Friday, 12 November 2010
An issue I've always found tiresome since I became an in-house lawyer is the frequently poor quality of supplier contracts (in my case, where my employer is the client acquiring services from a supplier). In this post, I look at the problems caused by poor quality supplier contracts and offer some solutions for those of us acting on the buy-side. Along the way I hope to persuade suppliers why they should view their contract terms and the contract process as equally important to both the initial pitch for business and the ultimate service implementation.
In the majority of cases, supplier contracts fall into three buckets:
1. Non-existent (literally); or
2. So poor you cannot believe they were drafted by a lawyer (and maybe they weren't); or
3. Thorough but unreasonable and unfair.
I'm not going to deal with bucket 3 because fellow in-house blawger, Legal Bizzle, recently dealt very well and rather amusingly with a similar issue at http://legalbizzle.wordpress.com/2010/10/27/wheres-the-love/.
At the risk of this posting becoming a series of lists, to go along with my three buckets here are five reasons why I don't like being handed one of the first two buckets in supplier negotiations:
1. It lengthens the sale/buy cycle. Most supplies of goods and services are not complex or expensive transactions. A simple and fair contract short-cuts unnecessary legal time spent drafting re-drafting the contract. (Quicker sales cycle) = (happy supplier + happy salesman + happy client).
2. It is not the job of the client to spend their own time and/or money improving the quality of (or even creating) their supplier's contracts. By requiring clients to do so, suppliers are actually reducing the value of the service they hope and claim to provide, by an amount equivalent to the time spent by the client's in-house team or external lawyers getting the supplier contract up to scratch.
3. It suggests the supplier may not know what they are doing. If the supplier has not taken the time to put together a contract that reflects the service they are providing, how can the client be confident in the services of the supplier? A poor supplier contract always rings an alarm bell with me for this reason, and in my view it is a role of the legal function to ask questions internally as to whether this supplier is an appropriate choice. If you are on the supply side you might wonder what the supplier selection decision has to do with the client's in-house team. Well, unfortunately for you, a lot of us in-house lawyers are quite nosey and like to poke said noses into decisions like this.....
4. It often results in a very unfavourable contractual outcome for the supplier. Why? Because faced with a poor document which needs a wholesale re-write, the client is likely to throw the kitchen sink into the re-draft out of expediency, rather than spend the time considering and taking a more measured approach. And what is the problem with imposing onerous contractual terms on lazy suppliers? Well I prefer to be confident that a supplier has both thought about what it can and cannot comply with under a contract and has also thought carefully about its risk position. Because if the supplier is unwilling to take the time to do those two things as part of the contract negotiation, then it may not think too hard about those issues in the context of service provision to its client, which ultimately is bad for the client.
5. I've left the most selfish reason until last. Which is about internal perception of the in-house legal function. In my experience, most of my colleagues appreciate the value the in-house legal team brings to a strategic supplier negotiation, where the client is buying a business critical or game-changing service. No-one minds too much spending the time on these contracts. But when it's your Marketing department trying to enter into a low risk services engagement, or your IT department wanting to buy a few days of IT consultancy, or your Comms team wanting to appoint an agency, then it does not reflect well on the in-house legal team for these kinds of contracts to take a disproportionate amount of time to conclude. But take time to conclude they will if the poor (total objectivity here of course) in-houser has to work themselves to the bone (more objectivity) sorting out a contractual mess before the purchase can be concluded. This reflection is unfair to us as buy-side in-house lawyers because the time lag in buying the services isn't our fault, but unfortunately perceptions sometimes are unfair and difficult to overcome.
So having ascertained the problem, are there any solutions?
The most obvious one is to introduce a generic procurement contract for use with such suppliers. I've always resisted doing this, not least because generic procurement contracts are designed for widget selling, tend not to be fit for purpose and I hate being on the other side of them myself. In my experience it tends to be either public authorities or large financial services organisations who favour the one size fits all approach generally over 30-40 pages of dense and irrelevant type. However, perhaps they are the lesser of two evils, compared to the contracts sitting in my first two buckets above.
Another solution is for clients to vote with their feet and only deal with suppliers who have a seamless sales process: from evaluation of client needs, to providing a detailed and thought out proposal, to conducting business on reasonable standard terms, to professional service implementation. In truth, it's not that easy for the Legal function to determine which suppliers are appointed by individual business units, although as lawyers we can and indeed should seek to influence the decision. If this approach can be successfully adopted, then the market dynamics of supply and demand should dictate that suppliers up their game.
A more radical alternative is to go with the flow and sign whatever flimsy document the supplier has handed you as the client. Whilst it may not describe the services you think you are acquiring very well, on the other hand it may not actually adequately protect the supplier's own position on issues such as liability. On balance the contract may be more favourable to the client than it is unfavourable. I find that lawyers (including me) find it very unnatural and unnerving to take this kind of approach in practice. We tend as a profession to be document perfectionists and find it hard to take a cheap and cheerful approach and sign-off a document that we know has holes in. One amendment leads to another and drafting pride kicks-in, and before you know it you have re-written the document you were trying not to re-write. I think this is an issue worthy of more consideration and will return to it in a future post.
The final alternative that I will put forward is to grin and bear it and spend your in-house's team's time doing the re-draft, knowing that the time expended on doing so will improve your own position as the supplier's client. Perhaps it is just part of the role and we have to get on with it and stop moaning.
No single solution is the right one and as clients we have to take a horses for courses approach. I've certainly convinced myself when writing this post that I should adopt the widget procurement contract routine for low risk low spend engagements, even if it is far from a perfect solution itself.
I'll end this post with a plea to suppliers. Try not to put your clients through this process and you will find that you sell more of whatever it is you sell quicker than you currently sell it.
Proof? Kudos to a recent supplier who the FT engaged to carry out some project management work. They provided a 10 page contract, which even incorporated their own response to tender document as part of the contract. Service description was clear, termination provisions flexible and liability position fair. Result? Contract agreed speedily, services due to commence, client about to pay supplier, legalbrat home earlier that evening, beautiful sunset over the Thames on my walk to the station and train arrived on time (last bits are clearly untrue, just getting carried away).
Proof then that it's really not that difficult for suppliers to get this right, for everyone's mutual benefit.