Business Negotiators Often Hit the Wrong Targets
The annual IACCM study of the most frequently negotiated terms in business-to-business contracts once again reveals a strong focus on the provisions that deal with risk allocation and the consequences of failure. 1
Those who negotiate these deals confirm that their focus is often in the wrong place. Indeed, one General Counsel observed: "Having studied this issue, I realize that much of our negotiation is more driven by functional positions than it is by broader business interests". In other words, business negotiations can actually result in the negotiation team fighting for things that undermine the interests of their own organization.
This is vividly illustrated when we look at the analysis of the underlying causes of contractual claims and disputes. These bear a strong correlation to the areas where negotiators say they should spend more time - and virtually none to the topics on which they actually do spend the most time.
For example, disagreements over acceptance or delivery are the number one cause of contractual claims and disputes. Digging further, we find that the main factors causing this are unclear or ambiguous requirements; poor change management procedures (i.e. negotiated amendments); and weak performance management and reviews. These represent the top three areas where our negotiators believe more time should be spent.
So it appears that the frequency of failure is in fact directly linked to the way we go about negotiation. Business negotiations - far from achieving a good deal - are often contributing to a failed deal.
Contract Negotiations Continue To Leak Value
We enter into contracts because each party believes that there is potential for benefit. But the results of IACCM's worldwide survey show that if we want to maximize the chances of realizing the benefit, we must focus on a different set of contract terms during negotiation.
In its 10th annual survey of the most frequently negotiated terms and conditions, IACCM once more reveals that business contracts are constraining the value that can be achieved from high-performing relationships. For the first time, the study also identifies the most common sources of failure in contract outcomes and this indicates the potential value that could come from a robust contracting strategy and competence.
Most business contracts are designed to fit a rules-driven approach, which assumes that the more powerful party will impose standard terms and conditions reflecting its interests and procedures. Negotiation is therefore restricted to situations in which there is some form of counter-balancing power, or there are deal or relationship characteristics that require crafted terms.
While the economic impact of standard terms can be debated (and many organizations appear to be making a poor trade-off in this regard), the IACCM study focuses on situations in which negotiation does occur. Since standard terms are now so widespread, these naturally form the base for most negotiations - and as a result, skew the topics on which the negotiators focus.
As the results of the survey show, the biggest divide between trading partners today is in how they seek to allocate risk. Therefore the 'polar extremes' are in their approaches to allocating liabilities and seeking or granting indemnities. These topics - along with price and payment - overwhelmingly dominate negotiations. A quick review of the 'top ten' negotiated terms reveals the extent to which negotiators are channelled into asset protection and the consequences of failure - intellectual property rights, liquidated damages, governing law and payment terms being examples.
The negotiators are clear that this focus damages the value achieved from trading relationships; they are also clear about where effort in negotiations should be placed (scope and goals, change or amendment procedures, communications and reporting). But for as long as contracting remains a largely transactional activity dominated by a legal / financial axis, there is little likelihood of change. Executives should be demanding more from their contracts. They should be asking why so many relationships fail to deliver to their potential - and what role contracting and negotiation are playing in that failure.
1 IACCM (The International Association for Contract & Commercial Management) has undertaken its 'Most Frequently Negotiated Terms' study for the last 10 years. The most recent study represents the views of more than 8,000 contract negotiators from 68 countries. Full results of the study can be found at www.iaccm.com
Business Negotiators Often Hit the Wrong Targets, By Tim Cummins
Copyright © 2011 Tim Cummins
Copyright © 2011 The Negotiator Magazine
The Negotiator Magazine (September, 2011)