Disorganized haste is bad; well-prepared speed is good. Ask any Olympic racer – and it’s the same with negotiating contracts. At the end of a recent debate sponsored by World Commerce & Contracting1, the audience voted that greater speed in negotiations leads to greater risks – by a 49% to 34% margin. But we believe speed may lead to risk only if you are inadequately prepared with little forethought. On the other hand, if negotiators focus on the elements of the contract that matter the most to their companies and keep an eye on fairness, the benefits of speed far outweigh any risks that may ensue.
Ask yourself -- why should you and your company be thinking about shortening the time for contract negotiations (aka Speed to Contract or S2C)? Doing so gives you economic and marketplace benefits whether you are the buyer or the seller and results in top-line and bottom-line growth. S2C can open the door for Contract Management and Legal to clearly add financial value to the company.
The faster you sign and seal a contract, the sooner the buyer can begin reaping the expected benefits from the purchase. This begs the question: Why are you entering this transaction in the first place? Do you see yourself…
- Gaining efficiencies?
- Beating out competitors in a fast-moving marketplace?
- Reducing costs?
- Moving to leading-edge technology?
- Expanding the business into new markets?
Time counts in meeting these objectives.
Speed flows economic gains to the supplier faster as well. The sooner the contract is signed, the sooner goods or services can be delivered and the sooner revenues and profits hit the books. This is particularly critical when the end-of-quarter or the end-of-fiscal-year is rapidly approaching. Accelerated sales produce higher sales volumes leading to economies of scale on the production line, competitive bragging rights, and more opportunities to push hard-earned cash back into the business.
When a contract is signed and a deal closes sooner, all parties can start working on other business opportunities. Many people and organizations provide either continual or sporadic input into a contract as it meanders from one party’s template to a final version. The most obvious ones are lawyers; account teams (on the sales side); procurement (on the buy side); contract managers; commercial managers; and finance professionals. And many more groups get involved as issues come and go, including risk management and insurance; security; engineering; internal user groups; and input-export experts -- just to name a few. Plus, this list extends outside the company if subcontractors and or other coordinating suppliers are tied into a more complex sale. So, the longer negotiations continue, hours add up quickly, taking scarce resources away from other projects and activities that could add even more value to the business. World Commerce & Contracting research shows that weaknesses in the contracting process can result in lost value for the organizations at 9.2% of annual revenue.
Another often overlooked benefit of speed is avoiding adversity. Contract negotiations, by their nature, are too often adversarial and occur at the worst possible time – just when the parties want to solidify what could be a long-term relationship. Parties want to move fast to shake hands on the overall structure of the commercials and the specifics of what will be traded. They are eager to “get married” after all the dating. However, standing in the way of their efforts is the contract they need to sign.
What began as mutual admiration becomes squabbling over words, esoteric legalese, and protections against hypothetical risks that are unlikely to ever develop. Over time, tensions rise, barbs get thrown, and frustrations grow. Is this all necessary? Isn’t it better for all concerned to minimize this to the largest degree possible? Clearly, your business imperative should be to make all details and settlements flow as quickly as possible.
To shorten the negotiation time, first we need fair and balanced contract templates. One-sided contracts can deter or sometimes frighten the other party from entering the relationship. Some companies prepare one-sided contracts thinking that contracting is a zero-sum game: the other party’s loss is your win. But unbalanced or unfair contracts only help raise tensions and multiply the other party’s worries about the negative effects of unfair clauses over the life of the contract.
Depending on their relative power, all parties will end up compromising during negotiations to reach a consensus anyway. We recommend starting on that journey as early as possible – when you are creating your standard contract forms. A great starting point when drafting your templates is the World Commerce & Contracting’s Contracting Principles.2 It provides detailed guidance on fair and balanced contracting practices.
If you want speed, you will also need empathy for the other party and be willing to compromise on some issues. The question is how and when. If you prepare well before the negotiations start and compile clause libraries and contract playbooks and principles, then you will know when to compromise and when to stand firm.
Clearly established escalation guidelines and well-observed contract principles will pave the way for easier negotiations. Remember that tools and techniques for efficient decision-making are abundant. They range from basic internal automation to state-of-the-art Contract Lifecycle Management (CLM) software to the latest innovations including smart contracts and Artificial Intelligence (AI) integrations.
The next important step is to identify the risks that are most critical to your company. Then prioritize the risks by calculating the probability that each of them will occur. Remember that when managing risks, prevention is the best insurance. Employee training, background checks, safety checks, equipment maintenance, and upkeep of physical assets -- to name a few -- are all crucial risk management strategies for any business.
