With litigation on an alarming upward trajectory, a lot of companies view contracting as a necessary evil of conducting business. It would be impossible to complete transactions without the terms of an agreement formalized in writing. But, contracts aren't just about portraying obligations and responsibilities in a textual format. Rather, contracts as a whole are meant to create value and yield economic benefits to the companies involved.
Lawyers tend to serve as the primary contract negotiators and drafters. Because they are both trained and paid to mitigate risk, contracts are usually teeming with definitions and clauses aimed at doing just that. According to a recent report by IACCM, this is one of the ten pitfalls to avoid if you want to maximize contract ROI. To start getting the most from your contracts, you should view them as assets, not weapons.
Focus on Increasing Value, Not Just Mitigating Loss
It is understandable that companies want contracts to spell out the possible consequences if a party fails to comply with the contracts’ terms. There is no denying that contracts have to contain these terms and conditions to some degree, but they do not need to dominate the discussions or become an oppressive part of the final agreement.
Companies have far more to gain from their contracts by conveying the value they add to the contractual relationship and by eliciting this information from the other prospective parties to a contract. Harmonious contractual negotiations should focus on creating a relationship that will provide the maximum reciprocal benefits possible, and this should be reflected within the contract itself. By ensuring that both parties stand to benefit generously from the arrangement and making this abundantly clear in the contractual language, the likelihood of encountering compliance issues and the accompanying losses diminishes greatly.
Foster Positive Incentives Rather than Negative Consequences
Fostering positive incentives within contracts corresponds nicely with using contracts to add value to the business. Of course, there may be some instances in which it is necessary to include some of the more traditional negative consequences, such as specific damages clauses. However, including too many or overly-taxing negative measures may end up backfiring.
For example, trying to impose excessive damages clauses may sour a potential relationship altogether, preventing the contract from ever being executed. Alternatively, negative consequences may cause the parties to proceed with an abundance of caution or result in tepid relations.
Rather than feeling threatened by negative possibilities, positive incentives will encourage contract performance and compliance. These can include any number of economic benefits, such as discounts when certain goals are met or business referrals for solid performance, among other options. Ultimately, it is important to frame the contractual relationship in a positive manner, so that all parties are motivated to perform and not merely acting to avoid disaster.
Look at Contracts Collectively, Not Just As Individual Documents
Companies usually consider all of their resources and assets when making business decisions, and the contractual portfolio should be no exception. It is important that contracts are negotiated, executed, and managed in an efficient manner, keeping in mind all existing and any future arrangements. A comprehensive approach to contracting and contract management will help companies avoid unnecessary overlaps or redundancies. This is particularly important, as money is often wasted because companies are simply unaware of all of their existing contracts.
By ensuring that each contract adds value to the business in a distinct way, that the relationships with each party to a contract is based on mutual benefit, that contracts are framed in a positive fashion, and that there is a coherent contract portfolio (not merely a handful of disparate contracts), companies are far more likely to maximize the value of their contracts.
The Buyer's Guide to Contract Management Software
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