Contractual Framework

Why it's important and what to consider when setting it up

One of the essential processes of a company is the contracts process - the way in which the company interacts with third parties  through legally binding documents with the goal of converting them to customers or partners to ensure the success of its business. 

This process is essential because: 

1. it sets out each party's rights and obligations in the newly established relation and 

2. It is the document which can either set up a company for success or failure in relation to its customers and partners. 

These points are interdependent for the establishment of a viable, legally safe and commercially agile document structure which forms the contractual framework of a company.

This framework is the external reflection of the company's culture and way of doing business because it is the first indicator of how well that company understands to take care of its customers (the customer oriented practices  that a company has in place are visible right from the moment a customer wants to sign up and span from the first interaction with the company through the sales team or directly with its products, right through the contract, payment and customer support).

That's why getting the above two points right is the key to implementing a successful contractual framework which is not only a process documenting how things happen in a company to sign up a customer but which can and should actively influence how things happen in a company. 

To illustrate with an example:

1. imagine you want to buy a piece of software for your company;

2. you go and do the market research and select  for evaluation to three vendors providing that specific software;

3. you look up their websites to see how to access their software;

4. you see that:

1. one of them allows you to access the software by asking you to complete your contact details and click to accept (or e-sign) the evaluation or trial terms and conditions;

2. one requires you to complete a contact our sales team form where you need to wait until you get a reply probably with additional questions or maybe directly the access credentials and the contract to be reviewed and signed (e-signed in the best case scenario as chances are that this vendor is still using a paper based contractual framework requiring wet signatures);

3. one asks for your contact data and credit card information before allowing you to access the software as permitted by the first vendor (with or without trial). 

As you can see from the above example, this simple go to market scenario has an impact on both customer experience and customer successful enrolment for the company's products and services. We will not look at the commercial customer engagement strategy but only at the contractual framework which supports it. 

Although we have three different commercial models in the example above, we have only two contractual frameworks examples, let's call them: 

(i) the Online Reasonable Terms “ORT” approach where in example one and three the customers need to review and accept the online terms; and 

(ii) the Contact Vendor for Contract or Online Unreasonable Terms “OUT” approach in the second example of vendor no two where you need to do extra steps for the simple purpose of evaluating their product - to ask for the contract terms for review (which can come through a PDF or WORD document) and physically sign, scan (for digital access if you have partial digital processes in the company) and physically mail them a copy the "Paper Based Process or PBP" - you would expect that no one uses the second approach anymore, at least not in the software industry, but you would be surprised while more trees would still be firmly rooted in the ground (especially as we include all the other industries where PBP is the norm, such a real estate or banking). 

We can easily see which contractual model is more efficient both for the vendor and for the potential customer due to the simplicity and efficiency to establish a contractual relation under the ORT. 

For this system to work the legal terms and conditions need to be written in plain language by avoiding unnecessary legaleze and by having fair and reasonable terms that do not subjectively favor a party over the other, provider over the customer.

If the terms are unreasonable there will be two outcomes: 

1. if the customer really needs the product and is forced to sign under these conditions that customer will drop the product when a better alternative appears or will request a renegotiation sometime during the contract life; or 

2. it will ask for a negotiation of the contract before signing it (thus delaying customer acquisition and complicating internal processes for review, negotiation, approvals and signatures) - in this case the advantages to the digital based system is greatly reduced.

Of course even if the terms are fair and reasonable and available to e-sign online (ORT) a customer might still want to have custom legal language which if it is acceptable by the provider can be easily included as an addendum to the online terms (modifying or adding to the relevant online terms) in an order form or purchase order or just a one pager document. This allows retaining the standard terms for most of the customers while limiting and keeping clear track of any deviations or possible high risk or nonstandard terms. 

As the entire contractual process is done online and in a digital manner, speed and efficiency support business development by having a customer centric approach including in the most sensitive part of the customer relation - the legally binding terms.

The above cannot be said about the  contractual framework vendor number two has in place (which can be OUT or PBP). In that process the entire cycle is disrupted and  various actions are needed from different teams to take a contract over the finish line.

Thus the contractual framework instead of being an enabler for rapid customer acquisition becomes a roadblock preventing it. If each customer is required to ask separately the vendor for the terms as this vendor is requiring them (which is in itself an invite for negotiation, just think how many of you are more inclined to review a contract you receive in your inbox versus online terms?) instead of having the ORT process, the objective (acquiring customers) may not be achieved. 

Even if that vendor finds nowadays some desperate customers still willing to work under the paper based system or online unreasonable terms (OUT) due to various reasons (either no alternative, lack of knowledge or complying with its own PBPs) on the long run that vendor will still either lose that business to a competitor using the ORT or have a difficult relation as that customer will try to renegotiate the terms that are not standard and reasonable - in both cases the result is a damaged customer relation, trust and reduced growth.

Even though the ORT approach is clearly the most efficient one for both the vendor and the customer the system is unjustifiably limited and used mostly in a B2C scenario with some B2B exceptions. 

As this system should be the rule for a successful, rapid and legally safe way to acquire customers, being easily accessible and fast to implement by any B2B company it is essential to understand how to do this. 

First, the contractual framework needs to be rewritten to comply with the above content related principles of: fair and reasonable legal terms for both parties. This also means saying goodbye to unclear and complex legaleze and welcome to the plain simple and clear language in the contract while also removing unreasonable penalties, interest or fees for various things which are not actually incurred by a provider as a result of a customer's particular action (for ex. outrageous penalties for late payment or unjustified termination fees or putting the burden and responsibility on the customer for something which is under provider's control).

