The “Tai Chi Chu” is a symbol for the philosophy of Yin-Yang that was taken from the Chinese book of changes called “I Ching”. Yin-Yang takes one thing, and notes that it can be expressed in two opposite ways. A hill has a dark side which gets less sun. This is the “Yin” side. The hill also has a sunny side which is the “Yang” side. Yin is the negative expression of the situation, Yang is the positive expression of the situation.
For example:
A glass is half full (Yang), or half empty (Yin)
A day can be sunny (Yang) or dark (Yin)
Business may be expanding (Yang) or contracting (Yin)
A task may be easy (Yang) or hard (Yin)
An issue may be good for one party (Yang) but bad for the other party (Yin)
In negotiations every issue can be characterized and be expressed in opposite terms similar to Yin-Yang depending upon the perspective you have. For you to “Win” the other party must “Lose”. In “give and take”, for you to take the other party must give. Issues that may be conceptually simple to you may be complex for them. Issues that are complex to you may be simple to them. For you to get improvement on the price they must reduce their margins. Each recognizes there is a limited base. It highlights that just like Yin-Yang there are two sides to each issue.
One of the keys in negotiations is to always consider both sides. If you only look at issues from your perspective, your view will be always focused on what would be good for you (the Yang side). You won’t understand what the impact may be to the other party that that they may view as their Yin side and that may affect their willingness to agree. In a negotiation, when the other party takes a position that will be a problem for you, explain the problem and the behavior that their position will drive. That will show them the Yin side of what they propose. In a negotiation for a supplier that would possibly be a single source I would always want a long term commitment on the having the product be available. When a supplier would tell me that they won’t provide me with that commitment I would use Yin-Yang in responding to them. I would agree that for them that may be potentially best for them (the Yang side). Then I would explain to them the Yin side of that position which was:
1) We wouldn’t invest in qualifying their product without that commitment (which would result in potentially no sales, and
2) If we did qualify them we would never consider them as a primary or single source of supply.
When you explain the Yin side that they may not have considered, they can then decide whether they want to maintain their position or change it because of the impact their position would have on them.
In writings about principled negotiation the suggestion is to “expand the pie”. The concept of “win-win” negotiating goes directly against Yin-Yang. It requires that there be two positive sides and no negative sides which may simply not be possible. Many times “expanding the pie” may not be something that you can do or may want to do. Expanding the pie may provide you with a Win or Yang, but under the Yin-Yang philosophy you also need to consider what you needed to give up to get that win (the Yin).
Many companies will have a mix of relationships with suppliers, which you could also consider as a form of Yin-Yang. Having a mix of relationships helps balance out the highs and lows. You have standard relationships where what you pay will vary based upon the market. You may also have strategic relationships. When you have a buyer’s market your purchase cost from the standard relationship will be low making it Yang activity. Your purchase from a strategic supplier will be higher making it a Yin activity.
When it’s a sellers market the reverse occurs.
When you negotiate and are trying to persuade the other party always phrase what you offer on the positive (Yang) side for them. When you are responding to a proposal from the other side always provide them the negative (Yin) perspective to you.
Yin-Yang is about balance. I don’t know If Sir Issac Newton ever read I Ching, but his third law of motion seems to state the same basic philosophy “for every action there is an equal and opposite reaction”.
Sunday, April 29, 2012
Friday, April 27, 2012
Memos to the file
Long ago I got into the practice of writing memos to the file and included them in contract negotiation documents and my contract management files. Some people will write memos to the file to “cover their behind”. My memos to the file were always intended to provide the reader with a clear picture of what went on; why certain decisions were made; and who or what influenced the decisions. I found this practice to be helpful in a number of ways. Any time an auditor would audit a contract, they would have most of their potential questions answered there and in the documentation that documented the selection of the source and that the price paid was reasonable. If I needed to transfer an agreement to another individual to manage the contract they would have a good history of what went on and why. If people asked them questions about the agreement they could point to that memo.
Doing a memo to the file is always helpful for re-negotiations. Many times the negotiators may change or it may have been negotiated a long time ago and you need to refresh your memory. What had been agreed in the past because of the circumstances at the time, may no longer apply. This allows you to differentiate those to negotiate better terms. Where memos to the file are extremely valuable in re-negotiations is when costs have been amortized into the price you paid previously. Since those costs would have been fully amortized, you can back those costs out of the rate and use that lower number as the starting point for the negotiation.
Memos to the file are helpful when a new user manager comes along and questions why the contract was agreed in the manner it was. It may have been negotiated and agreed based on the prior manager’s insistence and approval that you documented. When things go wrong, which they can do, memos to the file can help individuals that are having selective memory loss be refreshed about what the circumstances were and what they had been briefed upon and agreed.
Where I found memos to the file particularly helpful was when I was involved with negotiating agreements in conjunction with divestitures that had requirements to commit to purchase products or services for a period of time from the company that purchased the business. In many of those situations they would also be buying products and services from our company. In those situations, the negotiation is a form of balancing act. Our standard terms that we would want for our purchases, the new purchaser would demand for any purchases they needed to make from our company. You also have the additional complication that as the purchase of the business wasn’t complete, you didn’t want to have your demands be the cause of the buyer walking away from the purchase or demanding a significant reduction in the price to buy the business being divested. To manage that we needed to look at the impact on both sides to determine what was best for the company as a whole. For example in one divestiture our continuing demand would be only five percent of the buying company’s business. Our sales would be used for all of the new company’s customers. It was easy to determine rather than burden all of ours sales with an with that term, it would be best to give up pushing to get that term for our purchases. Based upon that and with senior management’s approval I gave up certain demands in turn for those terms not being applied to our sales agreement. For example one of our common terms was 60 day payment terms, so rather that have our sales be burdened with that I agreed to 30 day payment terms based on the simple fact that they would be purchasing twenty times more materials from us than we would purchase from them so it made financial sense to give the demand up for our purchases. When people would read the agreement I would always get a call about why I agreed certain things in the negotiation. I would point them to the memo to the file or send them a copy of it that explained the rationale for doing it and I had it approved in advance by senior management. That would end ninety-nine percent of the questions.
