The Scottish Liberal Democrats joined the new Scottish Parliament in May 1999 as a minor party which had become used to punching above its weight. It remained Scotland's fourth party, gaining fewer votes and MSPs than the apparently ‘toxic’ Scottish Conservatives, but entered devolved government via a coalition, as widely anticipated, with the Scottish Labour Party. This could be seen as the natural culmination of a less formal partnership between the two parties that had lasted for more than two decades. It won 17 seats, a figure at the top end of the party's expectations, and the largest number of Scottish Liberal parliamentarians since the 1920s.

Scottish Liberal Democrat leader Jim Wallace approached coalition negotiations better prepared than his Labour counterpart, the Secretary of State for Scotland, Donald Dewar. Wallace consulted his party and elected colleagues throughout, while preparation was key. David Laws, a future Cabinet minister but at that point a Westminster researcher for Malcolm Bruce MP, had outlined a possible partnership agreement in a paper commissioned by the Scottish party.

The SLD negotiating team comprised Wallace, Ross Finnie, Nicol Stephen (who had gained the constituency seat of Aberdeen South), Iain Smith, Laws, Denis Robertson Sullivan and Andy Myles. To assist the overall process, two party groups had arranged to go through each other's manifestos subject by subject in order to identify areas of agreement. Some Labour figures had qualms. Henry McLeish, for example, considered Scottish Liberal Democrats to be ‘a diverse and sometimes eccentric lot who had subjected us [Labour politicians] to virulent attacks at local level’. On one occasion during the talks, Dewar made deprecatory remarks about one policy idea he considered ‘Liberal nonsense’. On being told that it had actually appeared in Labour's manifesto, the Secretary of State for Scotland ‘laughed wholeheartedly’.

An impasse over tuition fees was harder to laugh off, not least because Prime Minister Tony Blair tried several times to have the abolition commitment dropped via Paddy Ashdown, who was also nervous lest the failure of coalition talks in Scotland undermine his UK realignment ‘project’. Blair, who seemed unaware that devolution might involve policy divergence, eventually agreed to an independent review of fees to break the logjam.