How Can SMEs Negotiate Contracts with Larger Companies?

Before starting Pixel Legal, I worked in large global organisations including AWS, Google and Accenture, where part of my role involved reviewing and negotiating commercial agreements with suppliers, technology providers and other businesses, including many SMEs.

One thing I saw regularly was smaller businesses asking for changes to our standard agreements. Some requests were accepted, some were negotiated and others were rejected, but the fact that the organisation had issued its own standard contract did not mean that every provision was automatically non-negotiable.

That experience is important because SMEs often approach negotiations with much larger companies assuming that they have very little bargaining power. You may receive a lengthy contract from the other party’s legal or procurement team, be told that the terms are “standard”, and feel as though your choices are either to sign the agreement or walk away from the opportunity altogether.

In practice, the position is usually more nuanced. Larger companies often do have more negotiating power, particularly where they have multiple suppliers to choose from, but that does not mean every clause is non-negotiable or that an SME should simply accept risks that are disproportionate to the value of the contract.

The key is to negotiate strategically rather than trying to negotiate everything.

Start by understanding where you actually have leverage

Negotiating power does not come only from the size of your business.

An SME may have considerable leverage where it has specialist expertise, proprietary technology, access to a particular market, an established relationship with the customer, a strong implementation team or a product that would be difficult or expensive for the larger company to replace.

Before entering negotiations, it is worth asking what the larger organisation actually needs from you, how easily they could obtain it elsewhere and what would happen to their project if they could not reach agreement with you.

If you are one of ten interchangeable suppliers, your ability to negotiate may be limited. If the business has already selected your product after a six-month procurement process and its internal team wants implementation to begin next month, your position may be very different.

Understanding that commercial context helps you decide where it is worth pushing back.

Do not try to negotiate every clause

One of the biggest mistakes businesses make is approaching a contract negotiation as though every unfavourable clause needs to be changed.

That can make negotiations unnecessarily long and may result in the other party becoming less willing to compromise on the issues that actually matter.

Instead, identify the provisions that create meaningful financial, operational or legal risk for your business and focus your negotiating effort there.

For many SMEs, the important areas will include liability, indemnities, intellectual property, payment terms, termination rights, data obligations, insurance requirements, service levels and any obligations that could create significant costs outside the agreed fees.

A clause that is slightly inconvenient may not be worth spending three rounds of negotiations on, whereas an uncapped liability clause could expose the business to losses many times greater than the revenue it earns from the contract.

Good contract negotiation is often about knowing which issues you can live with and which ones you cannot. AND it is also about explaining why you don’t agree to a certain term and how you would like it changed. I worked at large organisations where we would have small to medium sized businesses request changes to the agreements (a lot!) and provided the changes were reasonable, they would be accepted.

“These are our standard terms” does not necessarily mean the discussion is over

Large companies regularly use standard procurement, supplier or customer agreements, and there are good reasons for doing so. Their legal teams may manage hundreds or thousands of contracts, so having a consistent contracting framework makes their internal processes significantly easier.

However, a standard contract is designed primarily to protect the organisation that prepared it.

That does not automatically mean the terms are appropriate for your particular transaction.

If a clause creates a genuine problem, explain the commercial reason rather than simply saying that you do not agree with it.

For example, instead of saying: “We cannot accept unlimited liability.”

A more useful position may be: “The fees under this agreement are approximately $80,000 per year, so accepting unlimited liability would create a level of exposure that is disproportionate to the value of the services. We propose a liability cap linked to the fees paid under the agreement, with separate treatment for particular risks where appropriate.”

That gives the other party something substantive to consider and makes it easier for their legal team to justify a deviation from their standard position internally.

Pay particular attention to liability and indemnities

Liability clauses are often one of the most heavily negotiated parts of a business-to-business agreement because they determine who ultimately carries the financial consequences when something goes wrong.

An SME should understand both the overall liability cap and the exceptions to that cap.

A contract may initially appear to contain a reasonable liability limit, for example 12 months of fees, but the practical protection may disappear if most of the important obligations are excluded from the cap.

You may see exceptions relating to confidentiality, privacy, data security, intellectual property infringement, fraud, negligence, regulatory breaches or indemnity obligations, and depending on how the agreement is drafted, those exceptions can create very significant exposure.

Indemnities also need careful attention because they can shift particular risks from one business to another and may operate differently from an ordinary damages claim.

The question should therefore not simply be, “Is there a liability cap?” but rather, “What could we realistically be liable for under this agreement, and how much could that exposure be?”

Do not ignore payment terms because you want the deal

Payment provisions can have a much greater commercial impact on an SME than they do on a large organisation.

A major company may be comfortable with 45, 60 or even longer payment cycles because it has substantial cash reserves, whereas a smaller supplier may still need to pay employees, contractors, software providers and other operating costs while it waits to be paid.

If the proposed payment terms create cash-flow pressure, raise the issue during negotiations rather than assuming it cannot be changed.

Depending on the arrangement, you might negotiate milestone payments, an implementation fee, a deposit, shorter payment periods, the right to suspend services for material non-payment, or clearer procedures for disputed invoices.

The objective is not simply to obtain favourable wording; it is to make sure the commercial arrangement actually works for your business.

Protect your intellectual property

Technology businesses and specialist service providers should be particularly careful with intellectual property clauses.

