CURRENT CONTRACT PRACTICES—FOCUS ON WRONG ISSUES AND TERMS

Having strong contracts and legal resources along with approved contract terms and practices in place is generally a good thing, as is ensuring business controls and compliance. Yet these elements may have negative side effects in the form of increased bureaucracy and risk aversion. Rules in the contracting process that are too complicated can undermine productivity and threaten business performance. on the sell-side, this can lead to lost revenue, missed opportunities, and dissatisfied customers. In a survey related to sales contracting conducted by the International Association for Contract and Commercial Management (IACCM), a majority of the respondents felt that the contracting process fails in maximizing value, minimizing risk and assisting in the formation of strategic customer relationships. More than 40 percent of business people saw their sales contracts as a source of competitive disadvantage because these contracts are overly risk averse and impede would-be deals. If this perception is true, then today's contracting practices, while thought of as important for the management of risk, have in fact become a source of risk, resulting in potential loss or delay of business.[1]

The emphasis on the wrong things, including risk allocation (rather than risk management) is further reflected in IACCM annual surveys of negotiators—both sell-side and buy-side— from around the world. In these surveys, participants were asked to highlight the terms they negotiate with the greatest frequency. Year after year, two clauses have retained their # 1 and # 2 status: limitation of liability and indemnification. the results of IACCM's tenth Annual Survey, 2011 Top terms in Negotiation, are shown in the left column of the following table (table 3.1):[2]

Table 3.1 IACCM 2011 top terms in negotiation

"Top Terms of Today" The terms that are negotiated with greatest frequency

"Top Terms of the Future" Terms which would be more productive in supporting successful relationships

1

Limitation of liability

Change management

2

Indemnification

Scope and goals

3

Price/charge/price changes

Responsibilities of the parties

4

Intellectual property

Communications and reporting

5

Payment

Performance/guarantees/

undertakings

6

Liquidated damages

Limitation of liability

7

Performance/guarantees/

undertakings

Delivery/acceptance

8

Delivery/acceptance

Dispute resolution

9

Applicable law/jurisdiction

Service levels and warranties

10

Confidential information/ non-disclosure

Price/charge/price changes

11

Service levels and warranties

Audits/benchmarking

12

Warranty

Indemnification

13

Insurance

Intellectual property

14

Service withdrawal or termination

Payment

15

Data protection/security

Information access and management

16

Scope and goals

Business continuity/ disaster recovery

17

Responsibilities of the parties

Applicable law/jurisdiction

18

Change management

Confidential information/ non-disclosure

19

Invoices/late payment

Warranty

20

Audits/benchmarking

Assignment/transfer

The list of "Top Terms of Today” continues to be dominated by clauses dealing with the consequences of failure, claims and disputes, rather than on their causes—or on preventing them from happening again. What is shown in the left-hand column of table 3.1 makes sense from a risk allocation point of view, but is clearly not optimal from a true risk management point of view.

The good news is that most negotiators recognize the need for a new negotiating agenda. in recent surveys, iACCM has asked participants to describe also where they think negotiating time should be focused in the future. the "Top terms of the Future” listed in the right-hand column of Table 3.1 indicate that negotiators see a need to change their current agenda. They see more value in negotiating terms related to change management, scope and goals, and the parties' responsibilities than terms such as liability limitations and indemnities. The latter occupy the place they probably should—as last-resort fall-backs in the event that well-crafted intentions become derailed.[3]

  • [1] iACCM (2011a) The State of Sales Contract Management. international Associationfor Contract and Commercial Management, available at https://www.iaccm.com/members/library/files/The_State_of_Sales_Contracting_Final.pdf. The report draws frominput by more than 250 large corporations.
  • [2] iACCM (2011b) 2011 Top Terms in Negotiation. international Associationfor Contract and Commercial Management, available at https://www.iaccm.com/members/library/files/top_terms_2011_1.pdf. According to the introduction, the resultsof this survey are based on input from more than 1,100 organizations, representingmore than 8,000 negotiators. individual contributors came from procurement, legaland sales contracting functions in more than 60 countries. input typically representslarge international corporations and therefore may not be an accurate reflection ofnegotiations at a local level or between smaller organizations.
  • [3] See IACCM 2011b and IACCM (2009) The top negotiated terms: negotiators admit they are on wrong agenda. Contracting Excellence, July, available at http://www.iaccm.com/news/contractingexcellence/?storyid=923.
 
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