In today’s rapidly evolving business landscape, establishing and maintaining strong client-supplier relationships and being able to rely upon the strategic advice and guidance of intelligent suppliers, is crucial for the successful implementation of complex projects and the achievement of strategic business objectives.
One of the key challenges in developing such relationships lies in the drafting, discussion and alignment of the contracts that guide the parties, where the input of various stakeholders, including the supplier’s legal, commercial and sales teams, must be carefully balanced to ensure a mutually beneficial agreement and one which is focused on the achievement of the client’s anticipated business outcomes.
Navigating the intricacies of contract discussions requires a deep understanding of the practical (not just potential) risks and challenges that are likely to (as opposed to ‘may’) arise, as well as the development of effective governance strategies for encouraging collaboration and communication among the involved parties.
From the evidence we have reviewed in our Expert Witness work for the High Courts in major project relationships that have gone wrong, there is often very little focus in written contracts on how they can support driving the ‘right’ behaviours between client and supplier to deliver the project really successfully. There are also occasionally times where supplier teams may ‘oversell’ their own delivery team and project deliverable capabilities and, unless these inadequacies are identified and addressed, this misalignment may be baked into the drafting of the contract terms.
Strategic Suppliers Contractual Obligations
This article’s primary focus, therefore, is on the clarifications to consider should a supplier’s legal team attempt to exclude from the contract the professional advice and guidance provided by the supplier’s commercial and sales teams, which the client expects to rely upon for the successful delivery of the project.
Where these situations arise, it is essential to identify and address the risks of the proposed solution not achieving expected strategic objectives, if the contract that is drawn up does not accurately reflect what the supplier’s sales and commercial teams have represented (or implied) to you.
Oops … did I say that …?
Contract discussions can all too easily descend into a competitive melee, when they should be striving to create a document that reflects and encourages collaborative partnerships. By examining the common issues and potential conflicts that can emerge between the supplier’s legal and commercial/sales teams, and yourselves, we aim to provide valuable insights, and some recommendations, for fostering a collaborative and transparent negotiation process, from our own experience across nearly 600 complex projects.
This will hopefully supplement your own thinking to enable you and your supplier to establish a solid foundation for your partnership, one that can lead to the successful execution of projects and the achievement of all desired outcomes.
In the following sections, we will explore the various risks associated with the exclusion of the supplier’s commercial and sales teams’ advice, providing detailed explanations, examples and practical solutions for enhancing cooperation and ensuring that the supplier’s expert responsibilities are adequately captured within the contract.
Why some supplier legal teams try to water down their contractual obligations
There are a number of reasons why a major strategic supplier, contractor, or in the case of complex IT solutions – a system integrator’s legal team – may try to exclude advice given by their commercial and sales teams to you, when discussing and drafting written contract terms. These include:
- Issue 1: Liability concerns: A supplier’s legal team will often attempt to exclude advice from their commercial and sales teams to limit their liability in case their proposed solution does not meet your expectations.
- Example: The sales team might provide a guarantee that the solution will meet all of the expectations and Use Cases you have documented as part of your requirements to the supplier. The legal team may attempt to exclude this guarantee to avoid liability if the proposed solution fails to deliver on this promise.
- Collaborative solution: The supplier’s legal and commercial/sales teams can work together with you to include reasonable and well-defined performance metrics and warranties in the contract. These should ensure that the advice provided by the sales team is compliant with your expectations while not exposing the supplier to risks that its solution or its implementation team are (reasonably) unable to deliver or that are not (reasonably) part of the agreed (or implied) scope.
- Issue 2: Overpromising: A supplier’s sales teams may sometimes overpromise the capabilities of their organisation’s skills, competency and solution to win the contract, which may not align with their ability to deliver against your requirements and Use Cases.
- Example: The sales team might promise a solution that can integrate with all of your existing systems, while the supplier’s solution can only integrate with a limited number of systems or only in a more limited manner than you practically need.
- Collaborative solution: The supplier’s legal and commercial/sales teams can work together with you in their undertaking of an extensive due diligence process, so that the supplier can ask ‘the right questions’ to validate your requirements. In this way, the supplier can advise you on what can be achieved, what cannot and what compromises you will have to live with. This helps to establish clear boundaries and expectations for the solution prior to contracting with them, ensuring that the contract accurately reflects what the supplier can deliver and the governance that will drive really great behaviours between you both.
- Issue 3: Ambiguous language: A supplier’s commercial and sales teams sometimes use ambiguous or unclear language when describing their solution. This often leads to misunderstandings over both requirements and how the solution will meet those requirements.
- Example: The sales team might use terms like ‘state-of-the-art’ or ‘cutting-edge’ in the context of how their solution will meet particular requirements, which could be interpreted differently by you.
