Is the wording you use in commercial agreements costing you money? New research suggests that focusing on a different set of terms during contract negotiation may lead to increasing the long-term value of your business. People enter into contracts because each side considers there is a potential for benefit, however, parties are rarely on equal footing and negotiations usually involve a countering of an imbalance of power. Standard terms have become so prevalent that they form the basis for most negotiations and as such, they parametrize the topics on which negotiators focus upon. Research suggests that along with the concepts of price and payment, allocation of risk dominates the gist of most negotiations. The most substantial point of contention between parties is how the allocate risk. Parties begin negotiations in diametric opposition to each other regarding the allocation of liabilities, the seeking or granting indemnities. This often creates a contracting culture shaped largely by transactional activity dominated by a legal and financial axis. Ultimately, this archaic spectrum does little to foster ongoing development of the business relationship and can occasionally spark unnecessary litigation. Changes in the use of standard terminology could potentially nurture better business relations. To give you an immediate example, instead of the term “limitation of liability”, one could use of the term “change management” with the view to encouraging parties to adopt an inclusive, unified approach towards navigating pitfalls. Replacing the term “price/charge” with “scope and goals” allows for more robust discussions regarding changes to revenue that require consideration by one or both parties. The traditional model of contract negotiation focuses on the consequences of failure. This undermines the probability of success and has an adverse impact upon trust and the desire for collaboration. More importantly, it results in key areas of the contract being starved of the appropriate attention, in particular, the clarity of the scope and goals of the contract for both parties and what governance and management procedures should be adopted that will best secure an optimal, ongoing business relationship. Economist John Kay says there was a transformation in contracting practices which occurred in the 1990’s. He suggests that the substitution of transaction-oriented dealings for relationship contracting certainly added profitability in the short run, however, in the long term it led to an erosion of relationships underpinning profitability in the first place. Negotiation time is scarce and we need to prioritize how it is spent, however, research suggests that focusing on a narrow battle over the price and the allocation of risk often results in hidden costs and undermines outcomes. This approach may make sense for one-time transactions but is imprudent when there are longer-term opportunities or a dependency on cooperation between the parties. Fragmented negotiations, failure to involve key stake holders, reluctance to properly frame projects within the appropriate definition of oversight and management structure are all by-products of time scarcity, they are also potentially lethal to healthy long term profits. So what is the solution? You should start with a comprehensive review of your contract structures and standards. Educating and empowering staff such your project manager and sales team is imperative. The key objective should be to change the negotiation agenda so contracts become vehicles for managing and nurturing multifaceted relationships with bi-partisan clarity of purpose rather than simply evidencing a single, or a series of linear transactions.
Posted on: Tue, 07 Oct 2014 07:46:22 +0000
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