Contract Fundamentals

If you are a vendor of multi-year contracts (service or SaaS), there are 4 (and only 4) things in the contract that you should focus on.

You need to make sure that:
  1. Your price is really clear. Where your price is the product of a number of factors (eg. A x B, or A x B x C), then you need to make sure that the mechanism is laid out so clearly that no-one can misunderstand it (or pretend to misunderstand it).
  2. Your payment terms are also nailed down, in the same way as the price has to be nailed down.
  3. Your margin is protected from all forms of leakage and erosion.
  4. You are protected from excessive liability if your service fails. “Excessive” in this context means greater than the liability that you have – implicitly or explicitly – budgeted for in the price.

Of all those elements, it’s usually the third – margin protection – that repays the most thought and planning.

Untracked inflation is usually the biggest killer. Your price stays the same in nominal terms, but the value of each dollar, pound or euro of revenue goes down whilst your costs go up. See here and here for more on this.

Just as pernicious can be scope creep in all its multifarious forms. For example: you expected 10 users but now you are servicing 100 users for the same overall price.  Was the licence just to the customer’s company, or was it for the whole corporate group?

Or, if you are providing support, does the customer’s problem really fall within the scope of support, or have you just spent time and money on a problem which was never yours to start with?

More fundamental still, was it part of the deal that the customer can use its experience of your service to develop a competing product? Put another way, does your contract prohibit the use of your product as the basis for developing a competing product?

Contracts can be complicated things, but the fundamentals are always very simple.

Of all those elements, it’s usually the third – margin protection – that repays the most thought and planning.