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Developing Contracts That Fit Your Needs: The Commercial Framework

  1. Eric Evans Developing Contracts That Fit Your Needs: The Commercial Framework
  2. Housekeeping • The slides will be available on our SlideShare page; the link will be emailed to you • The recording of the webinar will be available to view; the link will be emailed to you • Please take the time to complete a post-webinar survey that will pop up at the end • You can type your questions throughout the session • Time will be allocated in the end for the speaker to address your questions 2
  3. Your Presenter Eric Evans has held Director level positions in the automotive, retail, fast moving consumer goods and healthcare sectors. He is the author of three books on procurement and negotiation, and a speaker on MBA programmes across Europe and the Gulf region As a management consultant, he has delivered improvement programmes in demand management and inventory management, and has coached organisations as they implement collaborative replenishment and customer-led approaches to demand management. 3
  4. Why is this important? A contract is a business document that must be written in a way which makes it legally enforceable. It will contain legal provisions, but must be seen as a business document Don’t be afraid of Contracts
  5. What drives the content of a contract? The contract should be driven by five things: 1.What is the contract trying to achieve? 2.What risks and opportunities do we want to manage? 3.What form of relationship do we hope to have? 4.How will we manage the business relationship? 5.What remedies do we want if things go wrong “A contracts simply says: This is what you will do, this is what we will do and this is what happens if things go wrong”
  6. Examples What are we trying to achieve? A low price or a fixed price? Our risk or their risk? An outcome or following our instructions? What risks and opportunities do we need to manage? What could go wrong? What further opportunities could arise? What type of relationship do we want? Adversarial? Risk sharing? Absolute certainty of outcome? How will we manage the relationship? Governance? Coping with change? Dispute resolution? What happens if things go wrong?
  7. The wrong way to start…….
  8. Why is this important? What the customer wanted What the supplier understood How it was documented What it actually didHow it was designed How it was billed by the supplier 8
  9. Risks and Opportunities A contract is, at its heart, a risk management tool
  10. 10 Column1 Column2 Column3 Column4 Column5 Column6 Column7 Column8 Failure Mode and Effects Analysis (FMEA) Risk Number Risk to be considered Probability Consequences Visibilty Risk Value Mitigation 1 Exchange rate changes 8 1 6 48 CR We buy in supplier currency and hedge 2 Industrial relations dispute 3 7 7 147 CC disallowing disputes as force majeure CC obliging supplier to advise on state of industrial relations 3 Ownership of supplier IPR 3 9 8 216 CC Supplier to warrant IPR ownership CC Supplier to indemnify us 4 Key man dependency 7 5 6 210 CC Supplier to agree long notice clause with key man 5 Late delivery 5 5 7 175 CC Liquidated damages, back to back 6 Unacceptable quality 2 9 8 144 CC Uncapped damages for poor quality 7 Supplier Bankrupcy 1 9 7 63 CR We take monthly credit checks 8 Takeover of company 3 7 9 189 CC Termination rights at our discretion 9 Design proved to be flawed 2 9 7 126 CC Uncapped damages for poor quality 10 Supplier breaches confidentiality 6 8 9 432 CC Liquidated damages Notes a) Risk values greater than 150 must have mitigation plans b) Risk values less than 150: mitigation plans are optional c) CC stands for "Contract Clause" d) CR stands for "Commercial Remedy" Risk Analysis Brainstorm of what could go wrong Likelihood of it happening (0 to 10) Consequences if it does (0 to 10) How much notice we will get (0 to 10) Risk X Consequences X Visibility Actions we could take
  11. What type of relationship do we want?
  12. The Relationship Continuum Adversarial Collaborative
  13. Managing the Relationship: the key role of Governance
  14. The Commercial Framework: The Point of the Deal The Commercial Framework is the first step in in preparation for contract drafting. It should define clearly what we want to achieve and the risks we want to avoid. This step should be done before we consider drafting the contract. This is the business proposition which will be embedded in the contract 14
  15. Why do we need a “Commercial Framework”? The Commercial Framework serves two main purposes: 1. It establishes the priorities – in terms of issues and clauses - for the commercial negotiations to take place. This ensures that the negotiating team prioritise the issues which are important. 2. It provides the mandate for the negotiating team by agreeing what the team have a remit to accept on each issue, during the negotiations. By defining the Most Desirable Outcome (MDO) we agree what we are aiming to achieve; by defining the Least Acceptable Alternative (LAA) , we agree the minimum we can accept. 15
  16. The Framework sets out deal principles & objectives What We want from the deal Commercial Priorities: • Meet business needs • Value for money, end to end, by exploiting value to maximise profitability • Security against risk & commercial assurance/contractual protection • No surprises • Managing contracts and relationships throughout the term and beyond Balance Risk & Opportunity: • Both parties to be upfront about risk allocation and the ‘value/price’ of risk allocation. • Increases awareness of risk • Focus on understanding risks/opportunities for a given contract/relationship Relationship Priorities: • Commercially sensible relationship. • ‘Necessary’ contractual depth to support relationship and capture risk allocation • Focus on contract/delivery management • Continuity of personnel in order to retain knowledge and relationships Principles of conduct: • Treat other party as a seamless extension of ourselves (the “extended enterprise”) • Relationship premised on ‘What can we do for each other’ • Senior stakeholder engagement & access • Build a mature, trusted relationships at all management levels to embed a commercial relationship 3 1 4 2
  17. Commercial Priorities: A word about: “Understanding the Deal” Before we can start drafting the contact, we must have absolute clarity over what the business need is. This means understanding outcomes and deliverables, risks, dependencies, and the commercial and contract strategies which underpin the contract
  18. The Framework shapes the deal -early Overview of dimensions included: Services Remuneration Asset & Business Protection Governance Termination Technical Legal Requirements Contract Management • Statement of business requirements • Technical requirements • Resource input & dependencies • Staff expertise • Term • Knowledge transfer & embedding • Co. policies • Sub-contractor & Third Party • Charging mechanisms • Incentives • Payment schedule • Currency • Bench- marking • Liability limitation • Subsidiary/ Parent exposure • Warranties & indemnities • IPR • Data protection/ System security • Disaster recovery • Insurance requirements • Employee Protection • Governance Structure • Dispute escalation & resolution • Supplier performance evaluation • Change control procedure • Tendering for new work • Customer termination rights • Our termination rights • Payments upon termination • Exit management • Tax • Regulatory requirements • Confidentiality • Fraud • Assignment & novation • Change of control • Divestment of • General ‘boilerplate’ provisions • Pre-contract activities • Contract management activities • Close- out/post contract activities Tier2Tier1Tier0 Commercial Framework Statement of commercial & contract principles Contract types supported by Commercial Framework Commercial Focus for various contract categories Note: Applied where relevant and to the extent relevant considering deal size/significance.
