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Have you ever been in a contract negotiation that seemed like it would never end? I have. I once broke my firm’s document management software, which was designed to handle multiple versions of the same contract in one simple interface. Apparently, if you go past 30 versions, the software breaks down and you’re out of luck.

I imagine the programmers sitting around, thinking, “What would be the largest possible number of versions anyone would ever want? 20? 25? 30?  Yeah!  Let’s go with 30, how could anyone ever waste that much time?

Sadly, it’s quite easy to waste that much time.  How come?  Well, think about the way a company manufactures a product.  In a manufacturing plant, there is a clear hierarchy of authority, from the line workers all the way up to the plant manager.  The manager can issue orders, and those orders will be followed by everyone on the team, and executed appropriately, step by step, so that the finished work exactly matches their desired goal to build an outstanding finished product.

But what if the plant operated differently? What if the plant consisted of two different teams? And, within each team, there were 4 separate groups, with each group having a different manager?  That would mean that 8 different managers, each allied with one of two different teams, would have to work smoothly together to make sure that all of their group members operate harmoniously to produce a great product.

Let’s take a look at a pie chart showing all the different players. Remember, these are just the groups led by the 8 managers. In fact, each group is composed of many individuals, too.

Looking at this chart, how successful do you think they would be? If you owned a manufacturing company, is this how you would design your organization, without any clear lines of authority, to make the best possible product? Most likely not.

You may have guessed by now that the pie chart above represents the typical corporate contract negotiation.  Often you will have 2 different companies negotiating with each other (just like groups A and B above), and each company will be represented by a large number of individuals from across the company. For example, a vendor team might typically include people from these departments:

• SALES
• FINANCE
• IT
• LEGAL/CONTRACT MANAGEMENT

On the flip side, a customer team might consist of just as many different constituencies, including:

• PROCUREMENT
• FINANCE
• IT
• LEGAL/CONTRACT MANAGEMENT

The result is you end up with a pie chart that looks like this:

Let’s ask the same question again, how successful do you think they would be? If you owned these companies, is this how you would design your organization, without any clear lines of authority, to make the best possible deal? Probably not.

The strange observation to take from all of this is that the first chart, if proposed as a way of running a manufacturing plant, would be instantly rejected by most people, but the second chart is oddly and universally embraced as the way of running contract negotiations. This occurs despite the fact that in both situations you are engaged in a similar conceptual process, namely, producing an outstanding product.  In the manufacturing case, you end up with a finished good. In the contracts case, you end up with a deal.

Clearly, contract production is crying out for a better design.  Why, if the inefficient manner of contract negotiations is so apparent, do most companies follow this method?

Harvard Business School Professor Scott Snook offers a telling lesson.  He writes in “Friendly Fire” about a horrific event after the end of the first gulf war, when American aircraft patrolled the skies near Iraq, enforcing a “No Fly Zone.” On one particular day, a U.S. “AWACS” plane served as an air traffic controller in the sky, tracking and communicating with all aircraft in the zone.  There were only 4 other aircraft in the sky that day, 2 U.S. Army helicopters carrying U.S. and United Nations personnel, and 2 U.S. Air Force fighter jets.  The jet pilots mistook the helicopters as Iraqi, and radioed the AWACS plane that they planned to attack.  There were many people on the AWACS plane, all of whom were aware that the only possibility was that the jet pilots had made a mistake, and yet no one told the fighter pilots that they were wrong.  Consequently, the pilots then sadly preceded to shoot down both helicopters, killing their fellow American soldiers.

Snook says that it’s extremely important to focus on what the AWACS personnel said when they were later asked this vital question: “Whose job was it to tell the fighter pilots that they had made a mistake?”  Their answer was almost always either, “It was everyone’s responsibility,” or “It was no one’s responsibility.”

