Commercial Arrangements in uncertain times
We are constantly reminded that we live in unprecedented times. Often this is used in reference to Covid and its impact on business and the general population, however, in a wider context “Disruption” is rampant. We define “Disruption” as the occurrence of a significant event beyond the control of an organisation that requires a response in its operating model to remain commercially viable. A common example is a new market entrant armed with a non-conventional and low-cost business model to challenge and potentially replace market incumbents. However, it could be anything and more holistically include geo-political influences, technological, environmental, and industry disruptors as well as global pandemics. Arguably disruptors are more prevalent than they were, say 10 years ago, and there is no reason to think this pace will slow down. Consequently, Businesses need to be able to operate more agilely, which flows through to all aspects of business including negotiating and contracting commercial terms with similar-sized organisations. This last caveat is important as it can be extremely difficult to achieve balanced commercial terms where there is a dominant party or when engaging with a large multinational where teams of lawyers are required to affect the slightest change in standard terms.
Notwithstanding, we have detailed below some considerations for agreeing and contracting commercial terms in times of uncertainty.
Focus on the commercial arrangements that can have the greatest impact on your business in the first instance. Given the financial and time resource is constrained, it’s important to prioritise from the most important to least. So, ask yourself, what are the “no more than 5” known key influences that could have the most impact on my business and focus on these. Ask yourself, “what would happen if…?” They may include retaining key customers, or valued staff members or protecting intellectual property directly attributed to organisational value.
Consider both customer and supplier agreements. For example, If your business is highly dependent on being able to operate out of a certain building in a certain location ensure that this is given the required importance.
Understand your costs and pricing so you are able to negotiate with confidence, understanding the cashflow consequences of the starting position vs where you end up.
It’s an old adage but still has resonance today, which is a focus on a “win/win” outcome, so the right behaviours are encouraged by all parties. So rather than punitive clauses for non-compliance, consider rewards for achieving agreed key performance indicators and outcomes that benefit all parties.
Consider the time vs value trade-off. Typically, longer-term commitments attract preferential pricing however with the prevalence of Disruption, it's normal for one or both parties to prefer shorter-term contracts. It’s still imperative the required margin $ is understood relative to the commitment timeframe.
Careful consideration is required on the default clauses and how the unbundling of any commitment is handled in a fair and equitable manner.
While in a perfect world, all commitments are contracted in a standard legal template and reviewed by lawyers this is simply not practical. Remember for a commitment to be binding there must be 5 key elements: 1. A clear offer, 2. unequivocal acceptance, 3. adequate consideration (usually financial but doesn’t have to be), 4. an intention for all parties to commit and 5. certainty of terms. So yes, even verbal commitments that meet these criteria can be binding.
2022 was certainly a year of adjustment to constant “Disruption” and challenging market influences. 2023 isn’t likely to see those challenges dissipate anytime soon, so if you would like us to review your current commercial arrangements, whether documented or not, or to assist in financial modelling please reach out.