Adapted from “When Umbrella Agreements Spring Leaks,” first published in the Negotiation newsletter.
This past November, in an unusual move, Costco, the largest wholesale club in the United States, removed Coca-Cola products from its shelves and posted messages telling shoppers that Coke products would not be available until the company lowered its prices. Coke products returned to Costco shelves within a few weeks, but the dispute shed light on the dog-eat-dog nature of price negotiations between manufacturers and retailers.
Negotiators tend to want the best of both worlds. When reaching agreement, they want to nail down parties’ respective rights and responsibilities, but they also want to retain the flexibility to deal with ever-changing business conditions.
One solution to this apparent dilemma is to craft umbrella, or framework agreements. (The term umbrella is more commonly used in the business world, while framework is more widely used in legal and diplomatic circles.) Such agreements set out general principles that will apply to more specific give-and-take contracts in the future. An umbrella agreement between a soft-drink company such as Coca-Cola and a retailer such as Costco, for example, would typically cover issues such as exclusivity, invoicing, confidentiality, and termination. Subsequent short-term contracts would set prices and promotional allowances for specific products.
In theory, working on these two different levels benefits everyone, as it allows customers and suppliers to create stable relationships even when market changes are largely unpredictable. However, marketing lecturer Stefanos Mouzas at the University of Bath’s School of Management, in England, cautions that the stronger party may be able to increase his advantage by insisting on favorable terms in the umbrella agreement that limit the other side’s ability to win when the parties subsequently try to hammer out dollars-and-cents deals. For example, suppliers often complain that they are held hostage by the general terms imposed by “big box” stores like Wal-Mart. Then again, some retailers grumble about manufacturers whose attitude seems to be “My way or the highway.”
Mouzas concludes that the virtue of umbrella agreements is that they give parties room to adapt to changing business conditions. When such contracts are one-sided, however, they can tilt the bargaining table in future negotiations and even lead to public disputes.
Discover step-by-step techniques for avoiding common business negotiation pitfalls when you download a copy of the FREE special report, Business Negotiation Strategies: How to Negotiate Better Business Deals, from the Program on Negotiation at Harvard Law School.
Related Article: When Umbrella Agreements Spring Leaks in Dispute Resolution