Snook calls this response an example of the “Fallacy of Social Redundancy.”  He notes that, in the engineering world, redundancy is wonderful.  If you are in a plane, and the main engine dies, it’s terrific if there is a redundant, second engine that can keep the plane from crashing.  However, when it comes to social processes, redundancy usually triggers bad systemic results.  If multiple people are equally in charge of a project, but no one, particular person has both managerial authority coupled with accountability to ensure that the project is successfully achieved, then that’s a recipe for disaster.

The same problem occurs in the contract negotiations context.  Person after person has limited responsibility for advising on some aspect of the contract.

Sales and procurement may formulate the pricing, finance may ensure compliance with accounting policies, IT may focus on specifications, and lawyers care about legal risks, but, ultimately, no one person is responsible for ensuring that the overall deal is completed in a timely and professional manner.  Even worse, there are usually no standards to determine whether the deal as struck meets key expectations, particularly regarding how to prevent future disputes and disappointments.

As a result, during the course of negotiations, it’s typical for no one to be sure at any given time as to whose court the ball is in, who everyone is waiting on, and who is supposed to move things forward to conclusion.  Additionally, the negotiators, lacking any game plan, usually focus on the less important issues, instead of ironing out exactly what each party wants, so the likelihood of a later lawsuit is enhanced.  Because the entire purpose of negotiating a written contract is to reduce the chance of later disputes, the fallacy of social redundancy means that most companies are bizarrely and regularly increasing their litigation risk.

Ultimately, the lesson here is to eliminate the “Everyone’s In Charge/No One’s In Charge” mentality, assign clear authority to one person to govern all stakeholders from all groups weighing in on the deal, and transparently review performance to ensure that everyone is performing their role ably so that the resulting finished product, the contract as finally written, prevents litigation and ensures a smooth future business relationship.

* * *

Jason Mark Anderman is President and Co-Founder of WhichDraft Consulting, and is an expert on showing sales and procurement executives how to harness contracts to maximize sales and savings.Jason leads projects to drive efficiency in deal-making, focusing on process improvement and knowledge management initiatives to develop efficient contract negotiation processes and templates. Fortune 500 companies and top law firms turn to Jason to improve contracts and accelerate deals.  He regularly publishes and speaks on legal issues, focusing on technology, knowledge management, and legal process improvement.  His work has been featured by Law.com, Legal Technology News, the Canadian Bar Association, and the International Association of Contract and Commercial Management (read press here). He also authors the Contract Alchemy blog, providing innovative insights into contracts, technology and law.

Read about Jason in “A Man With A Vision: Changing The Image Of Contracts” in Contracting Excellence.

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Increasingly, corporations are discovering that extremely experienced, talented individuals are leaving major law and consulting firms to launch virtual firms.  Often operating out of their homes, these individuals offer the same excellent service they provided under the roof of their former employers, but at a massively reduced cost, passing overhead savings on to their new and happy customers and purely billing the client for value created.

However, switching from a traditional law or consulting provider to a virtual firm is a bit disconcerting.  For one thing, you are trading down in prestige, replacing a white shoe law firm for a solo attorney working out of his suburban attic, or trading a Park Avenue consulting practice for a business expert in a Brooklyn studio.

Why take this apparent risk?  Isn’t the reduced cost dangerous?  When you pay a large, brick and mortar, traditional firm’s bill, isn’t that prestige worth it?

No, because when you purchase prestige, here’s what you’re actually buying:

1. Hoarding.

2. Leverage.

How can we understand how hoarding and leverage operate in a large firm?  Let’s have some fun and consider a science fiction metaphor. Imagine a dystopian future where civilization has broken down after a giant meteor has struck the earth. Luckily, you are the only person left with a workable bomb shelter, and survive quite comfortably, surrounded by cans of food, while you listen to horrific stories on the radio of scores of people starving to death.

What do you do? Do you protect yourself, or do you share your food with others?  What if others are much better prepared to rebuild the planet? If you are a thief, and your starving neighbor is an expert on agriculture and biology, would you give your food to the biologist, who can then better serve the bulk of humanity and rebuild the earth?

