How to deal with the outcomes of a contract review

In our previous article “How to review a contract” we provided a framework for anyone within a business to follow that would allow them to provide meaningful feedback on an agreement, whether prospective or already in operation.

This framework didn’t require legal qualifications, but rather instead focused on:

1. Accuracy: is it correct?
2. Reasonableness: is it fair and balanced?
3. Adequacy: is it complete and fit for purpose?
   
   

In this article we now look to answer the question “what happens next?” and show you how to deal with the outcomes from a contract review.

First, for context, it’s worth understanding the basic premise that in the business world of buying and selling, the contract that covers the arrangements is commonly provided by the supplier, although an increasing number of customer organisations want to use their own contract instead.

In each case, the contract will embody its provider’s preferred way of doing business and dealing with risk.

Understandably, a contract may have elements of approach, situational coverage, settings, completeness and other matters that vary in acceptability to the contract recipient. Checking this acceptability is the purpose of the contract review.

In this article we’ll outline the steps needed for dealing with issues found during the contract review, covering:

1. Prioritising detected issues (inc. free template)
2. Preparing a negotiating strategy (inc. free template)
3. Suggesting options for dealing with the issues
4. Advising the supplier about contract issues
5. Reviewing the supplier response to those issues
6. Conducting face-to-face negotiations to resolve issues
7. Ensuring the contract gets updated accurately
   
   

Assumptions

To set the context for this article, the following assumptions apply:

1. The supplier’s standard contract was provided to the organisation for consideration
2. The organisation has not used the supplier and/or the contract before
3. The supplier expects the organisation to negotiate some of the terms and conditions
4. The activities to be performed will mostly be described from the organisation’s viewpoint
5. The organisation’s equivalent to a Contract Lifecycle Management team will drive the process
6. The organisation’s people likely to be key stakeholders in the contract will be invited or required to provide input about contract aspects that could affect operational, regulatory, policy or other matters in their areas of responsibility
7. The free Contract Review Issues Log Template was used to record details of all issues found. The template makes life easier for both parties by listing details of all the issues in one place, in contrast to their random appearance throughout and across various contract documents when highlighted in place.
   
   

Prioritise the issues

The Contract Review Issues Log Template allows specification of the impact of each issue. This is a crucial piece of information because it:

1. Justifies the concern about the issue, and can reveal to the supplier implications and consequences for the organisation, and maybe also the supplier, that might not have been intended or expected
2. Provides the basis for setting a priority level for each issue to indicate its severity or unacceptability, in particular if it represents a showstopper in its current form.

The impact assessment needs to be genuine and supportable, not flippant, trivial or immaterial.

Stakeholder input will be required here, as the people involved are best placed to determine realistic implications of the issue, whether operational, financial, legal and so on, separately or in combination.

Prioritisation settings for each issue can be recorded in the Contract Review Issues Log Template.

Prepare a negotiating strategy

With the issues prioritised, they can be grouped in descending order of severity to highlight where the most attention is required. Minor issues can be addressed or disregarded as required.

Bearing in mind that the ultimate goal is to do business with the supplier, there is value in suggesting approaches for addressing the issues, particularly those with the highest severity.

The purpose of contract negotiation best practices is to determine how a clause might be changed, or what other actions might contribute, to removal or reduction of each associated issue, such as:

1. The preferred clause setting
2. An acceptable clause setting
3. The show-stopper clause setting
4. What can be conceded by either or each side
5. How to mitigate a non-negotiable setting.

Attempting to understand the supplier’s reasoning for presenting a certain position on a particular clause can be useful. It may suggest alternative ways of achieving the outcome the supplier desires in a manner that eases the organisation’s concerns.

Again, stakeholder participation will be vital for considering a range of options and opportunities to help with issue resolution.

A free Contract Negotiation Strategy Template is available to record the strategy developed for each issue.

Suggest issue resolution options

The natural inclination for resolving an issue is to suggest the organisation’s preferred position on the clause in question and be prepared to negotiate down from that position in line with the positioning strategy.

This approach accords with the standard negotiating practice of not making unilateral concessions, but since it also expects the supplier to do exactly that, the suggestion may be rebuffed.

The element of give-and-take can be introduced early by proposing several options from the positioning strategy right from the outset. This can be something like the preferred setting despite the chances of rejection, a slight reduction in the preferred setting, and/or some other small concession that will help maximise value for both parties.

Unless the organisation’s preferred position really is non-negotiable, its walk-away point on any clause should not be disclosed as a suggestion as this will remove any room for negotiation upwards if accepted.

The initial set of issue resolution suggestions should be added into the Contract Review Issues Log Template.

The provision of multiple suggestions indicates the organisation’s willingness to consider the supplier’s needs and to look for middle ground that might satisfy both parties. The aim really is to encourage the similarity effect in negotiations, where one side’s reasonable behaviour and approach influences the other side to behave similarly.

On completion of the template, it should be run through a quick sanity check by various stakeholders to validate the issues and their prioritisation, and the first-round suggestions for addressing those issues.

