Price legal terms into your contract
I recently negotiated an enterprise level software agreement that was amazingly complex and took way too long. Have you ever had a contract take too long? I joke, of course you have. Once lawyers get involved, contracts always take too long. I can say this with confidence because I’ve passed two bar exams and I’ve played that role myself.
Here is a common scenario. Your business needs something from an external vendor, let’s say enterprise software. You research products, choose a small set of vendors and maybe do a Request For Proposal (RFP). More often, you don’t have time for an RFP so you call a vendor your friend recommended. You don’t involve the lawyers because it’s not contract-negotiation time yet (they probably wouldn’t engage anyway since it’s too early). You negotiate a product, a schedule and a price with the vendor in a Statement of Work (SOW) and then bring in the lawyers when it’s time to “go to contract.”
The lawyers then engage in a veiled version of what they call the “battle of the forms” in Law School. Each company has standard terms they want in all their commercial agreements and they send their legal representatives in to do battle. Note that while the company’s attorneys will say that their goals are your goals, they’re not (I’m sorry my bar brethren). The traditional legal department is dedicated to value protection, to risk management. Their charter and remit is not short-term business results, but long-term risk management. The business creates value and the lawyers protect it.
Think about what the attorney will get blamed for versus you. If the technology doesn’t ship on time, is that the attorney’s fault? No, that’s on you. (You should have involved legal earlier.) What about if the business initiative doesn’t turn a profit because it took too long to get contracts in place? Legal’s fault? Nope. That’s on you. (Again, you know how things work, why didn’t you get the paper to legal earlier?) All the business implications of getting an agreement in place quickly are on the business unit.
What will the lawyer be blamed for? *If* there is a legal conflict, and *if* the contract has bad terms that are different from the standard terms, the lawyer might get blamed. (Remember that if the terms in dispute are bad, but they are the standard ones the company does for everything, then the lawyer won’t get blamed. That’s a management decision after all.) Traditional legal departments are trying to reduce risk in the case of catastrophic problem, one that has a very small chance of happening, but could be very costly and painful if it does. This is the risk profile of a nuclear reactor meltdown, small chance it happens but huge problem if it does. That means your agile, speed-to-market, software service agreement may be managed like an international uranium transfer.
The contract negotiation goes back and forth for weeks, maybe months. Meanwhile, the business folks start implementing anyway because the project can’t wait. Work gets done, promises made, accounts created, specifications get written, all without a contract in place because that’s stuck with legal. Different companies have different levels of discipline in shutting things down without a contract, but for the most part, in organizations with lean legal departments, i.e. those that can’t turn agreements quickly, enforcement will be light and so work will happen without contracts. As the accountable business unit leader, you are in a two-way negotiation, trying to nurture a relationship with a vendor while negotiating internally with your legal department.
What a frustrating an inefficient way to do things. Let me propose an alternative.
In Law School, one of the first things you learn is the difference between legal and equitable remedies. A legal remedy is money. If there is a disagreement, someone is wronged, and the legal system finds the perpetrator guilty of the wrong, then as a “legal remedy” the perpetrator pays money to the victim. An equitable remedy is when a sheriff shows up and forces you to do something. Money isn’t enough, something has to happen. The law makes a general assumption that any commercial transaction is limited to legal remedies. In other words, for any commercial wrong, an exchange of money is the right resolution. That means that every term or advantage in a contract has an implicit price.
Why not price that risk in up front in the form of a menu of legal terms that can be negotiated along with the SOW? For example, a traditional SOW will say “Vendor provides X software on Y date for $Z.” How about “Vendor provides X software and the *following legal terms* on Y date for $Z + 100”?
When I was at a Big American Tech Company X, an attorney friend of mine and I created an RFP process for vendors to bid on projects with set legal terms as part of the bid. We’d say, “please give us your price for this SOW and these legal terms. If you change the legal terms, we reject your bid. There will be no contract negotiation after we choose the winning bid. Price it in up front.” That way, you still got the benefit of an RFP and competition to drive down price and you eliminated 100% of the post-business agreement contract wrangling.
But won’t the price be higher than if you let the lawyers argue and maybe come out with better terms? No, the price will be competitive because of the RFP. And even if you don’t do an RFP, when your legal department extracts materially great terms, those terms will be costly to your vendor and you will end up paying for it in your next purchase. (If they aren’t meaningful, then why waste the time negotiating for them?). In any case, the business unit will pay for the ultimate cost of the contract whether it is in the price up front, in increased fees over time to account for onerous contractual terms, or in lost time-to-market, legal fees and opportunity cost of spending another three months trying to get an agreement in place.
And for vendors, it could be a great upsell. “Want 100 licenses and no IP protection? That will be $50. We will give you 100% patent indemnification for $125.” “And you want Illinois as governing law? That will be another $500 a year.” “Here, before we write up your order, have your legal department go through this legal term price menu and choose the terms you want.” Huge enterprise providers like Salesforce and Microsoft are already automating contract sign ups in ways that tie the legal department’s hands and hide terms in incorporated policies and EULAs hidden on a website somewhere that no one knows about and can change all the time without notice. Why not do that AND collect an upsell like selling an add-on warranty? Think of it as legal terms warranty program.
The vendor gets a new revenue stream, the vendor sale people save massive amounts of time in closing deals, the business unit gets the same value (remember, pay now or pay later), and legal department gets exactly the terms they want. Everybody wins!
