Spending too much time, money and effort on creating contracts before you even get revenue?
Creating fair, mutual and reasonable contracts, focusing on outcomes, and using streamlined contracts can quickly bring money in the door.
So what does “fair, mutual and reasonable contracts” mean? Contract provisions that apply to both sides in apportioning risk, contracts that recognize responsibilities of both sides, establish understandable scopes of works and allow for change—those are fair, mutual and reasonable contracts.
It’s no secret that there are common terms that are heavily negotiated. Limitation of liability, indemnification and pricing continue to be the most heavily negotiated terms year after year according to the International Association of Contract and Commercial Management (IACM).
Instead of one-sided indemnity provisions that put the burden entirely on the vendor selling to the large company, why not make it mutual? Why should SmallCo be obligated to indemnify for breach of contract to BigCo? Indemnity ought to be confined to third party claims for personal injury and damage to real and personal property. Limitation of liability can be limited to actual direct damages for fees under the contract for a reasonable period, such as 3 months to 12 months. As for pricing, why not an approach that there is enough for everyone, instead of a race to the commoditized bottom? Wise business executives know that price alone is not an indicator of quality nor a guarantee of value add to the buyer’s services or goods it sells.
On the other hand, the terms viewed as most important for success are different, e.g. responsibilities of the parties, scope and goals, service levels and the management of change. Apparently these value building terms get less time and focus according to the IACM annual survey.
While risk allocation and compliance issues are important, attention needs to be paid to building a framework for cooperation, mutual performance, and outcomes for both sides.
Often Statements of Work are ignored offering little guidance or are so lengthy and complicated they defy comprehension. The scope and goals for the goods and services provided usually don’t succinctly state what needs to be done. We suggest as a start answering the questions of who, what, when, where, why and how in the SOW.
The responsibilities of the parties are often overlooked or unbalanced—the selling or supplying party has obligations but the buyer has few if any.
And given the speed of disruption in this digital world, practical change management provisions are critical to enable the parties to adapt, enhance and cooperate to get the desired outcome—a product or service that solves customer problems and adds to the both the buyer and seller’s bottom line.
If IBM can reduce its cloud hosting contract to two pages (ok 2 ¼ pages to be precise), we think there’s hope for other companies to have a streamlined contract. We’d add that such streamlined contracts ought to be mutual, fair and reasonable. To change spending 75% of your company’s time on risk factors to spending 75% on value add provisions such as scope of work, it will take education and pricing discussions. And equitable and reasonable positions on risk and liability are the key to productive, streamlined contracts.
If you’d like to learn more about how your company can get clear concise contracts focused on outcomes, give us a call.