Lessons We’ve Learned From Years of Managing Contracts

1. You must actively manage your deals and relationships. Keep in touch with your contacts; make sure contracts are up-to-date. You never want a client to bring it to your attention that a contract has expired.

2. Share the lessons you learned with each deal. Remember why deals went sour or why they succeeded, then share the love with others … perhaps they’ve learned lessons that you’ve yet to stumble upon.

3. Use a process. This way you’ll never miss anything you need to cover. Whether you want it laid out in a mind map or a thorough checklist, a process is the framework of a successful negotiation.

4. Know the essence of what you want when you do your deals. Understand the essence of your goals. For example, we might have a goal of not wanting to have exclusivity in the agreement. The essence of this goal is flexibility. Understanding this creates bigger boundaries for creativity for both parties. Understanding that you might be okay with a very narrow and limited exclusivity (if it gives the other side more incentive to market your service) still gives you flexibility.

5. The value of your business is the sum total of its deals. Make good deals, have a good business. Enough said.

What have you learned from your time managing contracts? Are there any learned lessons we should add onto our list?

[Photo from this website]

The Deal Graveyard

Steer clear of these terms -- they've killed many great deals:

Begin With The End In Mind

One of the best ways to avoid being stuck in a bad deal is to consider - from the outset of negotiations / drafting - how to wrap up the relationship with the other party if things don't go as planned. Recessions happen, key people leave to go work somewhere else, products and services become obsolete and so on. 

Nearly all contracts provide for some sort of endpoint, this is what is commonly referred to as the "Term" of the agreement. This is your basic, if-all-goes-according-to-plan endpoint. Many contracts will also have an "Evergreen" element. That is, unless one of the parties specifically requests an end to the contract, it will automatically renew at the end of each Term. In planning your exit strategy, note any deadlines for notice to the other party if you do not want the Term to auto-renew. Just having a simple reminder on your calendar with enough lead time to make a decision about such auto-renewals can be extremely helpful. 

Next up is allowing for some kind of termination "for cause." Terminating the Term for cause usually follows a pattern of notice from one party to the other about a problem along with some time for the party in default to make good on the problem. If the party in default hasn't brought things back in line after the allotted amount of time the non-defaulting party can then terminate the contract. 

There are also many events that may warrant immediate termination or at least provide for a timeline for terminating the contract. These would include events such as one of the parties entering into bankruptcy, one of the parties being acquired by a third party, or even changes in the law that affect the parties' contractual relationship (especially important in contracts within highly regulated industries such as banking and healthcare). 

Finally, you may want to consider allowing for a simple termination of convenience. That is, one or both parties may want the ability to end the contract for any reason or no reason if the parties can agree to an appropriate lead time to wrap up the contractual relationship. There may be viable reasons for building in termination fees and contingencies for ongoing services during the transitional period through termination. 

Having an idea of some of the options available to you is only the start of your overall exit strategy. There are still several other options to consider, these include, but are not limited to:

1. Confidentiality of the termination itself;
2. Transfer back to original party or destruction of all confidential data; 
3. Knowledge transfer; and
4. Right to hire service provider personnel.

These ideas should provide you with a basic roadmap for forming your own exit strategy heading into your next contract. Just remember to begin with the end in mind!

When Better Becomes Perfect.

One of the thoughts we recently put up on our "Ideas" page (Better is Perfect) got me thinking about how to explain this succinct, yet possibly complex idea. When people are confronted with a new contract they are often a little apprehensive about what kind of work it is going to take to get a deal they can live with. You may be unsure what protections you need, how the ownership of the work product will affect your future business and what "gotchas" may exist to act as stumbling blocks in the future. Additionally, it may be difficult for people to feel like they can push back on their deals because they fear losing the business. 

