Category Archives: Contracts

Contracting Disease

It is somewhat interesting to me that you can both “catch” a disease, and you can “contract” a disease. So what is the difference? The principal difference is that catch suggests a transmittable infection (ex. You can catch a cold or the flu), while contract can refer to a wider variety of diseases, including those that are not contagious (ex. You don’t catch cancer or leukemia, you contract them). I had to look this up. I didn’t say that it was engrossingly interesting to me; I said it was only somewhat interesting to me. In the business world the equivalent would be that you don’t catch a bad deal with a customer or supplier, you contract it.

So many businesses do so many things right in the ongoing process of trying to satisfy customers, so it is truly a shame that when it comes down to consummating the relationship with the customer, in the form of a contract, that they fall short of the good contractual goal. It is almost as if the business entity gets so excited at the prospect of completing the deal that they forget to write a good contract. Contracts at their most basic are very simple: Both entities in a contract want to get something, and in return are prepared to give something. Buyers want to get products or services and in return expect to provide money, and sellers want to get money and in return are prepared to provide products or services.

Beyond this it gets complicated.

Buyers want to get more products and provide less money and sellers want to get more money and provide fewer products. Herein lies the rub. How do you make sure everyone delivers what they should and pays what they should? You create a good contract.

There are many benefits and detriments associated with the advent of contracts. The greatest detriment that I can think of is that contracts gave rise to a new species of life, commonly referred to as “lawyers”. To bring a little circular logic into play here, it is good to remember that it is very difficult to “catch” a lawyer (at anything). Invariably you must “contract” them, but if you wash your hands thoroughly afterwards, while you probably will not reduce any of your risks, you will definitely feel cleaner.

I know it sounds a little trite but contracts are definitely a necessity in business. There must be some way for both parties to enforce the agreement that they are pursuing. Promises are good, and I am sure that everyone involved is both reasonable and honorable, but it still needs to be put in writing. Understand that agreements and requirements of any type can span multiple years. During that period it is not uncommon for the people who were party to the initial deal and who may understand the reasons for what was done, to move on to other roles. At the very least there needs to be a historical record of the agreement in the form of a contract so that those who follow on both sides of the agreement have something to refer to when questions arise.

This brings us to “Contracting Disease”. This is a malady that affects many businesses and is very prevalent particularly around business deadlines or at the end of any measurement period. A measurement period is usually the end of a month, quarter or year. It is during these deadlines or end of the measurement periods where usually reasonably sane organizations will succumb to one of any number of pressures and sign what is known as a bad contract.

A bad contract is the result where for whatever reason one of the parties to the contract either temporarily or permanently seemed to lose their mind and the other party to the contract lets them.

Contracts are normally designed to balance each party’s risks against the specific values that they are to receive. The standard risks are normally associated with how much of a good or service is to be supplied, how long it will be supplied, how much is to be paid for it and when it is to be paid for. There are normally many other items to be considered in a contract, but these are the primary ones, and usually any others somehow relate to these.

Contracting Disease can strike buyers at almost any time but usually occurs when the buyer either puts themselves in a position where very few if any suppliers can fulfill their product specification requests, or they find themselves in a position where an external factor has occurred and they must obtain a good or service at almost any cost in order to remain functioning. The US government is a perfect example of the self inflicted product specification contract. Government contract specifications and processes are usually incredibly complex and are pursued by only a limited number of specialized businesses. This is the type of process that results in contracts for five hundred dollar hammers and twenty five hundred dollar toilet seats. This is not an example of “you get what you pay for”. This is an example of “you pay, and you pay a lot, for what you needlessly over specify”.

A good example of the buyer’s need situation can be seen in the oil embargo of the 1970’s here in the US. OPEC decided that the US was not their friend, needed to be taught a lesson and as a result they were not going to ship any more oil to the US. This resulted in a reduced supply of gasoline at the pumps for all consumers and anyone else who drove a car. Consumers needed gasoline so that they could continue to drive their gas-guzzling cars. Enterprising gas stations recognized this opportunity and started raising their prices for gasoline far beyond any rational level based on the newly limited supply. In short they took advantage of the situation and raised the price of gasoline to unheard of exorbitant levels, but back then they would at least clean your windshield when you filled up so it wasn’t quite so bad.

Gas stations raised their price for gasoline to far more than ONE DOLLAR per gallon during the OPEC oil embargo. Can you image the nerve of those places charging more than a dollar for gas?

This was seen as price gouging and federal laws were quickly enacted to stop the practice. However, at the time, gas buyers who wanted to drive their cars had no choice but to agree the gas station’s contract and to pay the exorbitant price if they wanted any gas.

Contracting Disease can strike sellers in a myriad of ways, but it usually boils down to the fact that the buyer for whatever reason wants the buyer’s money and will agree to almost anything the buyers’ want in order to get the money. As I noted, Contracting Disease in sellers appears to be primarily a seasonal related malady. It seems to strike at the end of each quarter and especially hard at the end of the year. It is no coincidence that these periods coincide with the end of the various financial reporting periods. It is at these times that some sellers’ drives for incremental revenue (and contracts) can reach a fevered pitch.

Unfortunately (or fortunately depending on which side of the contract that you are on) there are no laws to protect sellers from themselves when it comes to selling their goods or services. This has to be one of the ultimate self regulating environments; the environment where the long term costs of signing a contract outweighs the short term inflows of money. When this self regulation does not occur, Contracting Disease sets in. In many markets it appears that buyers have recognized the periodic nature of sellers’ Contracting Disease and purposely try to wait until these high risk periods to negotiate and sign contracts.