Let’s extend the metaphor a bit further. Not only did you have the foresight to build a bomb shelter, but you also are an expert at finding unpolluted drinking water. You also have a small army of water seeking robots, each of which is also capable of finding water. Unfortunately, these robots are much slower at finding water than you are, and sometimes make mistakes and provide polluted water.  People seek you out, asking that you share your excess water with them.  How do you decide who you will help?  Do you give them your pure, quickly discovered, unpolluted water, or do you make them wait for the lower quality, robot discovered, polluted water (enhancing your water wealth and power)?

There are two key themes this metaphor reveals: hoarding and leverage.

Hoarding means that people, when faced with the threat of losing what they most care about, will inevitably and fiercely cling to resources, even if that results in less utility for everyone else.  You may quite reasonably be inclined to hoard your food to save your own life at the expense of the more valuable (for everyone else) biologist.  The same thing happens in a large law or consulting firm when times are lean.  People will take any kind of work they can get their hands on, regardless of whether they are particularly talented or experienced at it.  And senior executives who bring in clients will assign work based on who they want to keep on the payroll, not based on how well they will do the work.  In a law firm, you’ll see litigators handling contracts, employment lawyers negotiating software licenses, and antitrust experts completing trademark applications.  In a large consulting firm, the same kind of behavior occurs.

This happens because people quite reasonably want to keep their jobs, even at the expense of their clients, who are paying for lower quality work than they would receive from a virtual firm.  At a virtual firm, the customer is familiar with all the possible people who can do the work (after all, there is only one), and knows whether or not the work being performed is within that individual’s expertise.

How come the customer does not know whether the right person is doing the work at a traditional, large service firm?  Because of leverage.

Leverage is the dominant business model used by large service firms. These firms want to hire as many employees as they can, pay them a fixed salary, and then have them spend all their time performing work for clients for fees that greatly exceed employee salaries, leveraging the difference to drive increasing profits. The more robots you have, the more water you have. The more employees you have, the more work you have (to sell to clients).

Ultimately, the size of these operations means that clients often do not know who is performing the work. It is quite common for a client to never meet any of the employees who actually perform the service, instead only interfacing with the senior executive who the employees will report to. As a client, you usually have no idea how qualified the person is who produced the service that you are paying for. Additionally, the senior executive wants to maximize the difference between the employee salaries and the fees charged, so they will tend to fill employee slots with lower salaried, younger, and less experienced people, resulting in youthful mistakes and overall lower quality work – just like the robots who provide lower quality water.

Contrast the leveraged situation with a virtual firm, where not only does a client know exactly who is performing the service, the client also knows that person’s experience level is excellent, and there is no one else to give the work to because there simply are no robots.

Now, this is not to say that there aren’t excellent performers at major, traditional large sized firms. There are. The problem is, as a client, you have little ability to always ensure that the service you are purchasing is at the level of quality you expect for the fee you are charged. During bad times, hoarding occurs.  During good times, leverage predominates.   But at a virtual firm, this problem is always solved.

What’s the ultimate lesson? Sometimes, paying for prestige means paying for polluted water.  Skip the robots, defeat hoarding, and end leverage.

Use virtual firms.

* * *

Jason Mark Anderman is President and Co-Founder of WhichDraft Consulting, and is an expert on showing sales and procurement executives how to harness contracts to maximize sales and savings.

Jason leads projects to drive efficiency in deal-making, focusing on process improvement and knowledge management initiatives to develop efficient contract negotiation processes and templates. Fortune 500 companies and top law firms turn to Jason to improve contracts and accelerate deals.  He regularly publishes and speaks on legal issues, focusing on technology, knowledge management, and legal process improvement.  His work has been featured by Law.com, Legal Technology News, the Canadian Bar Association, and the International Association of Contract and Commercial Management (read press here). He also authors the Contract Alchemy blog, providing innovative insights into contracts, technology and law.

Read about Jason in “A Man With A Vision: Changing The Image Of Contracts” in Contracting Excellence.

