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Contract terms and conditions are a necessary
evil. By the time the contract negotiation stage comes around, both the customer
and the seller are exhausted after having been put through the ringer for so long.
Both parties want to close the deal and move on. Sellers are especially motivated
to get the contract over with because they can smell the money from their commissions
or variable bonus payout. The reality is that in a traditional, back-end, staff
augmentation, global sourcing model, there was always minimal importance given to
this stage of the pursuit cycle. The customers and the service providers were trained
to put their stamp in the right boxes, initial next to the Xs, and sign along the
dotted lines for the deal to get done. Even when a dispute arose, it was never severe
enough to challenge the validity of the contract itself.
But large multiyear deals (Big Deals), often
with fixed pricing, are a different beast altogether. As the size of the deal grows,
the contract tends to get more and more innovative and complex. It is easy for the
customer or seller to interpret contract clauses differently if they are not explicitly
clarified. The story in Box 8.1 will make you consider why businesses need to be
ultrasensitive during this phase of business.
8.1: The Mega Effects of Missed Communication
Recently, Anirban was having a conversation with a partner from an eminent New York
law firm. The topic of discussion was mixed interpretations of global sourcing contracts.
This partner (who we will call Rodney for the purpose of this story to spare any
guilty parties) was representing the buyers of a mega global sourcing deal. His
customer, a large U.S. corporation, was in the midst of a potential lawsuit with
a prominent services provider. The customer was not happy with the services and
wanted to get rid of the service provider. The service provider was willing to let
go of the contract, so long as the customer guaranteed a fee of US$200 million per
year to the service provider for the next four years. The customer laughed, looked
at the contract, and decided that the service provider was nutty at best and greedy
at worst.
Well, maybe the service provider was not as nutty as they originally thought. When
the case was initially evaluated by lawyers from both sides, it seemed as though
the contract did not say that the customer had to pay almost the entire total contract
value if the work is taken away from the service provider. However, the contract
was worded in such a way that the master service agreement was to be read along
with all the local service agreements, exhibits, and so on and so forth, possibly
to marginally decipher the intent of the contract. If somebody did read all fifteen
or so of these documents, the service provider might get the idea that it could
qualify for a US$200 million-per-year handout under the reduced resource credit
(RRC) clause. All in all, there was a big disparity in how this contract could be
interpreted from the buyer and the provider perspectives.
The story in the box is a perfect and common
example of mixed interpretations of legal clauses. But before we can think about
how to fix such a conundrum, we need to understand large contracts better.
What exactly is a contract? To us, a contract
simply means two things: (1) a legal deliverable and (2) a business deliverable.
A contract should specify broader deliverables (outcome), risk, and changes—basically,
the incentives and disincentives.
A renowned outsourcing lawyer and global sourcing
expert from a prominent UK law firm defines a contract by the term “meeting of the
minds.” Now, this term has a different legal dynamic to it. It actually means intent.
So if we analyze the story in Box 8.1, was the customer willing to pay a US$200
million-a-year penalty if the contract was scrapped? Obviously, it seems as though
the service provider thought so. This scenario is not unique. You will often see
reports coming from major analyst organizations and research groups saying that
more than half of global sourcing deals fail. On closer observation, you will find
that these deals do not really fail in the typical sense, where the service provider
could not deliver the promised artifacts. In reality, it has more to do with customers
not getting some of the perceived benefits they thought they would get. It is a
case of missed connection, where the intent was not clear during the meeting of
minds. Without knowing the details of the case mentioned in Box 8.1, it is hard
to tell whether this scenario of apparent missed connection was created by design
or not.
Our extensive experience in doing Big Deals
has taught us a few basic lessons. Too often, the business leaders from both the
service provider and the customer side tend to believe that most of the items in
a contract are legal terms. Who can blame them for thinking so when all they are
hearing is legal verbiage such as force majeure, indemnity, and RRC? But if you
think deeply, most of these are basically business terms; that is, these clauses
will have a direct business impact (it does not have to be a legal impact). For
example, force majeure dictates what happens in an unforeseen event. As a business
leader, you need to ensure that the other party is not using force majeure as a
vehicle for gaining unfair advantage. We came across a situation where the customer
demanded to pay less because the price of gas went up, hurting its core business.
Now, although a northbound gas price hurts all of us, let’s get real: is it an act
of nature causing massive destruction? However, one could argue that force majeure
is a matter of interpretation. What’s majeure for you may be mineure for me. To
make a long story short, we believe that business leaders on both the provider and
customer sides need to have an explicit understanding of all terms and conditions
and make a judgment call with regard to what matters to them.
Our goal is not to make you a legal expert by
the end of this chapter. As a matter of fact, we are unqualified to do so. But we
want to cover some of the basic elements of Big Deal contracts you should be aware
of as a business leader. The actual process of negotiating the contracts is a chapter
by itself and is covered in Chapter Nine.
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