I had lunch with a few friends last week and we settled on the topic “what makes a good contract in business today.” The fun part of the conversation is that it ultimately led to what makes a bad contract as well…and with that, there were a lot of funny stories that we could all share. When I got home, I decided to sit down and write down a few thoughts…
If you do not know what you agreed to, you should not have signed it in the first place.
In general, a contract should be template-driven. Most of the terms in one license agreement should reflect the terms that you have in other license agreements. Where I find people getting into trouble is when each contract is a complete departure from every other one. Even worse, when the contract is not widely understood by the people who need to enforce it and the contract departs from the company norm, it is not likely to be followed. One of the stories that was shared with me was about a company that had a series of very different contracts related to professional services work. None of the people taking calls from customers understood the warrantee obligations guaranteed by contract. The officer in charge of them felt that the team should come to him each time they had a call from the customer so he could determine what they should do. Putting aside this person’s need to control things, and the lack of trust it implies regarding his team, it had the result of slowing down and removing efficiencies from the system. In general, not understanding your obligations can cost you time, the ability to scale and ultimately upset the customer.
Likewise, if the people who have to follow through on the contract do not understand what they are obligated to do, they likely did not knowingly agree that the work was even possible. Something I can recall from my own history was a company obligating its employees to perform monthly builds of software for a customer when the feature sets did not scale to fit in one-month increments. This resulted in enormous amounts of wasted efforts and a great deal of hardship for the company’s employees.
If you need an attorney to translate, you’re in for a bad day. It’s funny how often people don’t understanding what they are signing, but they often need someone to translate for them the contracts they signed. I was told a funny story that a few months ago; one company sent a contract to their attorney four times to figure out what their warrantee obligations were for a contract that had been in place for over a year. Items like warrantee, milestones and exit clauses are fundamental to any agreement and if someone needs an attorney to explain these obligations, they are either in trouble with the customer or are about to be.
If you do not have a way out, you need a better map. One of the most interesting parts of a contract that people seem to omit is what will happen when something goes wrong. Many people look at contracts as a sunny day scenario where you are more worried about payment terms than how do you get out of the contract. As a general rule, you should always have an exit plan for any agreement you sign. Interestingly enough, this can go in the other direction, too. I was in a contract negotiation about three years ago where the other party stated that they would agree to any state of jurisdiction for the contract other than the state that I was in. The point being that they had offices nearly everywhere and in the event that they wanted to violate the agreement, they wanted to make it as expensive as possible to litigate. Clearly some take this a bit too far… and you want to avoid getting into bed with companies like that. Regardless of where on the spectrum you sit, you should always have a plan to get out of a contract.
If you are being abused before you sign the contract, you’ll need therapy after you try to fulfill it.
I think it is safe to say that if you have not had a tough contract negotiation, you have not worked in the Silicon Valley. We have all had them and given how litigious our society is, they are likely to become more difficult. However, difficult does not mean abusive. Very recently, I found myself in an extremely unpleasant contract negotiation. The other party took to making personal insults to our engineering team, whom they did not hold in high regard. After several weeks pushing back on the behavior in meetings, I drove to their office for a face-to-face. I said that I was running out of people who were will willing to attend meetings with them and that we needed to continue under a more professional dialogue. The response was “You’re here to meet my needs regardless of what they are. ” Without a basic level of respect, this is a relationship you do not want to enter.
Generally speaking, most people are under their best behavior during a contract negotiation. If they are this abusive during the negotiation, you can only expect it to get worse afterwards.
If your obligations continue after a contract, so will your costs.
One of the most common rookie mistakes that someone negotiating a contract will make is around maintenance. This is particularly the case in the software industry where bugs and porting is perpetually required (at least until the product reaches its end-of-life). The circumstances around making mistakes in this area are pretty common and should sound familiar to most of the people reading this article as we have all seen them:
- A small company is desperate to close a deal at all costs (usually with a larger company) and ignores the long term implications of not charging for maintenance.
- The company does not understand its own business model and enters an agreement assuming only the best case will occur. This is often the case when someone has never operated as a vendor before.
- The company fails to properly estimate the costs of maintenance or underestimates them.
Regardless of the circumstances, the result is the same… runaway costs with little or no income.
I think that there are a few takeaways that you should leave with. The first is that taking the long view of a contract is almost always the right thing to do. When you cannot, you should start questioning what is forcing you to only look at the short term and push back. The second is that you should never sign something that you do not fully understand. I know that this seems a bit obvious but if you look back at your own careers, you will find that this is often the case. The third is that the best contracts are the ones that address the needs of both sides. Consider this… if you have a contract with another party where you have dictated all of the terms (in your favor), what will keep this person doing their best to fulfill the contract once their situation has improved. They will likely look for the nearest exit…as they should (assuming they left one open to themselves).