Maximize Profits – Contact Us Now

requests(at)whichdraft(dot)com (973) 457-1186

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There are few areas where companies struggle more than when it comes to contract negotiations.  Often, no one, particular person is in charge, and the negotiating team ends up being a shifting group of players drawn from various departments, with no clear authority or accountability.  As a result, the negotiation is often a failure.  Have you ever been involved in a contract negotiation for a straightforward matter that took over six months?  Have you had a matter where you struggled to work with members of the finance, procurement, information technology, sales, and legal departments?  Do you see the exact same struggles happening on the other side (e.g., a customer or vendor with same conflicting constituencies and lack of organized process)?

Companies pay a huge price for lacking negotiation planning.  Way fewer sales are closed, and way fewer procurement deals are made, resulting in lost revenues and savings on a constant basis.  Given that these problems exist, and the high cost of failing to address them, why are so few businesses willing to confront their negotiating failures?  Let’s explore the challenges in doing so.

There are at least 4 key obstacles you’ll face when trying to implement a global negotiation planning process:

1. Gradient: People tend to fall along a gradient, with 1 pole reflecting the idea that everything is new (the “fly by the seat of your pants” approach), vs. the other pole where people tend to think that there is hardly anything new under the sun (the “knowledge management” approach).  Most people are closer to the “everything is new”/”fly by the seat of your pants” pole.  This makes implementing a defined process and ensuring compliance quite challenging.  If everyone fancies themselves to be artists, then they‘ll be naturally inclined against breaking down how they do their work and systematizing their methods. Consequently, the best approach is to create a sense of urgency around the need to change that can overcome this inertia.

2. Sales and Savings-Return on Investment:  People struggle to see how completely changing how they negotiate will quickly result in improved sales and savings. As a result, a very good idea to get people to embrace a negotiating process is to make a business case as to how it would improve savings or revenues.

3. Market the Change-Create a Meme: Many people don’t know where to get started when it comes to implementing systemic change.  A good idea to advance implementation would be to come up with a unique cultural artifact that people can gravitate towards.  The “4 Day Deal” would be a good example.

4. Short Term vs. Long Term Efficiency: People naturally put off to tomorrow what they don’t want to focus on today, even if putting things off means more work in the long run.  A major challenge in implementing a negotiation process is overcoming the omnipresent tendency to overvalue the time you’ll have to spend to do the planning, and undervalue the much greater amount of time you’ll waste in the future on protracted contract negotiations. Ultimately, it’s vital to confront this “I don’t have time to plan” mentality.

5. The Deal’s Outside the Deal.  Many salespeople and procurement managers make the mistake of divorcing their conception of the deal from the contract, viewing them as two entirely separate items, and not taking the lead on ensuring that the contract is instead a mirror reflection of their mental picture of the deal. But when you are trying to close a deal, there are many more factors in play than the obvious sales price and volume issues.  You might be dealing with a host of people and agendas on the other side, including account executives or procurement managers, finance professionals, information technology experts, contract managers and attorneys.  The key to successfully navigating this host of players is to focus on key contract issues to solve everyone’s needs while shaping the contract to match your sales expectations.

* * *

Jason Mark Anderman is President and Co-Founder of WhichDraft Consulting, and is an expert on showing sales and procurement executives how to harness contracts to maximize sales and savings.

Jason leads projects to drive efficiency in deal-making, focusing on process improvement and knowledge management initiatives to develop efficient contract negotiation processes and templates. Fortune 500 companies and top law firms turn to Jason to improve contracts and accelerate deals.  He regularly publishes and speaks on legal issues, focusing on technology, knowledge management, and legal process improvement.  His work has been featured by Law.com, Legal Technology News, the Canadian Bar Association, and the International Association of Contract and Commercial Management (read press here). He also authors the Contract Alchemy blog, providing innovative insights into contracts, technology and law.

Read about Jason in “A Man With A Vision: Changing The Image Of Contracts” in Contracting Excellence.