- Collaborative solution: The supplier’s legal team can work with the sales team and yourselves to use clear, specific language in the contract that accurately describes the areas of the requirements and Use Cases the supplier’s solution will meet, its features, benefits and limitations, therefore reducing the risk of disputes.
- Issue 4: Inconsistencies with legal requirements: Advice provided by a supplier’s commercial and sales teams may not be compliant with legal or regulatory requirements, which could expose them to legal issues.
- Example: The supplier’s sales team might promise a solution that collects customer data without considering privacy regulations like GDPR.
- Collaborative solution: The supplier’s legal team can educate both their own sales team and your teams on relevant legal and regulatory requirements and work together to ensure that the advice provided is compliant with these requirements.
- Issue 5: Misaligned incentives: The supplier’s sales team’s primary focus could be on closing deals, which may lead to the prioritisation of short-term gains over your long-term satisfaction or legal compliance.
- Example: The supplier’s sales team might push for a high-priced, long-term contract that may not be in your best interests; or indeed that of the supplier themselves.
- Collaborative solution: The supplier’s legal and commercial/sales teams can establish a shared understanding of both your and their long-term goals and values, ensuring that the contract serves the best interests of both parties.
The supplier’s legal and commercial/sales teams can work collaboratively with you by setting clear expectations, using precise language (in layman’s terms, not ‘legal’ jargon), ensuring legal compliance and aligning incentives to ensure that the advice they provide on the solution’s fitness for purpose is included in the contract where appropriate.
What can drive this type of behaviour in some supplier’s sales and commercial teams?
Supplier’s legal teams know how some commercial and sales teams (not all) can, on occasion, over-estimate both their own solution and their technical team’s capabilities. They will also know that there are a number of reasons why their sales/commercial teams might be inadvertently incentivised by their company to over-promise the capabilities of a solution, or their team, to you. These may include:
- Commission-based compensation structure: Supplier’s sales and commercial teams often work on a commission basis when they obtain a formal order from a client, which means they earn a percentage of the revenue generated from the projects that have been ordered. This compensation structure can incentivise them to over-promise a solution’s capabilities to more rapidly secure an order from a client and earn a higher commission, more quickly.
- Performance targets and quotas: Sales and commercial teams typically have performance targets or quotas they need to achieve, such as a certain number of deals closed, or revenue generated within a specific time frame. This pressure to meet targets can lead some to over-promise a solution’s capabilities to secure more contracts and achieve their goals.
- Competitive pressure: In a competitive market, some sales and commercial teams may feel the need to outshine their competitors by presenting their solution as superior, even if it means exaggerating its capabilities. Over-promising can be an attempt to differentiate their offering and win you as a client, discouraging you from choosing a competitor’s solution.
- Internal recognition and career advancement: Sales and commercial team members may be motivated by the desire for recognition, promotions and career advancement within their company. Closing more deals by over-promising a solution’s capabilities can lead to praise from their superiors, contributing to their career growth.
- Lack of technical knowledge: Some sales and commercial team members may not have a deep understanding of the technical aspects of the solution they are selling. This lack of knowledge can lead them to unintentionally over-promise the solution’s capabilities based on their limited understanding of the product or service.
- Ambiguity in communication: Marketing materials and internal communications about the solution or service’s capabilities may be ambiguous or overly optimistic, leading the sales and commercial teams to inadvertently misinterpret or exaggerate the actual capabilities of the product when presenting it to you.
Ask the supplier’s management team about the specific incentive drivers they have
To be more informed on how you can mitigate the risk of supplier’s sales and commercial teams over-promising their team’s or solution’s capabilities, you should not be apprehensive about asking the supplier’s senior executive teams what specific incentives they have in place if their sales and commercial teams win the deal.
It is also important to ask what governance process the supplier has in place for implementing measures such as aligning their compensation structures with your long-term satisfaction, providing adequate training on the technical aspects of the solution, establishing clear and realistic performance targets and measuring whether the sales and commercial teams are promoting a culture of honesty and transparency in their communications with you.
This is not to say that these incentives will sway the integrity of the more mature and professional supplier sales and commercial team members, but it does help you to be better informed of the due diligence questions you should ask of suppliers in respect of how their sales and commercial teams have assessed how their solution will be fit-for-purpose against your requirements. In addition, it helps to inform what evidence you should ask for to be able to substantiate the claims made by the sales and commercial teams.
How can the ‘watering down’ problem be addressed?
In our recent article ‘How to (really) speed up deals for complex contracts’, we outlined a series of measures to help both supplier and client legal teams to be better informed as to the real and practical likelihood of the supplier’s solution meeting the client’s requirements.