Sometimes business owners may skip some risks to speed things up or close the deal fast, but too often they are not even aware of the risks. We must be risk-aware, even if that means hiring a risk management expert. Businesses need to identify the risks based on knowing the probabilities of when undesired events might occur and identifying ways to prevent them. Doing this allows us to use better internal preventive controls and leverage rigorous and reliable risk assessments.
So, if both parties genuinely want speed and equity, how can we do both without increasing risk to either side? The answer is to:
- know your business;
- know the weakness and the potential damages if something goes wrong;
- know the ways to mitigate those risks; and
- have a detailed plan on how to negotiate your contracts.
This strategy does not require a legal degree. It requires a multi-disciplinary approach to cutting through the issues that don’t really count and focusing only on those that do. It also requires a fundamental change in how contracts are drafted – going from an adversarial mindset (where I win only if you lose) to partnership and mutual benefit (where we both win or when we both come out even). That approach is where most contract processes end up anyway. The trick is to get there faster.
It is amazing how much knowledge exists across departments in a company and how you can use experience and data to paint a picture of what a contract should look like. Only then can you treat each party fairly and cover the most “likely” key risks.
But “likely” risks do not mean “all” risks. In other words, trying to protect yourself against every possible event, particularly those that have the least chances of occurring, will drag out negotiations and cause so much pain that both sides will wish they never started the relationship in the first place. Instead, our task in preparing for Speed to Contract is to gather information across relevant organizations that can be used in drafting balanced contract templates and framing negotiations strategies.
When assessing risks, look for historical data that exemplify, for example, the frequency of feared events and the financial impacts of bad things. One way to do this is to list all the risks associated with these kinds of deals and position them in a 3x3 box grid that has a probability of occurrence on one axis and a level of damage on the other (illustrated below). 3
In the upper right-hand corner of the matrix below list your priority issues involving the highest level of damages and probability of occurrence. You will likely spend the most time with the highest priority risk issues. Identify the decision-maker for each (typically, NOT the lawyer) who will call the shots during contract negotiations. Generally, it is not worth slowing down contract signing for the issues identified in the lower left boxes
Companies generally lack clearly defined organizational responsibilities for accomplishing S2C. The responsibility is normally shifted into the hands of lawyers. A better approach is to assign a multi-disciplinary contracts team empowered to negotiate, decide, act, plan or even reorganize itself to plan for blending overall company success into every negotiation. By doing so, you can avoid the contracts cliché, “They are touched by everyone, but owned by no one!”
Someone from that group must take the initiative and lead the charge by bringing real transformation to contracting. This leader will need help from colleagues across organizational silos to achieve substantial gains. Upper management must also be willing to support this effort in a very visible way if real change is to occur. They can do this by acting faster to issue directives and shortening approval times. This can mean setting up periodic meetings to review the status of initiatives. When the organization internalizes the vision and individuals know the tools and techniques to make it happen, they are striving for excellence!
Long-lasting and fruitful partnerships take a lot of work and preparation. Be honest, be transparent, and communicate well. Even if your partnership focuses mainly on business goals and settings, don’t forget to be human, and people will enjoy working with you. Add fairness to your partnership and contracts. Then reap the rewards.
Even if you are not eliminating all conceivable risks, you can still increase contracting speed. Contracts are about adding real business value that exceeds the risks. You need to search for and find your own company’s balance.
True, haste does make waste. But speed doesn’t necessarily have the same result. Not when there is an orchestrated team approach to knowing what is best for the company and defining a contracting strategy to support those goals. There are two main elements to the strategy. Start with fair and balanced terms. And then don’t try to negotiate every clause to death. Pick and choose your battles wisely and know what an optimal outcome would be for both parties. Speed is a good thing for buyers and sellers. Embrace the challenge and be a champion in pushing your company to reap the rewards.
- The Big Debate - Negotiations: Greater speed means greater risk (https://iaccm.wistia.com/medias/tpv3xx678v)
- World Commerce & Contracting Principles
- Stakeholder Analysis, Project Management, templates, and advice
ABOUT THE AUTHORS
Cemil ÇETİNBAŞ graduated from Istanbul Technical University, Department of Electrical Engineering; and completed his MA in International Business at London Metropolitan University. He started his career as an Internal Auditor at Vakıfbank Board of Inspectors and afterwards worked as a Fraud Auditor at Turkcell. In 2020 he made a transition from auditing to software industry, started serving as a Project Manager at the biggest software powerhouse of Turkey, Softtech. He was appointed as Sales Contracts Manager at Softtech and has been working on sell-side contracts since then.
Hal recently retired as Chief Counsel of British Telecommunications in the Americas. He is currently consulting on Speed to Contracting initiatives and is leading the World C&C work on its Contracting Principles. Hal is also Of Counsel to the firm of Berger Legal LLC. He can be reached at email@example.com.