Establish standard customer contract terms and a negotiation process that protects your company while remaining competitive—covering data rights, assignment restrictions, SLAs, and liability.
To maximize the impact of a strong contract on your company's growth and value, Golden Section recommends working with your legal counsel to assemble a contract playbook. A contract playbook is a document that outlines your standard contractual terms, a short justification for those terms, and any acceptable or unacceptable variations.
process for term negotiations, reducing the need for executive or outside legal input. Spending less time in contract negotiation prevents stalls in your pipeline. You will also have clear boundaries for what terms are unacceptable for your company and can walk away from prospective deals more quickly if mutually agreeable terms can't be found.
The impact: In addition to being the core of your enterprise value, contracts protect your interests and manage your risk. Contracts are vitally important. Well-managed contract execution can assist the scalable, efficient growth of your company and increase your enterprise value.
The goal: Create a contract playbook to streamline the contract negotiation process and maximize the value of your executed contracts.
How can Golden Section Assist?
By the time you reach contract negotiation, you have typically invested considerable time and resources into moving this prospect through your pipeline. Your sales rep is motivated to close this deal - a return on the time spent, quota attainment, and earned commission are all within reach - and does not want to lose it over terms that may not impact him. However, the executed contract is crucially important to your company and is not a stage to be glossed over. Poorly negotiated contracts can be costly in terms of resource cost, potential for revenue loss, addition of risk, and future devaluation.
Standard Agreement Language columns.
and Response to Objections columns.
Unacceptable Fallbacks columns.
A note on contract negotiation strategy: Not all customers will negotiate terms, but enough will that a negotiation strategy should be considered to put your company in a prime spot to get the most beneficial terms. To that end, we recommend putting one blinking, red button term in your contract. This would be one term that stands out from the rest as particularly weighted in your favor. For those customers who need to negotiate, this blinking red button will anchor their criticism. As the negotiation process continues, the customer can focus their attention on that one issue, avoiding negotiation on other terms. Additionally, if the customer raises objections on other terms, you have a lot of room to fall back on the blinking, red button term in return for not moving in regard to additional objections.
Generally, Golden Section believes you can stand by your contract without caving; a customer only negotiates a contract when the ROI you're offering is not strong. Your contract should leave you and your customer on equal footing. However, if the customer is forcing negotiations, Golden Section recommends never altering your terms without having an ask in return.
Term: Data Rights
If the opportunity presents itself down the road to monetize the data that you have accumulated from your core business, then your company needs to have the data rights to capitalize on that opportunity. Without data rights at the outset, it is very difficult to retro-actively obtain them.
Additionally, in certain regulatory environments where data owners intellectual property may be determined by legislation, your company can end up having data on its system that doesn't actually belong to the company. Additionally, your company can be at risk if someone uses your product for illegal activities. Having a strong Data Rights clause in your customer contract protects you so you're not responsible for the data on your product and also allows you to use and monetize the data in your product.
Term: Assignment w/o Approval
When it comes time to sell your company, you are fundamentally selling your customer contracts. Your customer contracts are the inherent value of your business. If your customer contracts do not have an Assignment without Approval term, then each customer will need to approve the reassignment of the contract to the buyer. This adds uncertainty and a potential pitfall to the buying process. No matter how nice, a customer will likely use this situation as an opportunity to squeeze you. You don't want a customer to be able to renegotiate because of reassignment.
Term: Billing on Signing
To reduce your AR cycle and improve your cash flow, you want to do all you can to collect payments as quickly as possible. Golden Section recommends including Billing on Signing in your customer contracts so that you can bill as soon as a contract is signed, when a customer is most excited about your product.
Term: 3 year term / 24 month renew
A 3 year term length is actually a placeholder; in reality, for B2B companies specifically, Golden Section recommends you negotiate the longest term you can. As previously mentioned, when it comes time to sell your company, you're selling your contracts, and a contract is worth more the longer the remaining term.
From an operational perspective, a longer term also buys your company more wiggle room should there be any operational problems; you can resolve the problem with enough time remaining in the contract to repair the customer experience. Additionally, the longer the term, the more equality that exists between your company and the customer; with a longer term, you're not indentured to serve that one customer because the customer can't churn whenever they want.
Term: Annual Escalation
Through this term, you can give your company the opportunity to escalate the customer price before the expiration of the contract term. Typically, this term will set a maximum allowable annual escalation.
As discussed in the Play: Customer Contract Playbook, Golden Section advocates for a blinking, red button in your contracts to anchor your customer's attention and negotiations. The Annual Escalation term is a great opportunity for a red button. For example, you could set a specific, high percentage as the maximum annual escalation. During negotiations, you could retreat all the way back to no escalation. However, Golden Section has found success countering with an objective, outside standard percentage (ex nominal healthcare CPI) rather than falling back all the way to zero.
Term: Dispute Int % and Late Payment Penalties
The terms regarding Dispute Interest Percentage and Late Payment Penalties are your leverage to prevent lengthy disputes and late payments, which can be very costly in terms of lost revenue, missed opportunities and time sucks for your company.
It can take up to three years to get a judgement in the case of a dispute. If the case is decided in your favor, the customer is required to pay pre- and post-judgement dispute interest. Golden Section recommends including the highest dispute interest allowable by law in your contract to disincentivize a customer from engaging in a suit. Additionally, if the dispute rate is not specifically set in the customer contract, you are limited to the maximum set by the state. In Texas, the statutory dispute interest is 6% and in other states, it is de minimis.
Late payment penalties should be very punitive and clearly detailed. With some of our companies, Golden Section has set a high flat late fee, which we recommend because it is easy to
understand and encourages on-time payments. A punitive late fee needs to be worded that late payment causes default.
One important prerequisite to late payment penalties: your company must have in place an effective invoice process delineated in the contract. You need to be able to say you invoiced properly, according to the procedures outlined in the contract, so that there are no disputes.
As discussed in the Play: Customer Contract Playbook, Golden Section advocates for a blinking, red button in your contracts to anchor your customer's attention and negotiations. The Annual Escalation term is a great opportunity for a red button. For example, you could set a specific, high percentage as the maximum annual escalation.
To maximize the impact of a strong contract on your company's growth and value, Golden Section recommends working with your legal counsel to assemble a contract playbook. A contract playbook is a document that outlines your standard contractual terms, a short justification for those terms, and any acceptable or unacceptable variations.
Establish standard customer contract terms and a negotiation process that protects your company while remaining competitive—covering data rights, assignment restrictions, SLAs, and liability.
If the opportunity presents itself down the road to monetize the data that you have accumulated from your core business, then your company needs to have the data rights to capitalize on that opportunity. Without data rights at the outset, it is very difficult to retro-actively obtain them.
A note on contract negotiation strategy: Not all customers will negotiate terms, but enough will that a negotiation strategy should be considered to put your company in a prime spot to get the most beneficial terms. To that end, we recommend putting one blinking, red button term in your contract. This would be one term that stands out from the rest as particularly weighted in your favor.