Doing a memo to the file is always helpful for re-negotiations. Many times the negotiators may change or it may have been negotiated a long time ago and you need to refresh your memory. What had been agreed in the past because of the circumstances at the time, may no longer apply. This allows you to differentiate those to negotiate better terms. Where memos to the file are extremely valuable in re-negotiations is when costs have been amortized into the price you paid previously. Since those costs would have been fully amortized, you can back those costs out of the rate and use that lower number as the starting point for the negotiation.
Memos to the file are helpful when a new user manager comes along and questions why the contract was agreed in the manner it was. It may have been negotiated and agreed based on the prior manager’s insistence and approval that you documented. When things go wrong, which they can do, memos to the file can help individuals that are having selective memory loss be refreshed about what the circumstances were and what they had been briefed upon and agreed.
Where I found memos to the file particularly helpful was when I was involved with negotiating agreements in conjunction with divestitures that had requirements to commit to purchase products or services for a period of time from the company that purchased the business. In many of those situations they would also be buying products and services from our company. In those situations, the negotiation is a form of balancing act. Our standard terms that we would want for our purchases, the new purchaser would demand for any purchases they needed to make from our company. You also have the additional complication that as the purchase of the business wasn’t complete, you didn’t want to have your demands be the cause of the buyer walking away from the purchase or demanding a significant reduction in the price to buy the business being divested. To manage that we needed to look at the impact on both sides to determine what was best for the company as a whole. For example in one divestiture our continuing demand would be only five percent of the buying company’s business. Our sales would be used for all of the new company’s customers. It was easy to determine rather than burden all of ours sales with an with that term, it would be best to give up pushing to get that term for our purchases. Based upon that and with senior management’s approval I gave up certain demands in turn for those terms not being applied to our sales agreement. For example one of our common terms was 60 day payment terms, so rather that have our sales be burdened with that I agreed to 30 day payment terms based on the simple fact that they would be purchasing twenty times more materials from us than we would purchase from them so it made financial sense to give the demand up for our purchases. When people would read the agreement I would always get a call about why I agreed certain things in the negotiation. I would point them to the memo to the file or send them a copy of it that explained the rationale for doing it and I had it approved in advance by senior management. That would end ninety-nine percent of the questions.
Wednesday, April 25, 2012
Outsourcing - Who should assume the risks?
I have a very simple view on risk management. The party that has the greatest ability to control and manage the risk should always be the one that should be responsible for the risk. When a company manages operations internally there will always be risks that they can manage, there will be risks they assume because of the cost to manage the risk, and there are risks they can't manage that they must assume if they want to conduct business.
When a company outsources they may want the outsource supplier to assume all risks. A smart outsource supplier will only assume those risks they can manage using their normal business practices and processes. If a customer wasn’t managing something on their own because of the cost, the supplier should pass any additional costs of managing that back to the buyer. Risks the outsource supplier can't manage are probably the same risks the buyer couldn't manage internally. Those risks should remain with the buyer. If the buyer demands the supplier assume those risks, the supplier should determine if they are prepared to accept those risks and what contingencies they need to build into the price to accept them or they need to decide to walk away.
If the buyer is smart they will know that the upside is if the risk occurs, they will be protected as the supplier has assumed the risk and any resulting cost. There is a huge downside in the fact that if the risk never occurs, the supplier makes that much more profit. An agreement to share in the risk makes the impact less extreme.
For any risk transfer or risk acceptance you always need to consider:
1) The ability to manage the risk.
2) The cost of managing that risk.
3) The probability of that risk, and
4) The potential cost impact should the risk materialize.
Many buyers want to transfer the risks and resulting costs to the supplier, but don’t want to pay the additional costs to manage the risk or the contingencies required to accept the risk. Many suppliers as part of negotiations want to transfer risk to the buyer. As a buyer before accepting a risk you always want to think about whether you have the ability to manage and control that risk. If you can’t manage or control it, don’t accept it.
Let’s consider the situation where you hire a contract manufacturer or CM to manufacture a product for you. In that situation you would need to consider things like:
1.Who designed the product? Product design has a number of potential impacts. It can impact manufacturability that can impact the quality of what’s produced. The design tolerances it was designed to can impact performance and reliability.
2.Who selected and specified the materials? Materials will be of different quality and reliability.
3.Who selected the material suppliers? Suppliers can impact quality, performance, product reliability, etc.
If the Buyer did all of these, can the CM manage all the risks associated? Will they be able to negotiate terms with the supplier that will protect them from the risks? Or can they only stand behind and be responsible for what they actually do which is to order the parts and manufacture the item?
The more control you want to retain over the process, the less the CM will be able to manage the risk and the more they will want the buyer to assume it. If you give control over these activities to the CM, the less control you have over managing the risk and the more you need the CM to assume and manage the risk.
In negotiations suppliers frequently want to have it both ways. They don’t want the buyer to have control over what they may do, and they want the buyer to assume certain risks. The problem is changes the supplier makes may also change the potential risk. My response to suppliers has always been simple. If you want flexibility that can create risks, you need to assume the responsibility for those risks. If you don’t want to accept the risk, then you need to agree to give me controls so I can manage the risk. Those are the only two choices. Otherwise you are asking me to assume a risk I can’t manage or control and I won’t do that.
