Like with all things in business, you need to think about process. With contracts, there are two main processes:
Main process 1: getting from proposal to signed contract.
Main process 2: managing contracts once signed.
Contracts are like gardens: they get weeds
Main process 2 is the most neglected because it has the least glamour. But contracts are like gardens: left to their own devices they become overrun by weeds and, sure as greenfly attack roses, left unattended, margins and other benefits will decrease over time.
(Quick digression for CEOs and CFOs that have recently joined a B2B business that sells outsourcing or similar services: IACMM research shows that most companies lose an average 9.2% of annual revenues by under-managing their contracts. The worst performers are oil, gas and utilities, which leave 14.5% on the table. The IACMM number for outsourcing is 4.8% but, from my experience, I reckon that the real number in the UK is closer to 7%. So, keeping the maths simple, assume your revenues from outsourcing sales are £100m per year, you are leaving £7m on the table each year. Fixing contract management for the next three years nets you £21m. This is the easiest money your company will ever make. If you are interested in finding out how to do this, get in touch. Oh, and why did I say that this was of interest to CEOs and CFOs that have recently joined a B2B business? Simply because, if CEOs and CFOs have been in position for a number of years and not addressed this, they will be too embarrassed to do anything about it. That’s enough about managing contracts post-signature; I will do a separate piece on that at some future point.)
Getting to good
Back to main process 1: getting from proposal to signed contract. Like most good business thinking, you need to start with the end point and work backwards. For this process, the end point is contract signature or, more specifically, the decision to enter into the contract (who actually signs the contract is less important). The key document here is the delegation of authority (DOA) which sets out who in the business can authorise contracts. Contract negotiation and approval then becomes a process which culminates in contract approval (or not), the main advantage of this approach being that the authoriser becomes a gate-keeper that can, and should, kick out any requests for approval that don’t meet the required process and quality requirements.
- Build a Delegation of Authority
A typical DOA looks something like this:
- Contracts of type X (value, and other metrics) can only be signed off by the Board.
- Contracts of type Y (value, and other metrics) can be signed by the CEO (but by no one else) without involving the Board.
- Contracts of type Z (value, and other metrics) can be signed by (for example) COO and/or CFO (but by no one else) without involving the CEO and the Board.
- Build a Contract Approval Pack.
The next step is to be clear about what you expect to see, as the person with authority to approve under the DOA, before you even consider a contract. A typical approval pack needs to confirm the following:
- that specific checks have been carried out (ie. due diligence),
- that the proposed contract complies with standard parameters (or, if it doesn’t, why it doesn’t),
- that the contract has been approved by those below him or her in the chain of command.
This is usually accomplished by a contract approval pack which includes the documents below. The approval pack needs to identify the person submitting it (thereby creating accountability) and should set out the approvals required from those below the authoriser (for example, authorisation by the CEO should require prior approvals from CFO, COO, etc.), thereby creating further accountability.
A typical contract approval pack looks something like this:
- Proposal document: this sets out the reasoning behind the proposal and the key elements of the deal. Included in the proposal (but can also be provided separately), is a due diligence report on the customer/supplier (where relevant), and a risk assessment in relation to the proposed deal (main risks, and how mitigated).
- Commercials: this sets out the commercials, including the costs to be paid/absorbed by your company and any irrecoverable costs, ideally modelled against various scenarios.
- Legal summary: this sets out the legal view of the contract, ideally calling out the differences to your company’s standard contract parameters.
- Create a legal baseline to increase efficiency
You need a set of standard contract parameters (possibly a different set for each contract type) because you are looking for differences to your legal standard. There are a number of reasons behind this. First, because managing against differences to a standard baseline consumes a lot less bandwidth. Second, because having standard parameters in place encourages everyone, particularly Sales, to stick within the parameters because an on-piste (as opposed to off-piste) contract is more likely to get through the approval process without awkward questions being asked. And third, most fundamentally, because your pricing (in particular if it’s a sales contract) needs to be based on your standard deal terms.
If you’ve got a legal department in your company (and if it’s any good), the legal summary it provides will implicitly call out the differences to the legal baseline without the legal baseline being clearly articulated. They will know, by virtue of skill and experience, what the company baseline is and what market standard is, and they will usually just confine their comments to things that are anomalous and merit the attention of the decision-maker.
If you don’t have a legal department, then the simplest approach is to create a table which sets out in three columns the key legal positions, the justification for those positions (the preceding two columns being the rule and the reason for the rule), and the position in the contract-to-be-approved. Like all templates, you should expect it to be improved over time as the business gets more sophisticated.
As you can imagine, this just the bare bones, and there are a lot of other variables that need to be set if you are going to get to an optimal or near-optimal process. If you are interested in increasing the quality of your contracts, increasing the efficiency of the approval process, and providing clarity to the C-level and the Board, I can help. You can contact me here.