Archive: June, 2015
Welcome back for installment two of The 5 Scariest Questions Your CEO Could Ask About Your Contracts, based off our recent webinar of the same name. In Part 1, we detailed the first three situations in which not knowing your contracts inside and out could make you shake in your boots: 1) an M&A event 2) a rogue vendor and 3) an MFN clause. Let’s dive into the rest.
The Data Breach
“Why is the Times calling me for a comment on a data breach of one of our biggest vendors? They would’ve told us about that, right?”
This unpleasant question will make you scramble for a complete picture of your relationship with the vendor. You’ll need to find out if your contracts impose on them meaty and timely disclosure requirements so as to determine if their apparent non-disclosure puts them in breach.
Seeing as your business’ and clients’ sensitive information may be compromised by a breach of a vendor, you will also need to have an immediate and comprehensive understanding of your disclosure obligations to all of your customers. Which events require you to disclose what, to whom, and within what timeframe? Did you make promises to customers that have already – albeit unknowingly – been broken?
Companies often believe that implementing comprehensive cyber security protocol internally is enough to protect themselves from the many liabilities that stem from a hack or data breach, forgetting the exposure caused by third party vendors.
The Risk Riddle
“What are the 10 riskiest contracts and what are we doing to manage that risk?”
This is a riddle indeed, as it may seem easy enough to answer but it turns out you need more than just an educated guess to answer with certainty. Your CEO probably does not want a vague, opinion-based, “it depends,” which doesn’t instill a high degree of confidence and, frankly, looks lazy. So how would you go about reassuring the CEO that their risk and legal experts have a handle on the riskiest contracts ?
To start, you’d need an accurate, high-quality, objective way to measure contractual risk across your contract portfolio. You may intellectually and instinctively know which vendor or customer relationships wave red flags (that Caracas-based company, perhaps?), but your contract language may tell a different story. If you do not have a way to assess risk embedded in contract language, there’s a good chance those high-risk contracts are not receiving the attention they require. And if you can’t articulate risk measurements when asked by the CEO, you’re essentially neglecting your responsibility as a legal or compliance officer to be on top of your risk. In other words, this little question may in fact be the scariest of them all, as it exposes not only your business risk, but your own weakness.
So what to do? Here are a few general rules to follow:
- Deal with early termination risk ahead of time; due diligence is too late
- The devil is in the details in strategic contract relationships – keep an eye on gaps
- Beware the MFN – it amplifies bad pricing unless very carefully managed
- Don’t wait for a crisis to manage risk; be proactive
But how, you ask? You’re right, it’s probably impossible to remember the precise details of every pricing and disclosure clause, to monitor every vendor and partner, and to monitor all your risk.
The one tried-and-true way to gain control and visibility over your contract portfolio is to invest in contract management software that organizes and reports on contract data so the answers to your CEO’s scariest questions are just a few clicks away.
The best software on the market today is the Hub™, an out-of-the-box solution that allows users to store, organize, access and report on the content of and risk in all of their contracts in one central place.
Answer the CEO with Speed and Certainty
Imagine your boss were to ask you one of the five scariest questions this afternoon. Let’s take the one about the most favored nation clauses. You know you have to identify the worst pricing you’ve ever granted along with any price variation and discounts included in the agreement. With the Hub, it’s as easy as opening Exari Hub to the main dashboard:
You can then search for all the contracts with Most Favored Nation clauses, adding filters (such as geography, value, etc.) as you require. With the Hub, what may have been a desperate hunt for contract data becomes a simple click and search.
Special thanks to Jamie Wodetzki, whose webinar inspired and informed much of these blog posts!
And how to respond without losing your cool (or your shirt)
Even if you’re not scared of your CEO, you may be scared of the questions they could ask about your risk and liability. It’s a good thing your contracts can probably tell you everything you need to know.
We recently produced a webinar called The 5 Scariest Questions Your CEO Could Ask About Your Contracts. Pulling from the webinar, we’ll go through the five scenarios in which your ability to mine into your contract data could make a massive difference to your business and your reputation. Because we think this topic is so important for corporate legal professionals, we’ll take two blog posts to dig into the risks and solutions presented by your contracts.
Ready? Let’s go.
“I don’t need to worry about contract surprises, right?”
In the case of a merger and acquisition – whether you’re buying something, selling something, or spinning off a piece of the business – your contracts, especially revenue and sell-side contracts, will get a lot of attention. The evaluation of your businesses value depends on many things, and on many things being certain. “Surprises” are rarely a good thing in this case, as they usually mean a reduced evaluation.
So what does your CEO mean by contract surprises? A surprise could be a missing contract, which leads to uncertainty and, thus, risk. Other surprises could be unaccounted for ‘termination for convenience’ or ‘termination for change of control’ clauses in your client contracts. Because such clauses mean a client may choose to end the relationship simply because they do not like the post-merger or post-acquisition relationship, it’s essential to understand where such clauses exist so that the risk they pose can be accounted for in negotiation and evaluation efforts. Furthermore, in the unlikely scenario that you have a client agreement with language that sees for strict customer consent, there’s the possibility that a customer withholding or delaying consent would, in turn, delay and potentially compromise the closing of a lucrative M&A deal. In short, when these types of clauses are “surprises,” the value will be less than expected and the CEO will not be a happy camper.
The Rogue Vendor
“We have a problem with a vendor – they’re claiming that they own part of our product/want to create a competing product/have already approached our biggest customer – but our contracts with them are tight, right?”
In the unlikely but unfortunate case of a vendor attempting to become a competitor, all of your contracts with this vendor would come under the microscope. If you’ve had a long business relationship, you’ll most likely have a long and messy contractual history as well. You’ll need to locate all the executed agreements you have with the vendor – including amendments – so as to understand your precise rights. Are you sure the copies you’ve found are the signed copies? Do they have the right to terminate? Do you have non-compete language? If yes, you’ll need to ask if are there any loopholes? Have they expired? Do the non-compete clauses apply after termination? Did we ever neglect to account for ownership of new things we created? Only once you can answer all of these questions with certainty can you know how to move forward in the case of a vendor gone rogue.
The Price Tap
“I have a strategic account insisting that they receive the best pricing we’ve ever granted to any client. What is this pricing?”
If you’re going to concede a Most Favored Nation (MFN) clause, you need to do so with your eyes wide open. MFN clauses are usually dangerous but, when used strategically, may help secure important business. What do you need to know when the CEO asks for the worst pricing you’ve ever agreed to? You need to know the pricing, of course, but also what types of price escalation and what discounts were used, as these are things you’d likely need to offer to this new strategic account. You’d also need to find this out very quickly: if you charge more than the lowest price, you’re in breach of the new contract; if you charge less, you’re in breach of all of your other MFN agreements. Yikes.
Check back or subscribe to our blog feed to catch the next post, where we’ll finish up the list and talk about how you can answer even the scariest questions about your contracts.
Click here to watch the webinar.