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Bad contracts are a way of life in business.
While there are a number of ways a contract can go bad, the most common
cause is attempting to solve every possible problem in writing.
Information Technology (IT) contracts are among the worst.
The complexity of IT deals, new business models, and pace of change in
the industry leads to documents that are unwieldy, convoluted, and obsolete on
the day they are signed.
Very few IT contracts are effective tools for managing an
agreement between the parties. As a
result of the overwhelming number of bad contracts in the industry, IT
professionals are skeptical of contracts in general. Most IT managers read the contract once, then throw it in the
bottom of a desk drawer and get to the real business of running an IT project.
Contracts are only exhumed if the project goes badly, and attorneys on
both sides profess amazement at how irrelevant the contract has become.
A good IT industry contract is easy to spot.
They are dog-eared pages contained in battered three ring binders kept in
the data center. The highest praise an IT negotiator can receive is to see a
page from their contract laminated and posted in the call center, or on the
project manager’s door. Good IT
contracts change frequently to keep pace with the project and the technology.
They are not always popular documents, particularly with people who would
prefer to deal in vague promises and missed deadlines.
Most IT professionals, however, prefer a clear, useful, up-to-date
document that allows them to get on with the business of managing technology.
So, where do all of these bad contracts come from?
As always, the first reaction is to blame lawyers for making contracts
too unbalanced, but in this case it is not (always) their fault.
The worst contract language often comes
from laymen
who were 'burned' by a past deal.
After a catastrophe, the people who made the decision direct their staff to 'change the standard contract so this can never happen again.'
Over time, the contract becomes a patchwork of horror stories, and nobody
remembers why the terms are the way they are.
Bad contracts aren't written, they form like silt at the bottom of a river. One person brings an agreement from a former employer to the company, it is then reviewed and modified by the attorneys, purchasing, sales, operations and IT in a convoluted round of revisions. The result is a document that everyone can agree on after an arduous process that nobody ever wants to do again. Unfortunately, the only truly important party is never represented, the customer or vendor who will be expected to sign the bad contract. Negotiations add to the problem, as changes made for each deal can cause inconsistencies in standard agreements and confusion caused by dozens of different terms.
A great test for bad contracts is to change the document enough so that it looks like it came from an outside group, then run it through the internal review process. Most people would never sign the terms they present to others, so the document will come back covered in red ink.
Few individuals set out to write a bad contract.
With the exception of the old-fashioned ‘hardball’ negotiator, or the
lawyer fresh out of school, most authors attempt to write a document that at
least appears balanced. Contracts require agreement, and an unbalanced contract
(written entirely in favor of one party) can be a huge early roadblock to
reaching agreement. Individuals
tend to want to reach agreement, and experienced negotiators prefer to sit down
at the table with a reasonable starting position.
So if individuals don’t write bad contracts,
where do they all come from? The
answer is found in rules, regulations, and contract review procedures. Where individuals tend to seek agreement, groups tend to
favor the status quo. For many
departments, no deal is as acceptable as a deal involving significant risk.
Lawyers are concerned when there is little precedent or legal guidelines
to limit risk. Negotiators are
concerned if too much is given to the other side, or, worse, “left on the
table” at the end of negotiations. Finance
is concerned about the time value of money, payment procedures and timeliness.
Operations is concerned about too-stringent requirements, end users are
concerned when requirements aren’t stringent enough.
Any attempt to satisfy all of these concerns leads
directly to a bad contract.
The more complex the contract generation or review
procedure, the worse the contract. This
is especially true in high tech, where there is little precedent, enormous ego,
massive hype, and a lot of dollars chasing nascent technology.
High tech contracts often try to cover every possible eventuality (if
written by the buyer) or leave serious issues with only vague, contradictory
coverage (if written by the seller.)
Efforts to simplify agreements usually miss the point,
the problem doesn’t lie in the complexity of agreements, it lies in the fact
that most high tech agreements occur in a vacuum.
Without consideration of the business relationship, any contract in the
wild and unpredictable high tech industry is on shaky ground at the start.
What procedures lead to bad contracts?
“Change the contract so that this can never happen
again!”
Drafting contracts before thinking through the real risks
and opportunities
Expecting every risk to be addressable through the
contract
Negotiating agreements without considering the overall
business relationship
Review and approval procedures that are too time
consuming or inflexible
Refusal of individuals or departments to accept and
manage risk
Reliance on negotiators to use ‘tactics’ to make the
other side take unacceptable risks
Belief that the law holds every answer for new technology
and business models
Refusal to acknowledge and plan for wrenching change in
contracts
Belief that a bureaucratic buy-in procedure can replace
actually thinking the deal through
Building a relationship in high tech is not easy.
The frequent change of players, technologies and companies convinces most
executives that building a relationship is impossible.
Once this happens, little effort is made to deal with vendors or
customers from a long term perspective. There
are, however, simple things your team can start doing tomorrow that will build
the relationship in spite of the difficulties.
Keep Up
Most people are intimidated by the tumult in high tech.
This leads many to dismiss changes, and believe that they can catch up
before a major negotiation. The
signal this sends to business partners is very clear, “I am too busy to care
what is happening in your industry. You
aren’t important to me.”
Put Business on a Personal Level
Deal with people, not departments. Realize that the dead-end middle manager at Company X today
could be a managing director of a hot start up company tomorrow.
Create a notify list, build a network, and broadcast significant personal
news to that network. Pick up a
book on building networks (Harvey Mackay is a good author) and start following
some of their advice.
Create a Principles Manifesto
Many negotiators craft a once-in-a-lifetime deal, only to
have it fall apart on execution. Why?
They did not know what management, sales, operations, or any of the other
departments believed was important. From
simple items like, “We believe that a margin of 5% for our vendors is fair”
to “When negotiations get contentious, we call a break and change lead
negotiators.” Don’t keep it a
secret! Knowing the principals on
both sides of the f the people you negotiate with is incredibly useful in
putting first things first.
Schedule And Participate In Appropriate Non-Business
Outings
This is going to come as a shock to some, but not
everyone golfs! Many people in high
tech do not golf. So, figure out what the majority of people enjoy, and then do that.
Do not focus on one senior executive, and assume that everyone wants to
do the same thing. Build camaraderie and fellowship with appropriate gatherings.
The payoff in better morale, working relationships and negotiations will
be evident immediately.
Plan to Build the Relationship
Where do you want your companies to be in six months? It is amazing how many people work at relationship building,
then are shocked when things don’t stay wonderful forever. If you don’t like to plan, hand relationship building to
someone who does. Sometimes, the
best, most personable relationship managers are the worst planners.
Get help. Without a
strategy, you are just being nice. While there is no harm in being nice, the whole point is to
make business easier and more fun.