Large customer agreements sometimes contain broad provisions stating that intellectual property created in connection with the services belongs to the customer, but that wording can unintentionally capture pre-existing software, methodologies, templates, systems, tools, know-how or other materials that the supplier uses across its broader business.

If you are building something specifically for a customer, the parties should be clear about what the customer is paying to own and what remains part of your underlying business.

A sensible agreement may distinguish between pre-existing intellectual property, newly created deliverables, customer materials and any licences required so that the customer can use the deliverables properly.

For an SME, agreeing to the wrong intellectual property wording can affect much more than one contract, particularly if the business relies on reusable technology or proprietary processes.

Make sure the scope is actually clear

A well-negotiated liability clause will not help much if nobody knows exactly what you have agreed to deliver.

The contract should make it reasonably clear what services or products are being provided, what is outside scope, which party is responsible for providing information or completing dependencies, how additional work will be approved and what happens if the project changes after commencement.

This becomes particularly important in technology projects, where requirements regularly evolve after implementation begins.

Without a workable change-control process, what started as a defined project can gradually become a much larger body of work without any corresponding increase in fees or delivery time.

The commercial schedule, statement of work or order form can therefore be just as important as the legal terms sitting behind it.

Look carefully at termination rights

A contract can be commercially attractive at the beginning and still become problematic if the other party can terminate it at almost any time without compensating you for commitments you have already made.

This is particularly important where an SME needs to recruit staff, engage contractors, purchase licences, reserve capacity or incur implementation costs in reliance on the agreement.

If the customer has a broad termination-for-convenience right, consider what happens to committed costs, completed work, outstanding invoices and work that is already underway.

In longer-term contracts, it may also be appropriate to consider minimum commitments, notice periods or early termination charges, depending on the nature of the arrangement.

Check whether the insurance requirements make sense

Large companies sometimes include insurance requirements based on their organisation-wide supplier policies rather than the actual risk created by the transaction.

An SME may therefore receive a contract requiring insurance coverage that is substantially higher than anything it currently carries.

Do not simply confirm that the business will comply and deal with the insurance issue later.

Check whether the required policies are available, what the premiums will cost and whether the proposed coverage is consistent with the liability you are accepting under the agreement.

If the insurance requirements are excessive relative to the services being provided, that is something that can be raised during negotiations.

Ask questions when the drafting does not match the commercial deal

Not every contract problem should be solved by immediately rewriting the clause.

Sometimes the most useful question is simply:

“What is this provision intended to address?”

The answer can reveal that the parties have misunderstood each other, that the clause was copied from another type of transaction or that the business team does not actually require the protection contained in the template.

This is particularly common in lengthy enterprise agreements that have been developed over many years and used across very different types of suppliers.

Understanding the reason behind a clause often makes it much easier to propose a practical alternative.

Negotiate the commercial arrangement, not just the legal wording

One of the most effective ways for an SME to negotiate with a larger organisation is to stop thinking about the negotiation purely as lawyers changing clauses.

Sometimes the best solution is commercial rather than legal.

If a customer wants you to accept additional risk, perhaps the price needs to change. If they require significantly higher insurance coverage, the cost of obtaining that insurance may need to be reflected in the fees. If they want an aggressive implementation timetable, you may need additional resources or different milestone dates.

The contract should reflect the commercial deal rather than attempting to solve every disagreement through legal drafting.

Give the other side something they can work with

Large organisations often have internal approval processes for contract deviations, which means the person negotiating with you may need to explain to procurement, legal, risk or management why your requested change should be accepted.

For that reason, a short commercial explanation is often more effective than simply marking up a clause without context.

If you can explain what the risk is, why the current wording does not work for your business and what alternative you are proposing, the other party has a much better chance of obtaining internal approval.

This also helps distinguish genuine risk issues from changes that are simply preferences.

Decide your walk-away positions before negotiations become difficult

The worst time to decide how much risk you are prepared to accept is when the customer is waiting for a signature and the sales team wants the agreement finalised immediately.

Before negotiations progress too far, identify your key positions and the points where the commercial opportunity would no longer justify the risk.

For example, you may decide that you can accept a higher liability cap for a strategically important customer, but you cannot accept unlimited liability. You may accept a longer payment period, but only if a significant implementation fee is paid upfront.

Having those parameters in place makes negotiations faster and reduces the risk of accepting unfavourable terms simply because everyone wants the deal completed.

Being smaller does not mean accepting every risk

There will always be contracts where a larger organisation has significant negotiating power and refuses to change particular terms.

The question for the SME is then not whether the contract is perfectly balanced, because many commercial agreements are not, but whether the risks are understood, manageable and commercially justified.

Sometimes accepting a less favourable clause makes sense because the value of the opportunity outweighs the risk. In other circumstances, a single clause can create exposure that bears little relationship to the revenue the business will receive.

The important part is making that decision deliberately rather than discovering the consequences after something has gone wrong.

At Pixel Legal, we regularly assist technology companies, SaaS businesses and SMEs with commercial contract negotiations, including customer agreements, supplier contracts, software and SaaS agreements, master services agreements, partnership arrangements and other technology contracts.

We focus on identifying the provisions that actually matter to the business, rather than negotiating contracts simply for the sake of making changes.

Disclaimer: This article provides general information only and is not legal advice. The appropriate position will depend on the particular contract, the nature of the transaction and the circumstances of the parties. You should obtain legal advice before entering into an agreement where the terms may create material legal or commercial risk.