A remediate-and-review cycle should continue until the template’s content is considered fit for submission to the supplier.

Advise the supplier about contract issues

The approved Contract Review Issues Log Template can be emailed to the supplier for consideration of the issues the organisation has found with the contract, and the organisation’s suggestions for dealing with those issues.

The organisation should accompany the template with details of the protocol to be followed by the supplier in respect of any questions or clarifications needed about the issues found or the suggestions put forward, the timeframe for responding and so on.

The supplier’s general responses should be made in the template. They could consist of full/part acceptance or rejection of suggestions including reasoning and full specification of changes to or additional wording for the applicable clause, submission of alternative suggestions, plus anything else desired.

The updated template plus any supporting documentation should be emailed back to the organisation for its consideration of the supplier responses.

Review the supplier’s response to issues

The supplier’s responses to the issues raised and suggestions offered need to be evaluated as follows:

1. Review in accordance with the how-to-review-a-contract process
2. Highlight issues and suggestions rejected by the supplier
3. Note which issues have been addressed satisfactorily
4. Determine which issues have been minimised but persist, and adjust the current effect
5. Identify any new issues resulting from supplier-proposed changes, and note the effect
6. Assess the impact and acceptability of any counter-suggestions made by the supplier
7. Reprioritise the remaining issues
8. Derive further suggestions for minimising issues, including supplier objections
9. Reset any previously established positions based on the inability of the supplier to accept certain suggestions.

It should be clear from a supplier’s responses if a contract just cannot be agreed: showstopper conditions have not been adequately dealt with and so persist, or most proffered suggestions have been rejected with too few alternatives received in return.

In such cases, discussions with the recalcitrant supplier should be terminated and other suppliers investigated when available.

Conduct direct negotiations with the supplier

With the supplier still in the game and a new set of issues and suggestions ready for discussion, it’s time for a direct meeting to try to resolve any outstanding differences.

This meeting should be supported by whatever technologies are available to simplify discussions, such as any online negotiation capability built into the organisation’s Contract Management System.

Every effort should be made to reach agreement on outstanding issues during the negotiations. Where conditional agreement has been reached but higher approval is needed, that approval can be sought immediately or when a natural break in discussions occurs. Where the necessary approvers aren’t readily available, the issue will need to be parked until they are, but negotiations on other matters should continue.

Remember, the objective is to try to reach acceptable compromises that will enable the organisation and the supplier to do business. This could mean that some normally unacceptable clause or clause setting needs to be accepted occasionally, by the organisation and/or the supplier.

It has to be understood that you can’t win them all, and that it’s unrealistic to have such an expectation. If it’s the best you can do, take steps to ensure that the attendant risk from acceptance of the normally unacceptable is managed appropriately.

The more worrying outcome is that you can’t win any or many of them, despite your best efforts. However it’s not necessarily just a case of a supplier’s take-it-or-leave-it attitude. It can also be indicative of an unrealistic attitude on the part of the organisation: "if the supplier wants to do business with us, it will be on our terms".

In circumstances where a contract could be signed but closing the gaps has been difficult to achieve, the organisation needs to make a go/no-go decision: either figure out a way to live with a less than desirable contract, especially when there’s no real alternative, or terminate discussions and seek out other suppliers.

Bear in mind also that the supplier might conclude, based on behaviour exhibited during the negotiations, that the organisation is likely to end up as a vexatious, 'unpleasable' or unprincipled customer not worth the effort, and walk away first.

Update the contract to reflect the agreement

As every issue is dealt with and approval obtained, the outcome of negotiations needs to be recorded. This can occur directly in the applicable contract document when an online negotiation tool such as Gatekeeper’s eNegotiate is used and all changes tracked, or the Contract Review Template can be used.

When the Contract Review Template is used, agreement is needed on which party will transfer the details from it into the contract documents, again with changes tracked. By default, the other party will then be responsible for confirming that the contract documents have been updated correctly.

With an agreed contract in hand, the usual contract approval and execution process can begin.

Summary

The usual outcome of a contract review is a list of issues or concerns that represent unacceptable risk, unrealistic expectations, impractical practices, violation of policy, errors of all kinds, and so on.

Often these issues arise because the contract provider has tailored the contract to suit the way it prefers to conduct business. This leaves plenty of scope for objection from contract recipients who do things differently.

Closing the gaps between what each side needs and wants in the contract is the next step towards formalising this specific piece of business. 

Getting the best of the other party through intransigence and bullying might deliver an unbalanced contract that can lead to resentment, a difficult and fractious relationship, early termination where possible otherwise little potential for renewal.

The keys to success in dealing with anything untoward in a contract include a willingness to negotiate, knowing your limits and sticking to them, flexibility and creativity, a strong desire to create a contract that works well and a counter-party with a similar mentality.

In this article we’ve presented an approach to help you negotiate the issues revealed in a contract review and provided two useful templates (Review Issues Log and Negotiation Strategy) that can be modified to suit your particular circumstances.

If you would like more information on how to deal with the outcomes of a contract review then contact us today for a free consultation.