Second, the framework needs to be fully digital. This means an end to end digital process for contract generation, editing, review, collaboration and negotiation, approvals and signatures. No more offline contract lifecycle process mentioned earlier (contract generation, editing, review, collaboration and negotiation, approvals and signatures) and circulating tens of versions via email attachments (which is also not secure) to agree the final version to be signed. 

Third, the framework structure needs to be modular so that all contractual framework elements work well together by completing each other depending on the customer specifics and not by introducing conflicting similar provisions which either create confusion or legal uncertainty for the customer (for ex. there should not be an indemnity clause in the main agreement and in an additional document related to support; or if liability is negotiated to be limited to a certain amount there is no other liability language hidden in another document which could make the already agreed provision ineffective, thus putting customer in a worse legal position then agreed and eroding trust).

Fourth, the framework needs to be efficient to allow for fast customer acquisition and contract negotiation and signatures.

Fifth, it needs to be nimble and adjust to the newest realities both in the company's environment and the market in which the company is doing business - having a complicated and cumbersome process to update any term or element in the framework or content is not taking full advantage of the benefits of the system.

Sixth, the content of the contractual framework needs to be online with content which is:

• industry standard (legal provisions that are generic and describe the main rules applicable to the parties<Q. Why? A. It is easier to accept legal terms that the customer understands are industry standard and there is no funky business included by the provider, such as for example asking for a non customary insurance or indirect damages>);

• exclusively legal (only legal specific terms and industry standard ones should be in the contract while all other related terms are included in their respective documents, such as support terms in Support Terms Exhibit, product and services description in Product and Services Description Documentation, security in Information Security Document, etc. <Q. Why? A. Because it's important for the provider to retain the ability to upgrade, fix and further develop its products without inadvertently breaching a contract with a customer because it agreed for example a different SLA with that customer when the contract was signed or different security standards>).; and

• included via a link either in the sign up process or the ordering document (Order Form or Purchase Order) signed by the parties (so that all applicable  documents are clearly mentioned and there is a clear and predictable contractual framework in which certain documents can be changed by the provider without customer consent - such as internal applicable policies - and customer clearly understands and accepts this in the signed contract while for the other there always needs to be mutual agreement before any change can be made.<Q. Why? A. similar to the above reasons provider needs to retain freedom to develop its products and oerational infrastructure while customer needs to be protected from changes in certain policies that may be material for the contractual relation.>)

Here is a short illustration of the above principles.

Essentially the contracting process can be made very simple and fast if all the above are implemented. The customer could easily sign up to use the providers products and services or agree a specific contract by only negotiating in an order form or Purchase Order the critical things it wants addressed without touching all the other standard terms which too often legal teams in an excess of zeal spend time to negotiate without taking the time to understand how is that helpful for their respective companies (I am sure you've all seen redlines of the notice section or another non material boilerplate clause).

For established companies with legal teams the above can be implemented fairly easily provided that the right case is made before the leadership team highlighting the business benefits - the mindset that legal is a cost center should always be challenged by legal to show that legal can be directly or indirectly a revenue generator (cost saving can help as much as a direct sale).

They have the resources, the money, know-how and the technology to do it - they just need to find time to modify their existing operating procedures.

For companies that are either at the beginning of their lifecycle or already established but with less resources both financial and legal the process can be a bit more difficult to implement as it requires time, technology and money. 

In both situations above the common denominator and the most important one which can delay or prevent implementing a more straightforward contractual framework is time.

This is something which hopefully Goodlegal can help address - saving precious time but also creating value for any company which wants to implement a digital contractual framework by providing one out of the box as part of Goodlegal community free edition and DayOneCompliance pack. 

How is this working? 

Using the above example with the three vendors, if all of them want to implement a ORT contractual framework they can just create a Goodlegal account through which they set up their legal infrastructure meaning a private and company public workspace allowing them to easily create, collaborate, design, e-sign and manage any legal terms, including DayOneCompliance pack "DOC". The DOC is a set of predefined essential contract and policy templates needed by a company from the first days of its life. 

One of the templates is a generic industry standard with reasonable legal terms drafted to cover both the selling of a company's products and services and acquisition of products and services. One template covers both vital situations where the company is either the provider or the customer. 

This is only one example of how the right set up of the contractual framework can help with designing an efficient and simple legal infrastructure that facilitates and  accelerates company's growth and customer acquisition. 

Do not spend time putting in place complex and very specific contract templates where you can simplify and streamline. You just need to realistically consider the potential risks vs lost opportunities due to factoring in an unlikely high risk for industry standard common situations such as licensing or selling your product and services under reasonable terms or buying products and services under reasonable terms needed for your company to operate. 

A company needs to solve its customers' needs as best as possible while in the process creating maximum value for its shareholders. Achieving a state of the art legal function both content and technology wise represents the critical underlying mechanism through which this can happen. Legal can make it or break it and Goodlegal is the platform where legal can find the needed elements to make it. 

Let us know your thoughts, questions or other subjects we need to approach to see if they can be solved with Goodlegal.

PS it would be great to hear your thoughts or feedback on any of the above or anything else - you can use the comment section or reach out directly at: vasile@goodlegal.io

PPS you can still register here: goodlegal.io for our private preview beta version of Goodlegal to be launched this month.