Contract Lifecycle Management (CLM) — which includes contract creation, management, analytics, and renewal — is becoming big and will likely get bigger still as organizations rely more and more on contracts to control price and mitigate risks. But, as we also pointed out in our first post, a contract lifecycle management system is not only useless without contracts to manage, but is also useless without good contracts to manage.

And good contracts are more than just specifications of product, price, and a few boiler plate T’s & C’s provided to you by legal. As we described in our first post, it’s understandable — by both parties, and, especially, by a party whose first language is not the contract language. Then, as we detailed yesterday, it clearly describes the need, which is first captured in a detailed statement of work that the contract will be created around.

But do you start writing the contract as soon as you have the Statement of Work drafted? Definitely not! Remember, there are two primary reasons you create a contract. One, to get what you want. Two, to mitigate risks associated with getting what you want. So, the next thing you have to do is:

Define the Risks
… and how they are dealt with

What are the risks? Start with the product. What are the risks in quality? In transportation? In import/export? In use? In recovery? Then move on to service. What are the risks in performance? In delivery? In quality or acceptance criteria? Then to the supplier? Will they be around? Are they financially stable? Are they sustainable? Are they located in a relatively risk free zone or risky zone?

Then, assess what are the impacts if a risk situation comes to pass. Additional Costs? Customer dissatisfaction? Brand damage? Regulatory fines or injunctions? Do they need to be mitigated? By who? When? Is there a penalty if the impact of the risk is not mitigated and could have been? What risks are excluded from mitigation because they can’t be, the risk is too low, or the mitigation too costly?

Is Force Majeure allowed? When? How long can it be claimed for? What documentation or proof is required? What happens if one party tries to claim it for longer than is reasonable under the circumstances? (E.g. if a power outage shuts a factory down for two days and the average line restart time is one day, and the supplier is still trying to claim Force Majeure after 10 days, that’s not reasonable.) What is the recovery if the product or service must be obtained on a regular basis or within a certain timeframe but the supplier cannot provide during the Force Majeure period? Can the buyer use another source? For how long? Can the contract be cancelled if the supplier cannot recover within a certain time frame?

Remember, generally speaking, a contract is not needed when everything goes according to expectations. It’s needed when things go to hell in a hand-basket and one or more parties that need to take responsibility for their actions don’t want to and/or still demand payment for products not delivered or services not rendered.

If something goes wrong, you need to make sure that the responsibility for remediation, recovery, and restitution lies with the appropriate party and that if the responsible party doesn’t own up, you have other options. Being locked into a sole source contract when a supplier can’t deliver for three months when you only have two weeks of inventory left is not acceptable. Nor is the ability for a supplier’s lawyers to tie you up in court for months because responsibility was not clear, remediation or penalties were not clear, or vague terms were included.

So, just like it’s critically important to specify what you want before you start writing a contract, it’s also critically important to specify what the risks are and what will happen if, and when, they materialize. (And we say when because your chances of not being hit by a disruption in at least one important contract every year are less than 15%, and since you don’t know where that disruption will come from and which contracts will be affected, it’s just best to assume they all will be.)

So can you start writing your contract now? Stay tuned!

As pointed out in yesterday’s post, Contract Lifecycle Management (CLM) — which includes contract creation, management, analytics, and renewal — is becoming big and will likely get bigger still as organizations rely more and more on contracts to control price and mitigate risks. But, as we also pointed out yesterday, a contract lifecycle management system is not only useless without contracts to manage, but is also useless without good contracts to manage.

Poorly created contracts that don’t define anything more than a bulk price and a term don’t ensure defensible pricing, loss management, or risk control. To be more exact, they don’t even ensure that absence of a typo or careful insertion of a single word by a litigious lawyer that could negate and entire contract and make it totally useless.

So where do you start?

Define the need

What do you really need? (And what are the core requirements?) When? Where? How do you need it delivered? Who is responsible for the production, delivery, support, and return? Why does it need to be this way? What are the risks and how will they be mitigated? Split?

