Tuesday, March 15, 2011

Goods, Services Agreements and Software License Templates.

In many companies there will be a library of standard purchasing templates. I’ve worked in companies that had hundreds of different templates. That makes the management of them and keeping them current a complex, time consuming activity.  I’ve also worked in companies that focused on having a library of standard clauses where you can pick the most appropriate one for the circumstances.  There are advantages and disadvantages to both. With the standard template approach there is less thought into considering what’s needed and whether it will work in the circumstances. From a standard clause approach there is always the risk that the wrong clause is used or needed items are omitted.  The one thing I do know is that contracts is not an area where “one size fits all” and to have a good contract there needs to be a certain amount of tailoring be available simple because of the differences in what is being acquired. A number of the terms required for one type of agreement will be required for others such as responsibility for taxes, payment terms, indemnifications, limits of liability, responsibility for personnel, control over the use of subcontractors, insurance requirements, and general legal terms such as waiver, survival, order of precedence, etc. There are a number of differences that require the ability to tailor documents to the specific requirements.

Lets start with the basic differences:
Is the item existing or will it need to be developed or customized?
Will it be used or consumed internally or will it be resold or re-licensed to customers?
Is it technical or non-technical?

Different types of purchases frequently require:
  • Different definitions
  • Different pricing structures and charges
  • Different payment structures (especially for large activities of development or customization) or payment of royalties.)
  • Different methods of acceptance.
  • Different warranties.
    • Products defects are repaired or replaced.
    • With software errors are corrected.
    • With Services the service may be corrected or re-performed. 
    • Products are warranted against defects in material and workmanship.
    • Services are warranted to be performed using reasonable care and skill.
    • Software requires error corrections and services provides in conjunction with the Software are warranted to be performed using reasonable care and skill.
  • Different requirements depending upon where the work will be performed (Supplier’s or Buyer’s premises)
  • New or custom purchases will include Scopes of Works versus defined Products or Services defined by specifications.
  • New or custom purchases talks about Deliverables to be provided instead of Products or Service Level Agreements
  • New or custom purchases will include schedules versus lead time and flexibility
  • New or custom purchases will include provisions to address changes that may need to occur in the development
  • New or custom products require responsibilities of the parties be defined and the Buyer may have more responsibilities than just payment. With standard products, services and software the Buyer’s responsibilities are more limited.
  • With new or custom you may want to suspend or delay the work, with existing you would want the right to reschedule or cancel the work.
  • With new or custom purchases intellectual property rights of the parties in the development will frequently become a larger part of the negotiation.  It may include ownership rights in the developed item, use of pre-existing materials and tools, invention rights for any copyrights or patents that may flow from the development. 
  • With goods or services you purchase the item, with Software you get the rights to use the item.

In addition to these general items there needs to be different terms to manage the Supplier’s performance, manage the cost, and manage risks that are inherent with what is being procured and where or how it is being used and to manage specific risks with a Supplier. For example:
  • If the item is being purchased for use with an end customer you will have reputation, end-customer satisfaction issues and potential liability.
  • If the item is being purchased for internal use, you may have certain performance or efficiency risks. 
  • If it involves the purchase of goods or equipment you may have inventory liability and obsolescence risks.
  • If your purchase deals with information, you can have information security, access, personal data and privacy risks.
  • If you are dealing with money or financial issues you may need to deal with Supplier employee/third-party fraud risk.
  • For almost all purchases you will have regulatory compliance, environment, health, and safety issues that may vary based on the specific commodity.

My ideal contract system would be one where it asks the Buyer a number of basic questions and presents them with a pre-established framework from which to build the contract. The framework would include the typical clauses types that must be included and optional clauses that might be considered.  Then for each section it would provide the Buyer with a number of different options that may be used with instructions on when it should be used and what changes, if any, may be required to other clauses if it is used.

I have two basic problems with standard templates. The simple fact is standard templates are written for average risk purchases from average risk suppliers. If you need to manage risk of performance the language may not be there. (See My blogs on Managing Performance and Managing Risk)  The second problem that I have with standard templates is they don’t force the Buyer to think about what they need and why they need it so they aren’t learning about contracts. If you don’t learn about contracts by going through the thought process of determining what is needed for that specific situation, you aren’t going to be prepared to negotiate them.