Explain why it is a concern to you, or what the risk is if unchanged.
Give an example of how this may be an issue.
Provide alternative wording that is more suitable to the situation.

5. What Evidence Can I Offer That Proves I’ve Met Expectations?

It is not uncommon for a customer to ask you to demonstrate you have met all of their requirements at the end of a project. Even if not specifically required, it is still good practice to plan for it and to provide it. Before signing a contract, spend time identifying ways you can show you have met every stated deliverable and requirement in the customer’s document. Proof can be as simple as providing a signed document confirming a shipment, or a more elaborate set of data and reports, to name some examples.

Identifying Acceptable Proof of Work Completion:
Add wording into the customer’s requirement to formally define deliverables so it is clear.
Ask the customer how they will verify a requirement has been met.
Tell the customer how you intend to comply and sign an agreement.

6. What is the Risk?

Sometimes, you need to negotiate customer expectations in order to manage risk. Sure, the customer can ask you to develop the software in three months, but you know you need at least one month to test it after two months of development time. If all goes well and there are no problems you should be ok. But if there are, then what? Look at each customer requirement from the standpoint of risk. While there is uncertainty in every project you undertake, contract negotiations are the best time for you to draw clear boundaries around your scope and to mitigate risk.

Negotiating Away Risk:
Carefully evaluate areas of risk and look at all mitigation scenarios.
Review prior projects and identify how you have handled similar customer requirements in the past.
Offer something else to the customer in exchange for reducing a requirement where you see risk.

7. Is This a Cost-Effective Requirement?

Just because something is possible, does not mean it is cost-effective. When you are negotiating details and technical requirements with your customer, always flag concerns about cost-effectiveness. Educate them on cost drivers so they understand the direct correlation between their requirement and your price. Once the contract is signed, you may be stuck with a financial problem you cannot escape.

How to Handle Expensive Customer Requirements:
Be transparent with your concern and make it clear how it will affect them.
Offer a lower cost requirement, option or solution.
Identify other areas where cost can be reduced if this requirement cannot change.

8. What Is My Fallback?

In Getting to Yes by Fisher, Ury and Patton, there is a negotiating term known as BATNA – the Best Alternative To No Agreement. In essence, the concept of BATNA says that in a negotiation, you must identify your default action or position if the situation does not change. If you are unable to convince the customer to relax their requirements, what action will you take? What is your backup plan?

Examining Your Fallback Position:
Do you have a solution that will work as-is, even if not ideal?
Do you have experience in the fallback position or with the fallback solution?
If the customer does nothing to change the situation, what will you do?

9. I Think This Is Doable, But I’m Not Certain of the Exact End Result. What Should I Do?

One of the best parts about developing something new is the curiosity and excitement of how it will turn out. One of the worst parts about developing or creating something new is fearing and worrying how it will turn out. Sometimes, you may be confident you can reach a solution, but at the time of the contract signing you may not have a clear understanding of what it will be. In these situations, deliberately negotiate wiggle room into those specific areas of the customer’s specification.

If You Are Comfortable, But Not Certain in Exact Result:
Add wording that allows for flexibility (e.g. “as needed,” “if required,” “as mutually agreed”)
Explain to the client possible issues that may occur to help justify your position and seek alternative language.
Discuss ideas for solutions to identify if the customer has something in mind that will meet their needs, and re-write requirement accordingly.

Managing and Negotiating Customer Requirements: The Takeaway

We often think of contract negotiations in terms of pricing, schedules as well as other key items that trigger a contract award, taking the details for granted. However, every line item in a statement of work or design specification must be eventually be satisfied and it is vital that you think strategically about each item during the negotiation period. Thus, never overlook the details as they may come back to haunt you, just like they did to my company …. to the small price of $4 Million!