When discussing Contracting Disease it is best to remember that buyers are usually protected in one form or another when it comes to the purchase (contract) of necessities and staples required for ongoing survival. Collusive or predatory practices by vendors are illegal. However Contracting Disease that results in a contract with incremental self inflicted risks and expenses associated with either the purchase of, or the sale of goods and services has no regulatory limit.

stead of caveat emptor (“buyer beware”) or caveat vendor (“Seller beware”), it should more accurately be Caveat Contractor.

Who’s Your Partner?

Sometimes I catch myself sounding (at least to my own ear) like Andy Rooney of “60 Minutes” fame, when I start asking questions that are obviously rhetorical. He would always ask some sort of simple minded question and then launch into an extended explanation of why it really was a simple question and therefore deserved a simple answer. Unfortunately (or fortunately, depending on your point of view) this is again one of those times.

When did we all fall prey to the metaphorical seduction of thinking we were, and more importantly wanted to be business “partners” when in reality we are, and will always be customers and vendors?

Have we ritualized the sales process to the point where we must now claim to be partners when we want to deal with each other? Isn’t it enough that one entity is trying to sell the other a good or service, and the other entity is considering buying a good or service? This is the essence of a healthy business relationship, not a partnership.

As usual, when in doubt about something, I go and look it up. Webster’s Dictionary, on line. I understand that this is viewed as an unfair practice in today’s day and age. The very idea of gathering information before putting forth an opinion runs totally against everything we learn, by watching television. No matter.

There were basically 4 definitions for “partner”:

• A person who shares or is associated with another in some action or endeavor; sharer; associate.
• A person associated with another or others as a principal or a contributor of capital in a business or a joint venture, usually sharing its risks and profits.
• A spouse; a husband or a wife.
• The person with whom one cohabits in a romantic relationship

Since this is a business and sales related forum, I think it is safe to say that it would not be in good taste to explore potential business partner definitions in terms of spousal or romantic relationships. Although there may be many good and potentially colorful examples of the exchange of capital for the provision of a good or service in this area, it is probably best to take the high road and just consider the first two business related partner definitions only.

The key word that I take out of the two business related definitions for partner is “sharing”. Partners usually share the risk and they share the (rewards) profits. This is the essence of a business partnership. You are diffusing and reducing your risk by having someone else share in it, and the price you pay for this risk reduction is that you must also diffuse and reduce your potential profit by having your partner share in that as well.

This is a basic tenet of economic theory associated with risk and return. If you want a greater return you must take a greater risk. Conversely, if you want to reduce your risk by having a partner assume some of it, then you must also expect to reduce your return because your partner will expect to share in that as well.

We often think of partners as being on the same team. This would mean that they both win or they both lose equally, and have a joint desire to minimize risk and to maximize profit. If a customer were to try and acquire a partner, wouldn’t that more correctly be seen as partnering with another customer to share the risks associated with the pending purchase?

But what happens if the supposed partners are not on the same team? What happens if the only way for your “partner” to minimize their risk is to shift that risk to you, and the only way for them to maximize their profit is to take that reward from you? Vendors, despite their seemingly most fervent desires cannot both sell and buy their own services and products. They can only sell them.

That doesn’t sound like the makings of a very harmonious partnership to me. What kind of partnership are you creating where the main objectives are to shift the risk to your partner and to appropriate as much of the return as possible for yourself? I think the best you can hope for here is an acceptable balance of the risks and returns between the vendor and the customer, and even that will take a lot of work.

As an example I would point to the everyday purchases that we all make. Despite my desire to share the risk of my food spoiling before I can eat it, my grocery store “partner” insists that I pay for my food at the grocery store in advance of eating it. The golf course “partner” where I play golf insists that I pay my fixed price green fee before I tee off instead of sharing the risk of my playing poorly that day and the resulting lower green fee that I would ask for based on my reduced satisfaction with my round of golf. Conversely I guess they could ask for a higher green fee on those days where I play well, but that so rarely happens that it is a “risk” that as a customer I would gladly sign up for.

They say that good fences make for good neighbors. I would assume that the business equivalent would be that good contracts make for good partners (if you insist on using that term).

The implied contract at the grocery store is that the food is fit for consumption on the day you buy it. If you wait too long or store it improperly, it is not the store’s fault, so you can’t ask for a refund. At the golf course they charge a fixed price and it doesn’t matter if you have a good day and use fewer strokes or have a bad day and use more strokes.

These are risks that as a customer I must take into consideration before I make the contract with the grocery store or the golf course “partners”. I must examine the food before I buy it to make sure it is in edible condition and see the golf course before I play it to make sure it is in playable condition.

As we move to larger more complex purchase contracts between businesses, we see that the terms associated with the agreement also get more complex. However these terms rarely include anything about “sharing” any specific risks or rewards. They are more focused on the specific responsibilities that each partner in the contract must fulfill, and the penalties that each partner may have imposed if they do not.

If marriage partnerships were negotiated with ferocity that these business “partnerships” are, I think it would be safe to say that marriage would in fact be a dying institution, but I promised earlier that I would not go down this interpersonal partnership road.

Suffice it to say that based on the onerous conditions and requirements that I have witnessed being placed in just about every business to business purchase contract that I have been a party to, either as a vendor or as a customer, there is very little that was contained therein that could even remotely be construed as “partner” or “sharing” oriented.

Being a trusted or valued partner is nice phraseology, but the bottom line, as it almost always is, is to get it in writing. With a contract in place you will invariably find that regardless of what side of the contract you are on, you will be called a “partner” to the contract when there is a desire to ask you provide something, and a “party” to the contract when there is a desire to compel you to provide something.

It just seems to be the way that vendor – customer partnerships work.