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.