As commercial consultants advocating entrepreneurship as a mean to reach economic growth, one of our battlefields is the negotiation process between SME’s and their clients.
A battle between partners.
Doing the review of a contractual document signed between a major corporation and an SME, is like watching a Godzilla blockbuster: each article is a crunching step of the monster, tearing apart the tiny ant that can barely defend itself. With the economic recession crying for cost reduction, oil giants use penalty, termination and performance measurement clauses as their fiercer claws.
SME’s usually fear the invitation to tender process, which can take years between technical evaluation, capacity assessment, audit, commercial clarifications, regulating governmental bodies’ involvement, etc. However, in the actual oil crisis, which deeply weakens the sector, a submitting SME that puts forward a tangible price reduction proposal significantly raises stakes of receiving the contract’s “holy Graal” award letter.
The core yet unforeseen challenge actually happens afterwards: on one corner of the ring, stands Godzilla, a major over-dosing on its negotiating leverage to secure win-lose agreements, from which derive risks such as supplier performance default.
Although the Chartered Institute of Purchasing and Supply module on Contract Management recommends “Trust” as the basis for sound supply chain relationships, the agreement terms drafted by majors are more of a dispute threat than fit-for-purpose mitigations. They offer little room for trustworthy collaboration, with long-term contracts managed at the arm-length’s side of the relationship spectrum.
On the other side of the ring, SME’s are so eager to work with “the big ones”, that they do not take the time to read through the engagement, which is, after all, a written commitment enforceable by law.
Although many countries have started flirting with the local content concept, in truth, Godzilla does very little to enforce a fair business practice: no constructive feedback when an SME fails a tender. No recommendations to help pass the supplier registration process. Scarcity of support so the SME secures financial products such as equity or lease. Little room for contingency. Anti-competitive practices undermining local suppliers.
In fine, Porter might soon have to add to his five competitive forces model a sixth one, threat of the customer.
For instance, the most recent contract I read between and oil and gas major and a small medical services provider included unlawful and unfair terms, such as holding the contractor fully liable in cases of exploration-related consequential damages, operational performance failure penalties amounting to 5% of the overall contract’s value per day, and absence of the company’s responsibility clause.
You end up wondering why these companies would go through such a lengthy selection process that actually asphyxiates their suppliers. Stakeholders must show serious commitment to the development of the SMEs Sub-Sector, so the economy necessarily witnesses meaningful economic transformation and prosperity, for which the SME is vital and imperative ( Tende and Obumneke, Impact of petroleum on SME’s growth, 2014).
Some court rulings have settled for clauses such as “Neither [party] shall bear any liability to the other … for loss of production, loss of profits, loss of business or any other indirect loss or consequential damages …” . (BHP Petroleum Ltd. v. British Steel plc . Nevertheless, back home, the entrepreneur must also tackle effectively the many challenges he is confronted with: lack of negotiation leverage, insufficiency of commercial knowledge and wrong focus. So what can we do?
1. Get on the ground info: what are the case studies of previous contracts with similar scopes of work? What went right or wrong? What best practices processes can you implement? It is the entrepreneur’s responsibility to apply a contractual Caveat emptor, diligence to be fully responsible of the agreement’s quality and suitability before he signs it.
2. Take control: put in on your agenda to draw, as soon as you receive the interest letter or proposal request, a brief design of all the key terms and conditions you want to secure, as well as the main obligations you are ready to settle on. This snapshot will come very handy during the lengthy negotiations sessions, and the fruit of your previous analysis will serve to make well-informed contracting or amendment decisions at any point in time.
3. Get help: well, yes, that’s what consultants are for. In front of you, the huge corporation has an armada of contract analysts, assurance clerks and legal experts, all of which will take weeks, if not months, to go through the agreement and make sure it accurately protects their company while securing their technical and conformance specifications demands. So, do not even for a second be tempted with what I have heard too often: “Let me just have a quick read and sign. Seek a commercial or legal advisor, any subject matter who will go through the document’s review with you, and break the chunks down into manageable pieces of information. He will pay attention to express and implied clauses such as contract termination, KPIs, invoicing and payment, disputes resolutions, claims, Agreed Contract Value threshold and amendments.
4. Plan ahead: is there a need for mobilisation plan, what will your key deliverables be along the life span of the contract? Do not wait for business performance reviews before you decide how you will set up a thorough cost and optimisation management scheme, operations or QHSE monitoring system; also, identify your key interfaces.
Finally, do not forget that the most effective way of reaching a profitable agreement is putting yourself in the other party’s shoes (Understanding Power Purchase agreements, Power Africa).
Then, keep in mind your original vision when raising surface concerns.
When you started your company, How did you see your company evolving? Have you taken your team through it? What are the key success factors that must be embedded in the contractual terms of each contract you sign, from you side and from the other party’s corner? How can you secure higher stakes of financial delivery or ROE/C?
Focusing on where you are heading will help you stay on the path that leads to success while mitigating risks with a contingency provided by your leadership instinctive prevision.
Before a little shepherd d went off to beat a giant, he got himself informed and asked many questions around him. “What shall be done to the man that killeth the Goliath?”
He made sure he did not reach the battlefield before asking about key terms such as conditions, risks, rewards and incentives, while sticking to his vision.
If you do so,
You are condemned to succeed.