Sunday, October 14, 2012

Contracts - Words Matter

When any of us makes a simple retail purchase, there is an implied contract that for the money we pay, we will receive the product or service we are buying.   When that does not happen, though there may need to be a stern discussion, we are entitled to a refund.   Complex businesses often require complex contracts to define not only the pricing; but the terms and conditions of the contract, which in many ways are far more important than the pricing.   In particular,  the termination provision is very important since in some cases it may be necessary to cease doing business. 

Sales people intent on closing a deal often do not understand, or appreciate the need for many provisions in a contract that they see as potential deal breakers.   However, contracts tend to evolve over time as problems come up.   Provisions are usually added to address things that happen causing additional risk, or liability to the company.   As such, there are some provisions in every contract that are non-negotiable because they deal with issues so critical that if missing in the contract,  the potential benefit from gaining the business is lost. 

As someone that has negotiated many complex contracts in my 33 years in business,  I believe in win-win for both parties.   It is only when the other party believes in win-lose that it is time to walk away from the table.   Nearly anything is possible, as long as legal and ethical, if the client agrees that profitability is necessary in the deal.   There are some big name clients that do not believe in this premise.   They actually operate on the notion that their name is so important on a client list that the supplier should lose money for the privilege of doing business with them.   We walk away from those deals because they are win-lose and never work out. 

Several years ago, we spent six months negotiating a ten year joint venture deal with a large company.   Since there were penalties for termination, I was much more concerned about the termination provision than the actual provisions allowing for the joint venture.   I insisted on terms and conditions for termination, without penalty, that seemed ridiculous at the time because this particular company was so large.   It was presumably unthinkable that the things I specified could happen to this very successful company.   In fact, within five years of signing that contract, all of the negative things I insisted be in the contract did happen, allowing our company to terminate the contract without penalty.  

Contracts are critical to complex businesses.   Protecting a company from unnecessary risk and liability is particularly important.  In addition, there must be a relationship between risk, profit potential and service requirements.   The scope of work must be clearly identified to prevent service creep.   The time spent negotiating a contract on the front end of a deal will prevent the need for countless hours dealing with issues during service implementation and or if contract termination becomes necessary.   There is no doubt that when dealing with Contracts, words matter. 

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