When a company outsources they may want the outsource supplier to assume all risks. A smart outsource supplier will only assume those risks they can manage using their normal business practices and processes. If a customer wasn’t managing something on their own because of the cost, the supplier should pass any additional costs of managing that back to the buyer. Risks the outsource supplier can't manage are probably the same risks the buyer couldn't manage internally. Those risks should remain with the buyer. If the buyer demands the supplier assume those risks, the supplier should determine if they are prepared to accept those risks and what contingencies they need to build into the price to accept them or they need to decide to walk away.
If the buyer is smart they will know that the upside is if the risk occurs, they will be protected as the supplier has assumed the risk and any resulting cost. There is a huge downside in the fact that if the risk never occurs, the supplier makes that much more profit. An agreement to share in the risk makes the impact less extreme.
For any risk transfer or risk acceptance you always need to consider:
1) The ability to manage the risk.
2) The cost of managing that risk.
3) The probability of that risk, and
4) The potential cost impact should the risk materialize.
Many buyers want to transfer the risks and resulting costs to the supplier, but don’t want to pay the additional costs to manage the risk or the contingencies required to accept the risk. Many suppliers as part of negotiations want to transfer risk to the buyer. As a buyer before accepting a risk you always want to think about whether you have the ability to manage and control that risk. If you can’t manage or control it, don’t accept it.
Let’s consider the situation where you hire a contract manufacturer or CM to manufacture a product for you. In that situation you would need to consider things like:
1.Who designed the product? Product design has a number of potential impacts. It can impact manufacturability that can impact the quality of what’s produced. The design tolerances it was designed to can impact performance and reliability.
2.Who selected and specified the materials? Materials will be of different quality and reliability.
3.Who selected the material suppliers? Suppliers can impact quality, performance, product reliability, etc.
If the Buyer did all of these, can the CM manage all the risks associated? Will they be able to negotiate terms with the supplier that will protect them from the risks? Or can they only stand behind and be responsible for what they actually do which is to order the parts and manufacture the item?
The more control you want to retain over the process, the less the CM will be able to manage the risk and the more they will want the buyer to assume it. If you give control over these activities to the CM, the less control you have over managing the risk and the more you need the CM to assume and manage the risk.
In negotiations suppliers frequently want to have it both ways. They don’t want the buyer to have control over what they may do, and they want the buyer to assume certain risks. The problem is changes the supplier makes may also change the potential risk. My response to suppliers has always been simple. If you want flexibility that can create risks, you need to assume the responsibility for those risks. If you don’t want to accept the risk, then you need to agree to give me controls so I can manage the risk. Those are the only two choices. Otherwise you are asking me to assume a risk I can’t manage or control and I won’t do that.
Tuesday, April 24, 2012
Performance Bonds or Financial Guarantees of Performance in Construction Contracts.
In the event of a breach of a contract by a contractor where the contractor fails to complete the work or abandons the work, the prime remedy a buyer has is to claim breach and pursue damages for the “cost of cover”. In construction that is the cost of having another contractor come in and complete the work.
When you require a performance bonds or financial performance guarantee you may not need to go to court to recover your damages. If there breach of performance you make a claim against the
bond issuer or guarantor. The bond issuer or guarantor can contract the work out and pay to have it completed if it may be completed within the cost of the bond or guarantee. If the cost of completion is more that that amount, they would simply pay the amount of the bond or guarantee to the buyer. At that point the buyer who would then be able to contract to have the work completed.
The collecting on the bond or guarantee doesn't excuse the original contractor. If there is additional cost over what you recovered under the bond or guarantee, you can then exercise your remedy under law directly against the contractor to collect any remaining damages to complete the work so you may recover your full "costs of cover".
The real advantage of having a performance bond or financial performance guarantee is instead of having to invest your money to complete the work and then wait for the recovery of damages that you may never collect, the response from the bond issuer or guarantor is immediate. The one disadvantage is bonds or third party guarantees add to your cost of construction. The second disadvantage is you now are dealing with a party whose sole goal is to minimize their costs.
If you deal with a high quality supplier that has significant assets it may make sense to not require a performance bond or guarantee as there is a high probability they will complete the work as they know if they don’t, they will be liable for the additional costs of re-procurement, any liquidated damages and that is likely to be more than what it would cost them to complete the work. If you deal with a contractor or supplier that isn’t as financially stable or a joint-venture company that was formed to do the work and may have limited assets on its own, you probably should require a performance bond or require that the two companies that make up the joint provide a form of parent guarantee in proportion to their share in the joint-venture company. Unless you have a parent or company guarantee, in determining whether a subsidiary of a company is financially stable, you can only look to the assets of that subsidiary.
When you require a performance bonds or financial performance guarantee you may not need to go to court to recover your damages. If there breach of performance you make a claim against the
bond issuer or guarantor. The bond issuer or guarantor can contract the work out and pay to have it completed if it may be completed within the cost of the bond or guarantee. If the cost of completion is more that that amount, they would simply pay the amount of the bond or guarantee to the buyer. At that point the buyer who would then be able to contract to have the work completed.
The collecting on the bond or guarantee doesn't excuse the original contractor. If there is additional cost over what you recovered under the bond or guarantee, you can then exercise your remedy under law directly against the contractor to collect any remaining damages to complete the work so you may recover your full "costs of cover".
The real advantage of having a performance bond or financial performance guarantee is instead of having to invest your money to complete the work and then wait for the recovery of damages that you may never collect, the response from the bond issuer or guarantor is immediate. The one disadvantage is bonds or third party guarantees add to your cost of construction. The second disadvantage is you now are dealing with a party whose sole goal is to minimize their costs.