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Close More Sales Deals Faster: Many salespeople make the mistake of divorcing their conception of the sales deal from the contract, viewing them as two separate enterprises, and not taking the lead on ensuring that the contract is instead a mirror reflection of the deal.

But when you are trying to close a sales deal, there are many more factors in play than the obvious sales deal price and volume issues.  You might be dealing with a host of people and agendas on the customer side, including procurement managers, finance professionals, information technology experts, contract managers and attorneys.  The key to successfully navigating this host of players is to focus on key contract issues to solve everyone’s needs while shaping the contract to match your sales expectations.

What are these principles?  Focus on the following:

SELL | PAY | DELIVER | NEED | TRUST

1. SELL – What Is Being Sold?

In the rush to get a proposal out the door, you might be tempted to describe the good or service you are selling vaguely, using unclear terms like a “Solution.”   Instead, nail down a short description of exactly what you’ll provide.  This makes the lawyers and finance people happy, and sets expectations for a smooth negotiation.  If the customer is not yet clear on exactly what they want you to do, set up a discovery phase to design a specification and focus in on what the customer cares most about.  This will put you well on the way to understanding how to alleviate customer pain points and create value.

2. PAY – What and When Will You Be Paid?

Clear budgeting and forecasting is essential. You might often demur on providing an exact price, often because there is lack of clarity as to what is actually being sold.  The price often ends up being a “moving target” during negotiations and even after the contract is signed.  This can cause a good deal of trouble, as the revenue generated from the deal might not match your expected sales targets, and, if you can’t get the job done for what the customer is willing to pay, then the customer has internal budgeting problems which they’ll blame you for.  Avoid these troubles by making sure that the fees, invoice payment due dates, and installment schedule are crystal clear.

3. DELIVER – When Will the Deliverable/Service Be Delivered?

Another common mistake in a sales deal is to skip providing a clear completion/installation date, or to only provide a date at which point some of the work will be done, but not all.  Nail down when you’ll be providing the good or service to the customer.  Without clear deadlines, you can easily end up being besieged by unrealistic delivery schedules that you can’t possibly fulfill, with the customer threatening to withhold any payment until you do so.  For large sales volumes, feel free to build in flexible contract language as to coming in a bit over or under on each delivery, and condition supply commitments on future arrangements as to annual volumes.  It’s also often a good idea to set up reasonable purchase commitments to make sure you aren’t dedicating capacity to a customer who doesn’t end up ordering anything.

4. NEED – What Do You Need the Customer to Do?

Often times, you know that you need the customer to do certain things or there is no way you can hit deadlines and come in at a certain price.  Spell out clearly these customer responsibilities.  Avoid vague language such as “Customer will provide all reasonable and necessary resources” and focus on clear language such as “Customer will provide a 10 foot by 10 foot room with a temperature maintained between 50 and 80 degrees at all times, and provide electric service and a broadband Internet connection.”

5. TRUST – Do the Sales Deal and the Contract Match?

A clear contract prevents disputes.  A contract that is clear creates trust because if, at a later date, one party makes an unreasonable demand of the other, the parties can then review the contract and find that the unreasonable demand is not allowed. Avoid long negotiations, many versions and endless meetings that produce vague contracts.  Instead, nail down straightforward contract language at the start and build long term trust that you can work together.  This will create good will to assist you in making future sales to the same customer.

Ultimately, getting corporate customers to sign off on a contract requires placating many interests.  The way to do that efficiently and book more sales is to establish the following:

1. SELL, PAY, DELIVER, NEED: What are your positions on what Is being sold, what and when you’ll be paid, what’s the delivery timeframe, and what do you need the customer to do?

2. BACKUP POSITIONS: There is very little new under the sun in the contracts game.  Therefore, get together with your sales colleagues and figure out every customer language request ahead of time so you can quickly deploy response language.  Mirror your contract language to your sales deal expectations, using what you know about the wide variety of customer concerns, and you will close more sales deals faster.

