Thursday, July 14, 2011

Contract Templates

Having worked for several major companies and been on both sides of the negotiation table, I’ve formed some clear opinions on contract templates. Most contract templates are based upon two basic expectations.
1. You are dealing with a moderate to low risk supplier who will accept all the terms that are there to protect the Buyer against the costs and risks the terms represent.
2. They assume that the activity you are dealing with is also moderate to low risk.

In a recent blog an individual asked how would you measure the success of a contract template. Some people responded that you could measure it based upon the adoption rate (how many times its accepted without negotiations) and how much negotiation occurs. I'm not sure that adoption rates are good measure. If you have a high percentage of adoption it could be a sign that you are assuming too much of the cost and risks in the relationship. It could also mean that the customer may not have other alternatives. As to the amount of negotiations, I think its not the amount of negotiations that are being conducted as much as what is being frequently negotiated. The results of that will partially tell you one indicator of success, especially if your goal was to reduce or limit the amount of time spent on negotiations. If you are constantly negotiating the same issue and frequently making concessions on that issue, it's probably not a successful template. You could save a lot of time and effort by modifying the term to what you most frequently have agreed.

There are other measures of success to also consider, Does the template describe what you want or need out of the deal? I’ve seen my share of contracts with problems where the individual tried to force fit a completely different situation into an existing contract template that simply didn’t work for what they wanted to accomplish. Does it effectively address the risks and costs of you want to assume? I’ve seen contract templates that were so risk averse that no one wanted to sign them without major negotiations. I’ve also seen standard templates used that didn’t adequately cover or allow you to manage the existing risks.

The point here is “one size fits all” doesn’t apply to contracts. In contracts “overkill” is almost as bad as “under kill”. When you have templates that try to manage ever potential risk that could occur (“overkill”) it makes the negotiation longer and more complicated and it can affect the price you pay for the goods or services. When you include less protection (“under kill”) negotiations may be simpler and faster but you may have more risks that aren’t protected.

My opinion is that contract templates should start as under kill, and be supplemented when you need additional terms or controls to manage either riskier suppliers or to deal with higher risk activities. The contract template should match the way that business will actually be done. I’ve run into a number of situations where because of outsourcing the business has changed, but the template never changed.

Unless you thoroughly understand the contract terms and the costs or risks the contract terms or conditions are designed to protect against, you should always involve your contracts person or lawyer for any contract changes. If a lawyer had confidence in your ability to correctly make the changes you could work with them to identify what terms they absolutely require involvement in versus what terms are strictly business terms that they don’t need to be involved in reviewing.

I’m not a big fan of standard templates. I have found that instead of having libraries of standard templates its better to have an outline of the types of terms that should be in a specific type agreement and then a library of standard terms and alternatives with guidance on which terms are recommended for each type of situation and what optional terms would be available for different situations or risks.

My reasoning is simple, if you tell the individual what to do by simply handing them a template to use they seldom learn what’s needed and why it’s needed or important. If there is a problem they can blame it on the template. When you require an individual to go through the process of constructing their agreement using a framework and alternative clauses based on the situation and risks, they learn what’s needed and why. If they miss something they have no one to blame but themselves so they will also take more pride in their work.

See also the Feb 24, 2011 post "Modifying templates to manage risk"

Body Language

Should You Attempt to Read and Use Body Language in Negotiations?

In every negotiation there are two forms of communication that occur, what we say and how we act or react. How we act or react is expressed by what’s called “non-verbals” which are also referred to as body language. Proponents of reading body language think it’s a way that you can see what the other person is thinking.

In writing about body language the argument is that how we react with body language during a negotiation will tell about what we are really thinking. In books and articles on body language they will describe signs that tell you that a person is listening and understanding what you are saying. There are negative signs that a person is not agreeing or is defensive. There can be signs showing the level of agreement or disagreement. There can also be signs of deceit.

If you want to read about body language, one of the best books is called “How to Read a Person Lake a Book: Observing Body Language to Know What People Are Thinking”.  The book was  written by Gerald I. Nierenberger, Henry H. Calero and Gabriel Grayson and available on

In many of the on line negotiation forums a number of people recommend that negotiations should always be face to face just so you can read the body language of your opponent. I’m not all that convinced of the importance of reading body language. If you are dealing with a novice negotiator who may never have read about body language, or someone on the negotiator’s team who may also not be aware of it, being able to read someone’s body language may help in the negotiation. In that instance it would be worth learning and face to face negotiations would be helpful.

When it may not be helpful and I the one caution I have about using body language is in situations where you are dealing with highly skilled negotiators. Skilled negotiators will control their actions and emotions just like a poker player. They may also use body language to convey the opposite of what they really feel. For example they could use body language to send negative signs when they may not be in disagreement or when they aren’t defensive to try to simply try to drive additional concessions. They may gasp in shock and surprise when they are neither shocked nor surprised. With skilled negotiators the problem you have is some reactions may be real and some may be play-acting. It can be difficult to sort out which is which.

Being able to read body language is a good tool to learn as a negotiator. You just need to remember that its not going to be 100% accurate.