If you deal with a high quality supplier that has significant assets it may make sense to not require a performance bond or guarantee as there is a high probability they will complete the work as they know if they don’t, they will be liable for the additional costs of re-procurement, any liquidated damages and that is likely to be more than what it would cost them to complete the work. If you deal with a contractor or supplier that isn’t as financially stable or a joint-venture company that was formed to do the work and may have limited assets on its own, you probably should require a performance bond or require that the two companies that make up the joint provide a form of parent guarantee in proportion to their share in the joint-venture company. Unless you have a parent or company guarantee, in determining whether a subsidiary of a company is financially stable, you can only look to the assets of that subsidiary.
Non-poaching provisions
A lawsuit has been brought against Apple, Google and several other San Francisco area technology firms alleging they colluded to avoid hiring employees of the other companies and the net result was to thwart competition for those employees thereby artificially keeping their salaries down. It is argued that each maintained a "blacklist" of companies they couldn't hire from which would be a form of restraint to movement of employees. I thought this would be it a good time to discuss “non-poaching” clauses.
Non-poaching clauses are common in many service related contracts and with temporary labor agreements. In “poaching” you are hiring an employee of a company that you do business. Non-poaching clauses are legal and my opinion is this case will have no effect on "poaching clauses" in contracts. In a poaching situation the companies agree that they will not recruit each other’s employees. It does not prevent individuals from pursuing employment on their own with the other company.
In many of these section you may have
1.Agreement that both parties will not recruit any individual that worked as part of the contracted activity.
2.A period of time in which the recruitment is prohibited.
3.Either an outright restriction against hiring the individuals during that period or a specified damage to be paid if the employee solicited work on their own is independently hired without any recruitment.
The narrower the non-poaching definition, the less likely there would be any problems from such a clause. For example restricting the hiring of all employees of a company may be more problematic than limiting it to only those employees that worked as part of that contracted activity. With that narrower definition it’s much easier to manage and would be less expensive, as damages would only apply to hiring of those specific individuals.
In the Apple, Google situation the facts are different. There probably was no written agreement. The restriction (if they existed) did not apply to specific individuals that performed work for the other company. The argument is that they applied to all employees of the other firms. Instead of the worker being able to seek work at any company other than the one they had previously done work for, the argument in the case was this group of companies were by their agreement deliberately not hiring individuals from these other companies to prevent each other from poaching the other companies employees. The argument is the restriction (if it existed) constituted a restraint of trade artificially keeping the employees salaries low.
Courts will enforce what the parties agreed as long as it isn't illegal. Standard non-poaching provisions have been held to be legal. The courts will look at the circumstance and facts in the lawsuit against Apple, Google and others to determine if there was a conspiracy and whether the conduct was legal.
Non-poaching clauses are common in many service related contracts and with temporary labor agreements. In “poaching” you are hiring an employee of a company that you do business. Non-poaching clauses are legal and my opinion is this case will have no effect on "poaching clauses" in contracts. In a poaching situation the companies agree that they will not recruit each other’s employees. It does not prevent individuals from pursuing employment on their own with the other company.
In many of these section you may have
1.Agreement that both parties will not recruit any individual that worked as part of the contracted activity.
2.A period of time in which the recruitment is prohibited.
3.Either an outright restriction against hiring the individuals during that period or a specified damage to be paid if the employee solicited work on their own is independently hired without any recruitment.
The narrower the non-poaching definition, the less likely there would be any problems from such a clause. For example restricting the hiring of all employees of a company may be more problematic than limiting it to only those employees that worked as part of that contracted activity. With that narrower definition it’s much easier to manage and would be less expensive, as damages would only apply to hiring of those specific individuals.
In the Apple, Google situation the facts are different. There probably was no written agreement. The restriction (if they existed) did not apply to specific individuals that performed work for the other company. The argument is that they applied to all employees of the other firms. Instead of the worker being able to seek work at any company other than the one they had previously done work for, the argument in the case was this group of companies were by their agreement deliberately not hiring individuals from these other companies to prevent each other from poaching the other companies employees. The argument is the restriction (if it existed) constituted a restraint of trade artificially keeping the employees salaries low.
Courts will enforce what the parties agreed as long as it isn't illegal. Standard non-poaching provisions have been held to be legal. The courts will look at the circumstance and facts in the lawsuit against Apple, Google and others to determine if there was a conspiracy and whether the conduct was legal.
Sunday, April 22, 2012
What to do when negotiating with a better negotiator,
The first thing to remember is the reason why you are having the negotiation in the first place is because both sides felt that have something to gain that will be lost if no agreement is reached.
If you can afford the delay consider bringing someone else into the negotiation to help you. I once was negotiating with a Japanese supplier that had brought a team of six people to the negotiation. As the negotiation progressed their team had significant discussions in Japanese and then the individual who was most fluent in English but who was not the decision maker would respond. Instead of negotiating with one party, I was negotiating against the team. I took a break, checked with my manager who told me that one of managers from our Japanese procurement office was in town. We asked him to participate in the negotiation and that changed the entire dynamics of the negotiation. The talking among the supplier’s team ended as I had someone at the table that would understand what was said. I would then explain what we needed and why to my Japanese counterpart who would then address that in Japanese to the true decision maker. I still did the negotiating but he helped me be successful.
If you don’t understand what the negotiator is proposing or the impact, always defer your response until you can discuss it with someone that will understand and can explain what it means, and what the impact will be. Don’t get pushed into agreeing to things you don’t understand.
If you prepared well, you should have established your goals and minimums. Never agree to anything less than your minimum. Keep track of all the concessions you make and their cost impact to demand a price reduction.
If what they want will add to your cost or risk, identify that and say no.
If they need or want the business they will need to get your agreement. If they insist on getting what they proposed and that would make it a bad deal for you, you need to be prepared to walk away.
