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A CFO's Role in Contracting

     

The CFO, while not always a primary party to the comany's contracting, has an obvious interest in the outcomes and value of contracting. Here are some important reasons that CFOs need to actively partake in their companies’ contracting process:

Understand the Real Cost of Clauses

Contracts contain many terms and conditions relating to pricing and fees, but they also contain clauses that have monetary value that may not be deliberately calculated. For example, clauses pertaining to damages for delayed or inadequate performance may be stated as a percentage of the value of the goods, although the exact figure for this may not be clear because it often depends on where in the process the breach occurs. And, in many cases, there is not a percentage or any other definitive sum because the circumstances would dictate the precise calculation. 

 

Nonetheless, there is usually quite a bit of language that makes it clear that one or more parties may be on the hook for far more than they initially anticipated. For this reason, it is crucial for CFOs to participate in discussions relating to these sort of terms, and where feasible, conduct preliminary analyses of the potential financial ramifications. By doing this in a proactive manner, it is possible to reduce the likelihood of a future financial setback or at least minimize its overall cost.

Provide Balance to the Legalities

In general, attorneys iron out many of the details when it is time to formalize a contractual arrangement in writing. Legal expertise in such matters is certainly warranted. However, CFOs should also provide input with respect to how to structure the agreement to ensure that the economic purpose of the contract does not become mired in legalities. After all, the primary purpose of a contractual relationship, and essentially all other business transactions, is to provide and/or receive something of value. Unfortunately, the scope of that value may be eroded by incessant risk-aversive practices and terms. In the end, CFOs are responsible for a company's financial health, and thus they must insert themselves into the contracting process to ensure maximum value is received.

Break Down the Barriers to Change

Clearly, it is the attorneys' duty to ensure that a company adequately protects itself throughout the life of a contract, much of which is accomplished during the contract drafting process. But, this often occurs to the detriment of the deal, and many old school habits are proving hard to break. Just as CFOs want to determine the financial impact of certain contractual terms and ensure that the parties remain committed and faithful to the commercial interests at stake, they often must be advocates for change and innovation. Turning a profit is no easy feat, and in the current economy, it requires substantial skill, unwavering diligence, and a fair amount of creativity. If CFOs are not there to push the folks resistant to altering the way things are done, far too many companies would eventually flounder.

Ensure that Contracts are Treated as the Critical Asset They Are

It is probably redundant to once again emphasize the importance of treating contracts as the critical assets that they are, but it seems to be an important notion that is constantly overlooked. Contracting, and cultivating business relationships in general, are at the core of what most businesses must do to operate and succeed. Therefore, CFOs must treat them as important assets and ensure that the rest of the team does as well. One way to demonstrate their significance is to merely be involved and remain abreast of developments within the company's contract portfolio. If no one from the leadership team inquires about the health of the company's portfolio and is unaware of what is happening at any given moment, this signals that it is a low priority item, which simply should not be the case.

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