Sunday, January 1, 2012

Using a prior agreement or another’s company’s template to create your contract

Writing contracts is not easy, especially to do it correctly. Many times people may want to take a shortcut and simply take a prior agreement and work from that. If you don’t have a template that matches, people may also look for sample templates from others. While these may save time, both approaches are risky. For example, a supplier may suggest that you can use their template. It’s easy to see what’s included and whether that works or not. What is more difficult is identifying what is not included that should be there and being able to analyze what’s there to determine if it will meet your needs.

Let’s talk first about using a prior agreement. This is risky as the prior agreement represents a final negotiated position. Before using a prior agreement you would need to do your homework. You need to first understand what the negotiator started with. Then you need to learn what the circumstances were that caused the negotiator to change from their initial desired positions to what they finally agreed. Once you do that, you need to determine if those same conditions are present for your negotiation. If they aren’t and you have more leverage, you want to start out looking for more, not negotiating from an already negotiated position. If they are or you have less leverage for this negotiation, you may need to push to get what you had. If you go for more and open the entire agreement up to negotiation, there is the clear risk that you may wind up with less than you previously had. Use prior precedence when it’s to your advantage. If prior precedence isn’t to your advantage, be prepared with arguments on why it doesn’t apply in the current negotiation. Before I would ever consider using someone else’s agreement I would also want to make sure that the prior individual had a strong reputation for consistently creating good agreements. What you don’t want to do is to be replicating problems or language that could be problematic. An important point to remember is just because they had no problems when they used it, that doesn’t guarantee that you won’t have problems. Every procurement is different and each supplier is different.

In working for major corporations one of the things I found was each company had a library of a number of templates. They will have versions of each template that have been tailored to meet the applicable laws and practices of individual countries where they operate. While many different company templates may look alike, each has their subtle differences based upon the they risks they want managed, their priorities, how they manage the business, what they need for resale, and what costs are they willing to accept and manage. They will vary based upon the quality of the individuals that drafted them. As business evolves and changes templates should be changed. If they aren’t they may not work or work well.

In using templates I have a number of key questions I would ask.
1. You can see what’s in the template, but the key is what’s missing that you may need.
2. Does it will work with the way you and your company manages the business.
3. Does it reflect the way you actually are conducting business?
4. Does the template provide you with the necessary tools to manage performance?
5. Does it adequately manage the costs and risks of that specific purchase.
6. Does it adequately manage specific risks you have with the supplier?
7. In the negotiation, if the supplier is unwilling to accept certain risks, does it give you the control you need over what the supplier can do that could impact those risks?
8. What country was it drafted for and will it work and be enforceable in my location?
9. Does the document include risks my company would traditionally accept?
10. Is the contracting approach something that we will have the resources and expertise to manage?

Someone could provide you with a sample purchase of goods template where they use it for purchase of goods for internal consumption. That probably will not work well if you are purchasing goods in a production environment. Contracts are not like a hat where the manufacturer may say that one size fits all.

Prior agreements or standard templates can be good starting point, but they should never be looked upon as the final solution. As I say elsewhere most templates are designed to manage average risk purchasing activities with average risk suppliers. This means that unless what you are dealing with fits exactly into that norm, it may not fit and may not work.

The biggest problem I see with re-use and using a standard template is you never go through the process of thinking about what you need and why you need it. It’s that thought process that helps you learn how to effectively write contracts.

I write a blog called Knowledge to Negotiate where I share a wealth of information about what you need to know to write and negotiate contracts. My website makes it easy to find blog topics. A page called “Links to Blog” lists they 400+ posts alphabetically by subject. Each topic is hyperlinked to my blog post on that subject. To get you to think about how to create your own agreement that works there are two posts I would start with. The first is
Contracts - what should be in a contract. The second is: Writing purchase specifications, statements of work, scope of work

If you learned from this post, think about how much more you could learn from the book.
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