As the failure to come to agreement may be caused by the parties not effectively communicating, before you walk away take the time to clearly define exactly what the issue or point is that is the deal breaker that is causing you to walk away. Write that down. Share that with both your counterpart and with the Buyer or Supplier’s management team. The reason for that is simple. Many times the negotiator, especially of they represent or are part of sales, may be trying to make it a win for them. They may be limited in what they can agree to. They may not know what the company will agree to or how much they need or want the business. Taking the matter out of the negotiator’s hands and making management aware of it allows the other party to make it strictly as a business decision.
If you can afford the delay consider bringing someone else into the negotiation to help you. I once was negotiating with a Japanese supplier that had brought a team of six people to the negotiation. As the negotiation progressed their team had significant discussions in Japanese and then the individual who was most fluent in English but who was not the decision maker would respond. Instead of negotiating with one party, I was negotiating against the team. I took a break, checked with my manager who told me that one of managers from our Japanese procurement office was in town. We asked him to participate in the negotiation and that changed the entire dynamics of the negotiation. The talking among the supplier’s team ended as I had someone at the table that would understand what was said. I would then explain what we needed and why to my Japanese counterpart who would then address that in Japanese to the true decision maker. I still did the negotiating but he helped me be successful.
If you don’t understand what the negotiator is proposing or the impact, always defer your response until you can discuss it with someone that will understand and can explain what it means, and what the impact will be. Don’t get pushed into agreeing to things you don’t understand.
If you prepared well, you should have established your goals and minimums. Never agree to anything less than your minimum. Keep track of all the concessions you make and their cost impact to demand a price reduction.
If what they want will add to your cost or risk, identify that and say no.
If they need or want the business they will need to get your agreement. If they insist on getting what they proposed and that would make it a bad deal for you, you need to be prepared to walk away.
As the failure to come to agreement may be caused by the parties not effectively communicating, before you walk away take the time to clearly define exactly what the issue or point is that is the deal breaker that is causing you to walk away. Write that down. Share that with both your counterpart and with the Buyer or Supplier’s management team. The reason for that is simple. Many times the negotiator, especially of they represent or are part of sales, may be trying to make it a win for them. They may be limited in what they can agree to. They may not know what the company will agree to or how much they need or want the business. Taking the matter out of the negotiator’s hands and making management aware of it allows the other party to make it strictly as a business decision.
How to use the “funder” in negotiations
In major sales, a supplier’s sales person will try to identify the type of buyer they are dealing with. In most major procurement activities there are at least five buying influences.
1. The funder. Their focus is price, performance and return on investment (ROI)
2.The user. This is someone who will actually use the product or service. Their focus is on making their job easier.
3. The champion for the purchase. This individual may advocate the purchase as part of solving a problem or improving performance. Their focus is on making the problem go away or getting improvements
4.The technical influence. They can have veto power over a decision on technical grounds. Their focus is on the technical fit of the purchase
5.The procurement person.
For the sales person to be successful they need to know who will be making the decision and how to focus on them, as each will be looking for different results. My preference is to always keep “the funder” away from the sales people until I want to involve them. The reason for that is in the supplier’s dealing with the users, the champion or the technical influence, the supplier will begin to form an opinion about how they perceive their and other suppliers chances of getting the business. The more they know you need or want them the less competitive they feel they need to be. This has a negative impact on the procurement person’s ability to negotiate price.
This is where “the funder” can be used to assist in the negotiation of the price and can help level the playing field. While a supplier may know that they have a solution that is preferred against other suppliers, what they don’t know is all the other problems or investments “the funder” has to consider in terms of whether to fund this purchase. “The funder” will look upon the purchase from a strictly financial results perspective. How does it fit within their available budget? How does it compare with all the other investments they need to make? What is the ROI from this purchase versus other investments?
“The funder” can send the message that if the supplier wants to make the sale, and have him or her invest in solving this problem versus other investments they need to make, the supplier needs to provide them with a better ROI. To improve the ROI the supplier has only two options and both of them are good for the buyer. They can provide more at the same price, such as extended warranty or other services or they can reduce the price. When a buyer tells a supplier they need to lower their price the supplier knows that’s the buyer’s job and they may still not lose the business if everyone else on the decision team wants that solution. When the funder tells a supplier they need to improve their ROI or risk losing the sale it’s a different message. If the funder doesn’t agree, the odds are high that they will lose the sale.
1. The funder. Their focus is price, performance and return on investment (ROI)
2.The user. This is someone who will actually use the product or service. Their focus is on making their job easier.
3. The champion for the purchase. This individual may advocate the purchase as part of solving a problem or improving performance. Their focus is on making the problem go away or getting improvements
4.The technical influence. They can have veto power over a decision on technical grounds. Their focus is on the technical fit of the purchase
5.The procurement person.
For the sales person to be successful they need to know who will be making the decision and how to focus on them, as each will be looking for different results. My preference is to always keep “the funder” away from the sales people until I want to involve them. The reason for that is in the supplier’s dealing with the users, the champion or the technical influence, the supplier will begin to form an opinion about how they perceive their and other suppliers chances of getting the business. The more they know you need or want them the less competitive they feel they need to be. This has a negative impact on the procurement person’s ability to negotiate price.
This is where “the funder” can be used to assist in the negotiation of the price and can help level the playing field. While a supplier may know that they have a solution that is preferred against other suppliers, what they don’t know is all the other problems or investments “the funder” has to consider in terms of whether to fund this purchase. “The funder” will look upon the purchase from a strictly financial results perspective. How does it fit within their available budget? How does it compare with all the other investments they need to make? What is the ROI from this purchase versus other investments?