So how do you get Better deals? Whenever we start working with a new client that will be executing multiple contracts which require the same basic format (e.g., master services agreements or independent contractor agreements), we forge a master template for doing those types of deals which takes into account your specific needs and problems. This has two primary benefits: (1) If you are able to get the deal signed as is, you can be sure you have a great deal in place; and (2) If you are in a situation where you have to negotiate a deal, you have a metric for measuring whatever deal is presented. Through use of your master template and negotiating from that template you'll have a concrete way of knowing when your deals get better.

Now the logical leap comes in: Better is Perfect. That might seem like a stretch, but if you are able to take a proposed deal that, in the past, you would have signed without any changes and compare it to a deal where you were able to get some of your Master Template changes incorporated, you have a deal that is not only better, it's perfect! Now, I'm sure it's not perfect in the sense that you got everything you could have ever wanted in any deal. But one of the key principles of doing any deal is that both sides should be able to walk away from the bargain ready and willing to do another deal together. If you are able to put all these steps together, you'll realize that Better is Perfect.

Contracts - Who needs 'em!?

I was reading a post over at AdamsDrafting's blog the other day called "Can Contracts Be Counterproductive?" which links out to an article in the UK's TimesOnline by Sathnam Sanghera entitled You can't write trust into a contract. I'm pretty sure most legally minded folks will probably cringe when they think about proceeding in any meaningful business relationship without some written understanding of the parties' think is supposed to happen. 

But to answer the question, can contracts be counterproductive? Sure. They tend to slow things down. I'm sure we've all heard at least anecdotal evidence of deals being closed on the golf course. But I'd be more than a little surprised if the salesperson whipped out a contract on the 18th hole after "closing" the deal. The fact is, coming up with a written memorial of an agreement can take some time. There are so many "what ifs" out there that failing to address them can be disastrous. It might be cheaper and easier on the front-end to simply shake hands and call it good, but that will only take you as far as the first problem you have.  At that point, it might be much more expensive to figure out the next step.

Deepak Malhotra of Harvard and Negotiation Genius fame aptly points out where contracts can go wrong in his article "When Contracts Destroy Trust."

1. Contracts that are too rigid can be problematic if they lock parties into arrangements that don't allow for adjustments as circumstances change.
2.  Contracts can erode trust and goodwill if the contract structure assigns roles and obligations without enough information to properly balance the parties obligations. 
3. Some contract terms can even signal mistrust: Performance based pay, earn-outs and vesting schedules may communicate to the other party that you believe they cannot deliver without some extra incentive.

Bear in mind these points when approaching your next deal and try to strike the balance between a handshake and an unreasonably rigid contract. 

Identifying Ownership - It's Trickier Than You Think

Many times, when two parties approach a deal they tend to think of their contribution and ownership of the overall project like this:

The problem is that most of the time there is going to be a significant amount of overlap. In those three circles. Your deals need to be able to not only identify the areas of collaborative ownership that exist within a given deal, but it should also accurately reflect the parties' understanding with respect to these overlaps.

Here's a tool to help you think through the ownership issues that you might be facing in your next deal:

Understanding Contracts - What's Your Strategy?

OK, you made it, you have a deal. It's great, it's perfect - life is good and now you just want to get on with the business of fulfilling your end of the bargain. But, how do you make sure that the people responsible for carrying out agreement actually understand what they are supposed to do?

Chances are you aren't going to find too many people excited to dive into the language of the contract every time they have a question or a question about upcoming contractual milestones. You are going to need some kind of summary - a way to help the business people understand what they have to do without drowning them in the finer legal points. One strategy we've had a lot of success with at the Studio is to use Mind Mapping software to create a Deal Map. A visual summary of important deal terms. We use MindMap Pro to help us create our Deal Maps.

There is definitely a craft to Deal Mapping. The need to be legally accurate and easy to understand can take some teamwork between you and your attorney/legal department. But the payoff can be realized in having greater certainty about important contractual elements and a confidence that each new deal will be implemented accurately and on time.

For an example of a simple Deal Map, click here.