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Time to re-work your contracts?

December 30, 2013

As a new year begins, many organizations have plans to update or re-design their standard contracts or term templates. Such projects usually aim to consolidate changes that have occurred since the last revision; perhaps to reduce the length of the agreement; maybe even to simplify language. But most do not ask fundamental questions regarding the overall efficiency or effectiveness of their terms or agreements.

What do I mean by efficiency and effectiveness? As an example, few (I hope) would disagree that contracts are vehicles for communication, ensuring that the parties understand their obligations and commitments. So a valid question might be to ask how easy is it for people – the actual users of these agreements – to understand your contracts? Can they quickly find relevant content and will they correctly interpret it?

It has been some years since organizations started to recognize the need to improve the quality of their external communications. There was a revolution in the design of forms and documents, ranging from product specifications or installation instructions, through to Annual Reports. Yet in many cases, contracts and their related documents remain untouched, or have been impacted in only superficial ways. The fact that contracts are in general not ‘easy to use’ has a variety of negative consequences and some organizations are grasping this point and looking for more fundamental ways to re-work their existing portfolio.

IACCM is involved with this in two ways. One is the Contract Design Award, introduced in 2013 and providing expert advisory services on ‘best practice design’, together with the potential for successful applicants to display the IACCM Award logo on their contract documents. The criteria against which IACCM evaluates contract quality are:

  • Language Criteria: How understandable are the words in your contract?
  • Design Criteria: Does the design make the contract structure clear and easy to read?
  • Relationship Criteria: How far does your document go to help cultivate a positive relationship among the contracting parties?
  • Content Criteria: What is your content and is it organized to deliver your document’s purpose?
  • Balance: Do the terms of your contract generate a sense of collaboration and trust?

Another, more fundamental, shift is when groups of companies band together to promote ‘industry standards’. While such an effort is certainly not new, I am seeing it take new forms and wider scope. For example, these efforts are global and their goal is to reduce the amount of low value negotiation by establishing mutually agreed (buy-side and sell-side|) model terms or contracting principles. The aim is not to eliminate negotiation, but rather to ensure it is focused on issues of value – the areas where misunderstanding might arise or where improvements can increase the chances of success.

I believe we are nearing an end to the days when contract re-work was a purely internal affair, informed only by the wishes and desires of functional stakeholders. We have all been through that painful exercise where efforts to streamline or simplify are frustrated by the laundry list of items that interest groups push to include; or where we beat our hands against resistance to change; or where, through lack of external data, we really cannot answer management questions about competitive impact. So if contract re-work is on your agenda for 2014, are you clear about what you want to achieve and might IACCM help you to do it?

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