Desktop version

Home arrow Sociology arrow A short guide to contract risk


Many organizations adopt a deal-maker approach in contract negotiations that separates contract formation from contract implementation. in the words of Danny Ertel,

An organization that embraces the deal maker approach... tends to structure its business development teams in a way that drives an ever growing stream of new deals. ... But they also become detached from implementation and are likely to focus more on the agreement than on its business impact.[1]

Just as organizations adopt a deal-maker mindset, individuals within an organization who negotiate contracts can slip into a deal-maker mindset as their competitive instincts (fuelled by the mythical fixed pie assumption) emerge during a negotiation. one of the consequences of this mindset can be a focus on clauses dealing with liabilities and risk allocation. other consequences noted by Ertel include the prevalence of positional bargaining tactics such as using surprise to gain advantage, holding back information, and setting false deadlines to close deals.[2]

These deal-making tactics might produce a contract that, while it looks good on paper, inhibits the relationships necessary to successfully implement the contract. Given the ascendancy of business models that are built on relationships, negotiators who can move from a deal-making to an implementation mindset have an opportunity to minimize the risk of contract failure, thus creating competitive advantage for their companies. Among the characteristics of the new mindset described by Ertel are a focus on the end of the deal, the identification of obstacles to successful completion, and a willingness to help the other side prepare for the negotiation, including consideration of implementation concerns.[3]

An implementation mindset is especially useful in identifying the parties' often unrecognized and unexpressed expectations. For instance, by asking simple questions during the dealmaking stage, both sides can specify and align needs, establish expectations, and clarify the scope of solutions in a manner that can minimize the risk of major business and legal problems later on.

  • 5
  • 6

An implementation mindset is consistent with the IACCM survey described in Chapter 3, in which participants were asked to describe not only what they spend most time on in negotiating deals today, but also where they think negotiating time should be focused in the future. The "Top Terms of the Future” listed in that chapter indicate that negotiators see more value in negotiating terms relating to change management, scope and goals, and the parties' responsibilities than terms such as liability limitations and indemnities.

The top terms of the future are dominated by the need for clarity about the basic intentions of the parties, and the need to ensure that the deal remains on track and can be adjusted in the face of changing conditions or requirements. With a revised focus on these terms of the future, the parties can attempt to establish procedures for more open information flows and greater transparency, thus signaling their intent to collaborate and work together to manage risks and optimize results.

Another aspect of the implementation mindset relates to the evaluation of negotiation success. As Ertel notes, rather than focusing in their evaluations on whether they achieved price discounts, purchasers should emphasize a full-cost approach that considers matters such as "the operating efficiencies gained through using the supplier, the reductions in defects achieved by the supplier, and even the supplier's role in developing product or service innovations.” And rather than focusing on sales volume, sellers should emphasize "the longevity of their customer relationships, the innovations that have resulted from their interactions with customers ... and the referral business that can be traced to those customers.”[4]

  • [1] ertel, D. (2004) Getting past yes: negotiating as if implementation mattered.Harvard Business Review, 82(11), November, 60-8, p. 62.
  • [2] ertel 2004, p. 65.
  • [3] ertel 2004, p. 63.
  • [4] Ertel, D. (1999) Turning negotiation into a corporate capability. Harvard Business Review, 77(3), May-June, 55-70, p. 62.
< Prev   CONTENTS   Source   Next >

Related topics