“The funder” can send the message that if the supplier wants to make the sale, and have him or her invest in solving this problem versus other investments they need to make, the supplier needs to provide them with a better ROI. To improve the ROI the supplier has only two options and both of them are good for the buyer. They can provide more at the same price, such as extended warranty or other services or they can reduce the price. When a buyer tells a supplier they need to lower their price the supplier knows that’s the buyer’s job and they may still not lose the business if everyone else on the decision team wants that solution. When the funder tells a supplier they need to improve their ROI or risk losing the sale it’s a different message. If the funder doesn’t agree, the odds are high that they will lose the sale.
How much do you owe?
My wife received a bill from one of her suppliers. The bill was for the entire contract price even though no work was performed. Her company had breached their obligations to provide materials so work could be done. She asked me what did they owe the company? Could the Supplier invoice the full amount? Clearly there was a breach of the agreement. The agreement itself included no limitation of liability provision and the governing law was English law. Payments were due in consideration of the supplier’s services of which none were provided.
The supplier clearly has the right to terminate the agreement and claim damages. The question here is what damages could they claim and could they claim the entire amount of the contract?
Since no work was scheduled and then cancelled there was no impact on their personnel expense. Since work was not performed, no cost or liabilities were incurred on the work. I concluded the supplier suffered no direct, indirect or consequential damages. As there was no limitation of liability precluding claims for lost profits, I determined that they could claims lost profits. There is a significant difference between what the lost profits would be and the full amount of the contract. My opinion was that the difference between the amount of the lost profits and the full amount of the contract would be considered a penalty and would not be allowable under English Law. A penalty is when one party would be unjustly enriched at the expense of the other party. In this the supplier had invoiced for work they simply had not performed. Since they incurred no costs, getting paid for costs they didn’t incur would be unjust enrichment.
Suppliers may invoice for things they clearly aren’t owed. Always consider what they are contractually entitled to.
The supplier clearly has the right to terminate the agreement and claim damages. The question here is what damages could they claim and could they claim the entire amount of the contract?
Since no work was scheduled and then cancelled there was no impact on their personnel expense. Since work was not performed, no cost or liabilities were incurred on the work. I concluded the supplier suffered no direct, indirect or consequential damages. As there was no limitation of liability precluding claims for lost profits, I determined that they could claims lost profits. There is a significant difference between what the lost profits would be and the full amount of the contract. My opinion was that the difference between the amount of the lost profits and the full amount of the contract would be considered a penalty and would not be allowable under English Law. A penalty is when one party would be unjustly enriched at the expense of the other party. In this the supplier had invoiced for work they simply had not performed. Since they incurred no costs, getting paid for costs they didn’t incur would be unjust enrichment.
Suppliers may invoice for things they clearly aren’t owed. Always consider what they are contractually entitled to.
Friday, April 13, 2012
Can you force a party to a contract to perform?
The only way a party to a contract may be forced to perform would be under the law of equity. Under the law of equity a party may seek what’s called “specific performance”. In that the court orders the non-performing party to perform. If they fail to perform they would be in contempt of court. Courts are extremely reluctant to issue orders for specific performance and the general requirement for specific performance is the party seeking the specific performance order must prove the performance is unique and could only be provided by that party. If another party could perform the work or sell the product or service, a court will not order specific performance. Where this leaves the party who wants, but is not getting performance, is they will have any remedies they reserved under the agreement for non-performance and they will rights for breach of the agreement by the other party.
There may be a number of reasons why a party to a contract may not be performing. One may be the contract wasn’t structured properly, where it allowed the supplier or contractor to commence the work and then abandon the work while they perform work for other customers. They may intend to return and complete the work. At the other end of the scale you can have companies that are deliberately not proceeding with the work simply because it will cost them more to complete the work than what they are owed. If you encountered the latter, you need to review the agreement to determine what remedies you may have and whether you may claim anticipatory breach.
Anticipatory breach of a contract can occur from statements the party made, or by that party’s actions. There would not be an anticipatory breach if the party merely suspended the work and would still be able to complete the work on time. If there was anticipatory breach you could pursue termination for cause and damages you sustain. What you would recover would be based upon the types and amount of damage the agreement allows you to recover.
If the agreement had liquidated damages, you would be able to claim that, but that would be all you could claim. If you didn’t have a liquidated damages provision, your recovery would be based upon the actual damages you sustain and the types of damages the contract allows you to recover. Damages may be direct, incidental, consequential, and may include lost profits. For example, if you needed to hire a party to have the non-performing party’s equipment removed and stored off site, that’s a damage you sustained.
What types of remedies might you have? If you want remedies other than those that you have at law or in equity, those remedies need to be reserved in the agreement. For example, if you were dealing with a prime contractor and they breached the agreement, you could potentially have as remedies that the prime must assign all subcontracts to you so you can use the existing subcontractors to complete the work. You could include the right to keep and use any of their equipment on site until the work is completed. Why would a contractor agree to that? The simple fact is since they will be liable for damages as a result of their breach, allowing those things would mitigate the amount of damages you could claim. It could also cost them more in the end if they didn’t.
There may be a number of reasons why a party to a contract may not be performing. One may be the contract wasn’t structured properly, where it allowed the supplier or contractor to commence the work and then abandon the work while they perform work for other customers. They may intend to return and complete the work. At the other end of the scale you can have companies that are deliberately not proceeding with the work simply because it will cost them more to complete the work than what they are owed. If you encountered the latter, you need to review the agreement to determine what remedies you may have and whether you may claim anticipatory breach.
Anticipatory breach of a contract can occur from statements the party made, or by that party’s actions. There would not be an anticipatory breach if the party merely suspended the work and would still be able to complete the work on time. If there was anticipatory breach you could pursue termination for cause and damages you sustain. What you would recover would be based upon the types and amount of damage the agreement allows you to recover.