  19. An example of Commercial Priorities Focus for contract dimensions related to Commercial Priorities Lower Commercial Focus • Business objectives (3.1.1) • Service Level requirements (3.1.2) • Technical requirements (3.2.1) • Charging Mechanisms (e.g. Types of Charges (4.1.1-4.1.6), Service Credits (4.1.9), Currency (4.4.1), Rebates (4.1.7), Expenses (4.1.8) • Knowledge transfer (3.6.1) • Flexibility in volumes & services (6.4.1) • System & technical changes during contract (3.2.2) • Benchmarking (4.5.1) • Developed IPR & Licenses (5.4.1- 2) • Removal of services (6.4.4) • Contract Term (3.5.1) • Extension of term (3.5.2) • Gain Share (4.2.1) High Commercial Focus Medium Commercial Focus CommercialFocus Contract dimension in the CF Low Med. High Knowledg e Transfer Develope d IPR & Licenses Technical changes during contract Removal of Services/Licen se Technic al Req. Charging Mechanism s & IP Licenses Service Level Req. Business Req. Volume flexibility Term & extension Benchmark Gain Share
  20. Using a Precedent or Template • Time can be saved by basing a contract on a precedent or template. This is a more efficient way of drafting a contract, and as long as the precedent is a good pone, it reduces the potential for drafting errors • It is helpful to: – Choose a precedent for the same type of transaction – Choose a precedent where you started from a strong negotiating position – based on spend, the relationship with the supplier, the desirability fo doing business with your company etc – Use a starting agreement rather than an executed agreement
  21. Key Drafting Principles 1. Be consistent with the front end • Check the front end and definitions schedule • Use definitions consistently • Don’t cover provisions that are covered in the front end (e.g. extra limits on liability, indemnities) • Don’t include extra obligations • Say if you think the front end/definitions are wrong 2. Use technical terms carefully • Technical terms with a well- understood meaning are okay (e.g. Ethernet, anti-virus,) • Explain/define ambiguous technical terms (e.g. IAM, CoS class 1) 3. Think about structure, and be comprehensive and clear • Structure • Clarity • Comprehensiveness 4. Points to avoid • No new customer obligations or joint obligations • No liability or indemnity provisions • No assumptions • No agreements to agree • No charges (except in the charges schedule) • No repetition 21
  22. Checklist: Good to Go? 1. Are the correct parties named in the contract? 2. Are the recitals accurate – what would the effect be if they were published in a lawsuit? 3. Do the definitions work each time a provision is used? 4. Are the obligations in the “Actions” section clearly defined? 5. Are the representations and warranties that we are making accurate? 6. Has the other party made warranties and representations which are strong enough? 7. Were representations made pre-contract which we need to capture or exclude? 8. Can we control our covenants? 9. Has the other party made sufficient covenants? 10. Are we able to control our dependencies to their covenants? 11. Could I misinterpret the scope if I tried? 12. Have we carried out a risk analysis? 13. Have we defined “completion” clearly enough? 14. Are acceptance procedures fully defined? 15. Are delivery dates clearly defined? 16. What happens if delivery dates are missed? 17. Have we explicitly defined “dependencies”? 18. When and how is payment triggered? 19. Are we comfortable with the cash flow throughout the contract? 20. When can the one party terminate, and what compensation does the other party get? 21. What are our liabilities and how are they limited? 22. Who owns foreground and background IP? 23. Are IP licensing terms clearly understood? 24. Are there clear and agreed processes for change management? 25. What assumptions have we made? 26. Have we considered the things we need to exclude from the contract? 27. Have we been clear on what warranty does and does not cover? 28. Are the representations and warranties that we are making accurate? 29. Has the other party made warranties and representations which are strong enough? 30. How will we resolve disputes?
  23. Questions?