If the legal teams understand the operational aspects of the project and the project/implementation teams’ respective capabilities to deliver a fit-for-purpose solution in a mature client environment, the supplier’s legal team will often come to the conclusion that the contractual warranties you are asking for are in fact a very low risk, in practical terms, and as a result they will often therefore include them. It is only when the supplier’s legal teams push back on including these necessary warranties, that you should ask yourself two further questions:
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- Does the supplier’s legal team have a clear enough understanding of the project? While you may worry that the supplier’s legal team could be ‘trying it on’, it is often more likely that they simply haven’t had time to fully get to grips with the details of the deliverability of the project from their own team. By following the article outlined above, you should be able to engage with the supplier’s legal team and evidence why they should be confident enough to include the appropriate warranties in the contract.
- Has the legal team identified that the supplier over-estimated its delivery capability? If the legal team has asked appropriate internal due diligence questions of its delivery team and come to the conclusion that they are unlikely to be able to deliver to your expectations – or your requirements are considered to be too ambiguous for the supplier’s delivery team to specifically quantify what and how they will align their solution – the legal team will likely push back on including appropriate warranties for fitness-for-purpose. But, if this is the case, it should set off alarm bells for you to encourage the supplier to undertake further due diligence on your expectations until you are all clear about the degree to which they can be realistically met. This is set out further in the next section.
In terms of a governance process between the supplier’s legal team, sales and commercial teams and your legal and project team, the following steps outline how to assure all parties are comfortable in contracting for a solution that is likely to be fit for its intended purpose:
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- Joint workshops: Conduct joint workshops or meetings between you and the supplier’s legal, commercial and sales teams to discuss your requirements, the supplier’s understanding of those requirements and any likely challenges and risks. This collaborative approach helps build trust and ensures both parties are on the same page.
- Clear communication: Clearly communicate the importance of the supplier’s expert advice and your reliance on it. Emphasise that you value their expertise and that you are reliant on it to ensure the solution meets your needs.
- Define the supplier’s ‘expert responsibilities’: Work together with the supplier to explicitly define the scope of their expert responsibilities in the contract that you will rely on. Outline the specific areas in which the supplier’s expertise is required, as well as any limitations to those responsibilities.
- Solution validation process: Collaboratively develop a validation process that the supplier should be strongly encouraged to follow to ensure they have fully understood your requirements. This process should include appropriate checkpoints and milestones for them to demonstrate their understanding and seek clarification on any uncertainties.
- Dispute resolution: Include a dispute resolution process in the contract to address any disagreements or misunderstandings related to the supplier’s expert responsibilities and the advice you will rely on from them. This process should promote open communication, negotiation and problem-solving between the parties, minimising the risk of the solution not meeting your requirements, or much worse, a legal dispute.
- Performance metrics and incentives: Establish performance metrics and incentives tied to the supplier’s expert advice, ensuring that their expertise is effectively utilised and contributes to the success of the project. The incentives can be both financial and non-financial, such as recognition, long-term business relationships or opportunities for future projects.
- Liability limitations: To alleviate the supplier’s concerns about potential project risks, include reasonable liability limitations and indemnification clauses in the contract. These provisions should balance the need for you to rely on the supplier’s professional advice and guidance as to the degree of fitness for purpose the solution is likely to provide, against the supplier’s willingness to be clear and honest about the degree to which they have represented their solution to you.
- Regular reviews and feedback: Implement regular reviews and feedback sessions between yourselves and the supplier (including your respective legal and project teams) to monitor progress, address any concerns and maintain open lines of communication. This ongoing collaboration will help ensure that the supplier’s expert responsibilities are being met and that any issues are resolved quickly and amicably.
Conclusion
Fostering a collaborative and transparent contract discussion and negotiation process is essential for the successful execution of complex projects and the achievement of all related strategic objectives. By understanding the factors that drive some supplier’s legal teams to attempt to water down their contractual obligations, and taking proactive steps to address them, you can build a solid foundation for your partnership with suppliers, ensuring the proposed solution is fit-for-purpose and the supplier’s expert responsibilities are accurately reflected in the contract.
Establishing a strong governance process and promoting open communication between you, the supplier’s legal, commercial and sales teams can help mitigate risks and build trust. Additionally, incorporating joint workshops, solution validation processes, dispute resolution mechanisms, performance metrics and regular reviews into the contract negotiation process can ensure that the parties maintain a productive and effective working relationship throughout the project’s lifecycle.
Ultimately, the key to overcoming the challenges associated with watered-down contractual obligations lies in developing a deep understanding of the practical risks and challenges involved and fostering a culture of collaboration and communication between all stakeholders. By taking a proactive approach to contract discussions and negotiations and adopting the strategies outlined in this article, you can minimise potential disputes, enhance cooperation and ensure the successful delivery of your complex projects.