Create a Statement of Work

Clearly specify what is required, when, by who, in what quantity, how it is to be packaged, stored, delivered, supported, maintained, and recovered. Specify delivery dates for products if known or delivery timeframes if exact dates are not known but response or replenishment times are needed. If the contract revolves around the construction of a particular deliverable (system, machine, building, etc.) specify key milestones and acceptance criteria. If it revolves around ongoing services, specify delivery timeframes and required service levels. Specify as much detail as is known and where specifics can’t be specified up front, specify how the details will be worked out later and agreed to, as well as the procedure that will be followed in case of disagreement or conflict.

Make sure Milestones are Clearly Specified
… with Deliverables and Acceptance Criteria

Go so far as to explicitly number the milestones and make sure they are easy to index, track, and assign to buyers, supplier managers, and other organizational individuals who are affected by the contract. It should be easy for the CLM to auto-index these milestones and even auto-assign the milestones (and monitoring management responsibilities) to the most logical individuals in the organization (who can reassign if necessary).

Make sure the deliverables are clearly annotated, that precisely what they entail is defined, that the acceptance criteria that will be used are spelled out in sufficient detail to allow work products to be rejected if they are not up to requirements, and who has final determination of whether those criteria are met. Also, if there is a dispute, the process that will be used for resolution must be indicated.

Define the Payment Schedule
… and Tie it to the Milestones

Don’t just specify how much will be paid, but when it will be paid, and what the dependencies are on the milestones and deliverables. Also specify if there are any penalties for late or unsatisfactory delivery, precisely how they are calculated, and when the remaining payment(s) will be made. Also clearly specify how disputes will be filed, handled, and resolved and whether any payments will be made during the dispute, and in what amounts.

Define any SLAs and Warranties the Supplier Must Adhere to

Do so up front and in plain English. It’s critical that the supplier understand exactly what is being expected, how it will be measured, what guarantees the supplier is making, and what it will cost them if they are not adhered to. If the products are rejected, do they have to deliver replacements? Are they penalized? Is the contract terminated?

Then, and only then, start thinking about writing the contract. But don’t write it yet!

Contract Lifecycle Management — which includes contract creation, management, analytics, and renewal — is becoming big and will likely get bigger still as organizations rely more and more on contracts to control price and mitigate risks. And since no one can ever find a paper contract once it’s been sent to filing, the ability for anyone anywhere at anytime to access a relevant contract, compare deliverables and prices to negotiated deliverables and prices, track (evergreen) renewals, and determine which party is responsible for a loss is almost priceless.

That being said, a contract lifecycle management system is not only useless without contracts to manage, but is also useless without good contracts to manage. Poorly created contracts that don’t define anything more than a bulk price and a term don’t ensure defensible pricing, loss management, or risk control. Nor do they ensure termination, as evergreen status could be implied if orders are still made after termination and pricing is still honoured. Nor do they even imply that the supplier even has the right insurance or certifications to even produce or ship the products the supplier is selling to you.

In order to control risk, mitigate loss, and realize the expected benefits, a good contract is critical. This not only requires good negotiation, but good contract drafting that covers all of the necessary T’s and C’s, including those you never hope to need. All of them. And, more importantly, that spells out all of the requirements of both parties in terminology that cannot be easily misinterpreted or twisted by leeching litigious lawyers who will bleed both parties dry in legal fees before an agreement or decision is reached.

So how do you get a good contract? Well, as the legendary Dick Locke once wrote in our classic post on Blogging on International Contracting, not only should your contracts be in plain English, but they should be written with a high reading ease score (40 or more in Microsoft Word) and a grade level requirement of 11 or less. Especially since the contract is not likely to be in the supplier’s native language if the contract is with an international supplier.

After all, as Mr. Locke so keenly pointed out in a follow up piece on Simplified Contracts, Part 3, if you let a litigious lawyer write a contract from a supplier with a slimy sales team, he could easily insert just one word in a twenty page contract with an average sentence length of 73 words and paragraph length of half a page that negates the entire contract, and you’d never know.

So how do you write a good contract? We’ll explore that in this series.