* * *

Jason Mark Anderman is President and Co-Founder of WhichDraft Consulting, and is an expert on showing sales and procurement executives how to harness contracts to maximize sales and savings.

Jason leads projects to drive efficiency in deal-making, focusing on process improvement and knowledge management initiatives to develop efficient contract negotiation processes and templates. Fortune 500 companies and top law firms turn to Jason to improve contracts and accelerate deals.  He regularly publishes and speaks on legal issues, focusing on technology, knowledge management, and legal process improvement.  His work has been featured by Law.com, Legal Technology News, the Canadian Bar Association, and the International Association of Contract and Commercial Management (read press here). He also authors the Contract Alchemy blog, providing innovative insights into contracts, technology and law.

Read about Jason in “A Man With A Vision: Changing The Image Of Contracts” in Contracting Excellence.

Maximize Profits – Contact Us Now

requests(at)whichdraft(dot)com (973) 457-1186

requests(at)whichdraft(dot)com (973) 457-1186

Cognitive Contracting: The tremendous fear and publicity right now about swine flu is out of proportion with the actual number of deaths (however sad these individual cases may be).  Apparently, during the 1990s approximately 36,000 people died each year due to the flu in the United States.  So the current number of deaths, which is in the low hundreds, pales in comparison. All of this hullabaloo makes me think about the nature of human cognition, and how it can lead us to not focus on the most important issues at hand.

In particular, we employ cognitive fallacies like “Contrast,” which makes us perceive an event as being more important or less important, not based on its merits, but based on contrasting the event with what we see occurring around it.  Viewing reports about the horrific 1918 worldwide flu pandemic, for instance, triggers this Contrast problem.

Another problem is “Self Confirmation,” where we ignore data that does not support our fear, and only embrace data that does back our contentions. A good example would be the failure to think about the greater number of people who die from normal flu outbreaks instead of the swine flu.

Finally, we often engage in “Confirmity,” meaning that we go along with what everyone else is concerned about, following along with the mass hysteria as part of the chain reaction.  Listening to nonstop reports about swine flu is certainly causing this confirmity error.

All 3 of these cognitive errors happen all the time when we contract.  Let’s consider a few examples:

• Contrast: We might not care about focusing on the riskiest contract terms, like the goods/services description, and instead focus on less important terms, like limitation of liability, because in all of your past deals you focused on less important terms each time.
• Self Confirmation: In this vein, we might only think about what kinds of damages the other side might sue us for, so we again only hone in on limiting our liability, even though a dispute is much more likely to occur over whether or not the goods and services met expectations (which can be prevented through an excellent goods/services description in the contract).
• Confirmity: Moreover, we might be focusing on the contract’s limitation of liability clause because we were trained to do so.  We are simply following along with how more senior negotiators handle agreements, and, matching their approach, we fail to focus on other issues of greater importance.

Try looking for Contrast, Self Confirmation and Confirmity in your negotiations.

Do you see it happening? Remember, if you can limit these cognitive errors, you spend less time negotiating unimportant clauses, finish up faster and close more sales or book more savings.

* * *

Jason Mark Anderman is President and Co-Founder of WhichDraft Consulting, and is an expert on showing sales and procurement executives how to harness contracts to maximize sales and savings.

Jason leads projects to drive efficiency in deal-making, focusing on process improvement and knowledge management initiatives to develop efficient contract negotiation processes and templates. Fortune 500 companies and top law firms turn to Jason to improve contracts and accelerate deals.  He regularly publishes and speaks on legal issues, focusing on technology, knowledge management, and legal process improvement.  His work has been featured by Law.com, Legal Technology News, the Canadian Bar Association, and the International Association of Contract and Commercial Management (read press here). He also authors the Contract Alchemy blog, providing innovative insights into contracts, technology and law.

Read about Jason in “A Man With A Vision: Changing The Image Of Contracts” in Contracting Excellence.

Maximize Profits – Contact Us Now

requests(at)whichdraft(dot)com (973) 457-1186