Who’s negotiating your contracts?

I’ll take a bet that the ones negotiating your contracts; they don't love it.

Many negotiators feel uncomfortable and even inadequate in their role, and they don’t see the value of quality contracts. At best they see the value but hate that it slows down the deal making process.

It's hard for the people doing negotiations

Both machine sellers and buyers tell us that the contractual risk focus for their daily jobs is getting bigger and bigger. More attention to legal risk distribution and minimisation. On a personal level, people don’t seem very happy with this development. It takes time away from discussing technical, operational, and commercial matters.

It is also related to the background and backing of the frontliners. Responsibility have incrementally added to the negotiator’s role, or management have given the responsibility, but they might lack interest, or ability, or clear expectations.

Having spent most my professional life negotiating contracts, I’ve come across some excellent practices, and some less excellent practices. I’ve also made some mistakes myself along the way. But being guided, trained, and exposed to many solid negotiators, have helped me.

?

What can go wrong.

To understand what can go wrong with improper contracting, we present the RATS framework, compromising risk, ambiguity, time, and stress. All of them impacting your people, profits, and operations.

Let's get into it

• Risk: Take on too much risk. Risk in general could be fine. Insurance companies live of taking risks. What I’m talking about here are the risks that doesn’t really belong to you. Risk that’s hard to manage for you, but better for the counterparty. Risk that is neither back2back with your sub-supplier, nor in your control. Taking on this, leaves you vulnerable to projects gone bad, on time, cost, and quality.
• Ambiguity: It’s not clear who takes on what. A poorly negotiated, and defined contract leaves open spots for who’s responsible for what. This means that a deliverable is executed double (rarely) or it’s not done at all. And one of the hard things to get right are the legal, commercial, operational, and technical elements working well together. Seller’s offer, terms on both sides, SAT procedures, handovers, payment schedules, product quality, and so on. They all need to be MECE (mutually exclusive, collectively exhaustive) – specify everything, but only once.
• Time: You spend too much time and effort on non-critical topics. I’ve seen that terms often differ quite a lot on each side. Leaving a lot of time to be spent clarifying. Both sellers and buyers are telling us that they spend more and more time on this. Without an approach that’s on the right risk and ambition level, time is wasted in the process.
• Stress: Pressure on your people. Stress piles up when people deal with tasks they feel unprepared for, or are in situations where they don’t have the right techniques to clarify, negotiate, and draft. I’ve seen many times that people wonder whether they’re doing the right thing or not, and what they should be doing. One side of the table might spend the big bucks on lawyers, and the other side relay on the technical team to deal, creating a strong power asymmetry in the legal domain.

?

Who shows up to the party?

So, who is negotiating and drafting your contracts?

Why is it this way? Just that’s how it’s become or is that well planned?

What kind of training, guidance, and expectations do they have?

?

We’ve seen many different constellations of team negotiators; all bring their own flair to the table. For sellers it could be mechanics, project managers, sales managers, corporate leadership, legal counsels – internal and external, and CEOs. And for buyers it could be technical managers, factory managers, project managers, SC directors, procurement professionals, and lawyers.

?

For one, people care about very different things. Another element is that people have a very different understanding of contractual matters. Language, underlying law, and the risks. Some are burnt in a past project and over-index on risk on mitigation of this particular point in future projects.

?

A technician transitioning to technical sales may lack the legal expertise to navigate complex liability terms, intellectual property claims, and align contracts with applicable laws, unless they receive extensive training.

Similarly, a lawyer needs detailed onboarding about the specific products, technology, and project details to accurately assess and tailor the risks relevant to the project and the counterparties involved.

It’s not the largest company that comes out on top. It is the one with the most experienced and dedicated people.

?

Recommendations

Align ambitions with capabilities: Take stock of your status - consider your team's competence level, organizational structure, and documentation practices. Identify areas for growth and plan how to get your team's capabilities to the next level.

?

Structure your team: I recommend having at least one person who's accountable for commercial decisions and another with technical expertise as your core negotiating team. Depending on the situation, you might also include a lawyer, project manager, or quality control specialist. Including team members who will be directly involved in project execution can offer invaluable insights, and make the implementation better as well.

?

Establish a strong foundation: Develop a robust framework for your contracts and supporting documents. This foundation is important for successful negotiations (I'll delve into this more in a future discussion).

?

Invest in targeted training: Begin with training your team on fundamental aspects and then move to more specific scenarios relevant to your business. This approach helps your team be well-prepared for a variety of negotiation situations.

?

Get systematic about learning: Learn from your past experiences. Analyze previous negotiations and contracts to identify recurring issues and unique challenges. Understanding what has historically raised concerns from counterparts can guide future negotiations.

?

The most impressive negotiation teams I've encountered have a deep understanding of the risks involved and are adept at either assuming these risks or justifiably declining them. Equally impressive is when a team shows a genuine effort to comprehend and accommodate the risks faced by their counterparties.

?

Who you put on the frontline of negotiations, and what background and training they have, significantly impacts your people, profits, and operations.

?

Let me know what you think.

Get in touch:

To follow, please click Here.

For contracting training or an unconditional Q&A chat – see here.

To start a conversation, email me at: [email protected]

To get more insights in the machinery market, visit Machine Maestro.