If the agreement had liquidated damages, you would be able to claim that, but that would be all you could claim. If you didn’t have a liquidated damages provision, your recovery would be based upon the actual damages you sustain and the types of damages the contract allows you to recover. Damages may be direct, incidental, consequential, and may include lost profits. For example, if you needed to hire a party to have the non-performing party’s equipment removed and stored off site, that’s a damage you sustained.
What types of remedies might you have? If you want remedies other than those that you have at law or in equity, those remedies need to be reserved in the agreement. For example, if you were dealing with a prime contractor and they breached the agreement, you could potentially have as remedies that the prime must assign all subcontracts to you so you can use the existing subcontractors to complete the work. You could include the right to keep and use any of their equipment on site until the work is completed. Why would a contractor agree to that? The simple fact is since they will be liable for damages as a result of their breach, allowing those things would mitigate the amount of damages you could claim. It could also cost them more in the end if they didn’t.
Monday, April 9, 2012
Intellectual Property Indemnification – When to commence remedies
Most Intellectual Property Indemnification clauses consist of several elements. The first element is the indemnification element. The second is remedies or actions the supplier must take in the event of an infringement. The third element is a list of situations that excuse the supplier from needing to provide the indemnification or remedies. One of the key issues in the negotiation of an intellectual property indemnification is those actions or remedies and especially what triggers the supplier to pursue those remedies. The typical remedies that a buyer may want in descending order are:
1. Obtain the right to use the Intellectual Property. (A license)
2. Modify their product or service so it’s non-infringing.
3. Replace the product or service with non-infringing products or service.
4. Allow cancellation of open orders without liability.
5. Refund the amount paid for any all inventories of infringing product
The reason why they are in that order is because the impact and cost to the buyer increases as you descend down the list.
To a supplier, the item that is the least expensive for the buyer may be the most expensive for the supplier. As such, suppliers will always be concerned about what triggers the obligation to take those actions and provide those remedies. I’ve seen contracts that require remedies to be provided upon either a reasonable belief that a claim will be filed or the actual filing of a claim. The problem with that is while there may be a third party claim of infringement, the claim may not be valid and immediately responding to that may be adding unnecessary work or cost.
If you wait for the final claim to be decided in court, the impact to the buyer would be a disruption in supply until one of the remedies is provided. That disruption to supply isn’t acceptable to buyers as it would cause their supply chain to break if there wasn’t a second source of supply.
If there was a claim, as a buyer the latest you could wait before either you need to have the supplier commence those actions work or be qualifying another supplier would be the combined lead time for the product purchased plus the estimated period to either develop or qualify another supplier to provide an alternative product. That time period could be well over a year.
Another way you could look at what makes sense in terms of when a supplier needs to commence the actions is to consider what a reasonable period would be for both parties to perform discovery after the claim has been filed. If that period has lapsed and the claim was still being litigated, I would want the supplier to commence providing the remedies.
If the supplier felt that they still could defend against the claim, their preference would be to work on modifying the product to make it non-infringing. If they lose, they will normally be ordered to pay a license fee on the infringing products that exist and have been sold. They may not be able to negotiate a license. As a buyer, as long as I can still use the products and the solution provided for the future is cost neutral, I would have less of a concern.
If you encounter this in a negotiation involve your law department. They should be able to help provide a solution and identify how long the litigation could last and what a reasonable period would be for discovery.
1. Obtain the right to use the Intellectual Property. (A license)
2. Modify their product or service so it’s non-infringing.
3. Replace the product or service with non-infringing products or service.
4. Allow cancellation of open orders without liability.
5. Refund the amount paid for any all inventories of infringing product
The reason why they are in that order is because the impact and cost to the buyer increases as you descend down the list.
To a supplier, the item that is the least expensive for the buyer may be the most expensive for the supplier. As such, suppliers will always be concerned about what triggers the obligation to take those actions and provide those remedies. I’ve seen contracts that require remedies to be provided upon either a reasonable belief that a claim will be filed or the actual filing of a claim. The problem with that is while there may be a third party claim of infringement, the claim may not be valid and immediately responding to that may be adding unnecessary work or cost.
If you wait for the final claim to be decided in court, the impact to the buyer would be a disruption in supply until one of the remedies is provided. That disruption to supply isn’t acceptable to buyers as it would cause their supply chain to break if there wasn’t a second source of supply.
If there was a claim, as a buyer the latest you could wait before either you need to have the supplier commence those actions work or be qualifying another supplier would be the combined lead time for the product purchased plus the estimated period to either develop or qualify another supplier to provide an alternative product. That time period could be well over a year.
Another way you could look at what makes sense in terms of when a supplier needs to commence the actions is to consider what a reasonable period would be for both parties to perform discovery after the claim has been filed. If that period has lapsed and the claim was still being litigated, I would want the supplier to commence providing the remedies.
If the supplier felt that they still could defend against the claim, their preference would be to work on modifying the product to make it non-infringing. If they lose, they will normally be ordered to pay a license fee on the infringing products that exist and have been sold. They may not be able to negotiate a license. As a buyer, as long as I can still use the products and the solution provided for the future is cost neutral, I would have less of a concern.
If you encounter this in a negotiation involve your law department. They should be able to help provide a solution and identify how long the litigation could last and what a reasonable period would be for discovery.
Wednesday, April 4, 2012
Apple’s profitability
There are two types of companies that exist. Those that don’t want to compete on cost and those that compete on cost. The companies that don’t want to compete on cost are usually market leaders that may be first out with a product and use tactics to drive you away from measuring them based on cost. They will focus on building a brand name that drives the feeling of prestige with the purchase of their product. They will add new or different features to make their product distinct in the marketplace and provide benefits the others can’t provide. They will have slick designs with great appearance. Their products will be designed in a manner where they are intuitive and simple to use. They will also focus on providing excellent service and support. Their intent is to create a loyal following of customers. Apple is a company that doesn’t want to compete on cost.
I don’t know how many of you have ever been to an Apple store, but if you have its easy to see how Apple became so successful in recent years and how they were able to generate close to 100 Billion dollars in profit that they hold. They use all the tactics they can use to get customers to focus less on cost or competition. How do they do that?
They focused on having their product be intuitive, simple and easy to use.
They designed their software to be reliable.
They created markets where markets didn’t exist such as the IPod and IPad.
Where markets existed, such as cell phones they adding features to expand their functionality.
They enabled developers to write applications to provide even more functionality.
They made updating the software simple.
To upgrade the operating system (which allows you to use newer functionality) they priced in inexpensively.
Their designs are innovative and great in appearance.
When you go to one of their stores, you can see touch and try their products.
You are surrounded by a number of knowledgeable sales people.
If you have a problem there is the knowledge bar where you can get help.
It’s all about the experience.
The simple fact is by doing all of these things, they have almost locked their customers into using them and their products in the future. Purchase an I-Pod and you buy music on I-Tunes. Want to change to a different player? You would need to convert all your mp-4 formats to Mp-3. Buy an application on I-Phone or I-Pad, that won’t work on non-Apple device. What a great example of how you make it costly or difficult to change suppliers to protect your pricing and retain your customers.
How did Apple become so profitable and how did they wind up producing products in China? While most people would say it’s the lower labor cost they would be wrong. The real answer is the United States corporate tax rate has driven companies to produce product and provide services outside the United States. It has driven those same profitable companies to not invest in traditional manufacturing and service jobs in the U.S. It has further created companies having huge profits held off shore because the cost to repatriate those profits back into the U.S. is also too high. That prohibits investment in the U.S. At a time where the United States borrows money from China there are billions and billions of dollars of profits that U.S. Corporations are holding off shore rather that pay tax to repatriate those profits. This means the tax rate has not only driven jobs out of the U.S. it has also providing a large financial dis-incentive to use those profits to invest in the U.S. to create jobs. Apple alone has some sixty-billion dollars $60,000,000,000 in profits that they hold outside the U.S.
While human rights organizations focus on the conditions of Foxconn workers in China who build products for Apple, who is focused on doing what’s needed for the American people? One in every two American homes has an Apple product. I’m sure that Apple has done everything legally in managing their taxes so they are not the problem, the problem is the U.S. tax rates and laws that have driven the export of jobs out of the U.S.
I’m not a political person, but in an election year where the creation of jobs is a critical issue, why is no one is talking about how to change the corporate tax rates and close all loopholes that have been the primary cause for job loss in the United States? My opinion is that if it weren’t for the taxes and the tax management strategies, there would be more jobs in the U.S.
If you would like to read about how tax management is done I wrote a separate post called “Tax Management contracting strategies” where I described how they legally do it.
I don’t know how many of you have ever been to an Apple store, but if you have its easy to see how Apple became so successful in recent years and how they were able to generate close to 100 Billion dollars in profit that they hold. They use all the tactics they can use to get customers to focus less on cost or competition. How do they do that?
They focused on having their product be intuitive, simple and easy to use.
They designed their software to be reliable.
They created markets where markets didn’t exist such as the IPod and IPad.
Where markets existed, such as cell phones they adding features to expand their functionality.
They enabled developers to write applications to provide even more functionality.
They made updating the software simple.
To upgrade the operating system (which allows you to use newer functionality) they priced in inexpensively.
Their designs are innovative and great in appearance.
When you go to one of their stores, you can see touch and try their products.
You are surrounded by a number of knowledgeable sales people.
If you have a problem there is the knowledge bar where you can get help.
It’s all about the experience.
The simple fact is by doing all of these things, they have almost locked their customers into using them and their products in the future. Purchase an I-Pod and you buy music on I-Tunes. Want to change to a different player? You would need to convert all your mp-4 formats to Mp-3. Buy an application on I-Phone or I-Pad, that won’t work on non-Apple device. What a great example of how you make it costly or difficult to change suppliers to protect your pricing and retain your customers.
How did Apple become so profitable and how did they wind up producing products in China? While most people would say it’s the lower labor cost they would be wrong. The real answer is the United States corporate tax rate has driven companies to produce product and provide services outside the United States. It has driven those same profitable companies to not invest in traditional manufacturing and service jobs in the U.S. It has further created companies having huge profits held off shore because the cost to repatriate those profits back into the U.S. is also too high. That prohibits investment in the U.S. At a time where the United States borrows money from China there are billions and billions of dollars of profits that U.S. Corporations are holding off shore rather that pay tax to repatriate those profits. This means the tax rate has not only driven jobs out of the U.S. it has also providing a large financial dis-incentive to use those profits to invest in the U.S. to create jobs. Apple alone has some sixty-billion dollars $60,000,000,000 in profits that they hold outside the U.S.
While human rights organizations focus on the conditions of Foxconn workers in China who build products for Apple, who is focused on doing what’s needed for the American people? One in every two American homes has an Apple product. I’m sure that Apple has done everything legally in managing their taxes so they are not the problem, the problem is the U.S. tax rates and laws that have driven the export of jobs out of the U.S.
I’m not a political person, but in an election year where the creation of jobs is a critical issue, why is no one is talking about how to change the corporate tax rates and close all loopholes that have been the primary cause for job loss in the United States? My opinion is that if it weren’t for the taxes and the tax management strategies, there would be more jobs in the U.S.
If you would like to read about how tax management is done I wrote a separate post called “Tax Management contracting strategies” where I described how they legally do it.
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