Handling Risky Terms

1
Handling Risky Terms

• What to do when faced with unreasonable demands
  for performance, warranties, liquidated damages,
  indemnities, and other remedies
• Robert.Peak_at_Honeywell.com

2
Introduction

• Terms do not make deals risky,
• people make risky deals.

3
Overview

• A Perspective on Risk
• The Big Picture
• Three Areas for Discussion
• Organizational Capabilities
• Negotiations
• Individual Risky Terms

4
What Makes a Deal Risky?

• Business risk
• New Technology /Products / Markets
• Uncertain Funding
• Unrealistic Completion Dates and/or Budgets
• Project Scope is not Clearly Defined
• Project has not Been Rigorously Evaluated
• Unknown Customer
• Multiple Participants

5
The Risk Pie

• The Risk Pie is the parties collective risk
  

• Question Risky terms
• a) just allocate the risk pie or
• b) also can increase the risk pie ?

6
Hypothetical

• Assume
• We sell a non-mission critical system to a
  commercial airline
• We agree to pay LDs for any unscheduled
  maintenance that interferes with the airlines
  on-time performance
• Airline maintenance staff has discretion when to
  perform unscheduled maintenance

• Is it good a good idea to tie the LDs to actual
• interference with on-time performance ?

7
Hypothetical - Effects?

• Airlines maintenance staff has
• An incentive to submit LD claims, even if
  other
• parts partly caused the interference
• Less incentive to avoid interference

• More difficult to verify and investigate
  claims

• Not a good outcome if the working
  relationship is
• adversely affected or claims unduly
  increase!
• How we structure risky terms is important!

8
Risky Terms Can Increase the Risk Pie !

• Eliminate a partys incentive to avoid losses
• Allocate risk to a party that does not control
  it
• Allocate risk to a party that cant bear the
  risk
• of loss
• Increase the likelihood
• of a legal dispute
• . . . and many other ways !

9
Big Picture Approach

• If greater risk assumption is part of the
  value
• proposition that Buyers truly seek . .
  .

• Improve organizational ability to manage
  potentially negative outcomes in performance
• Improve ability to negotiate draft risky terms

10
Risk Survey, IACCM, October 2002
. . . leading vendors will need to . . .
increase their quality and governance methods
so that they can offer greater balance of terms
without incurring adverse financial
consequences.
11
Organizational Capabilities

• Initiate improvements to reduce the likelihood
• and consequence of risk. Consider linkage
  to
• Quality system
• Information systems
• Customer feedback
• Performance audits
• Incentive systems
• Supplier inspections
• What are the key capabilities in your company
  ?

12
Proficiency Characteristics

• Identifies conceptual limits early
• Identifies the no-yield deals
• Applies lessons learned
• Negotiates effectively
• Avoids the big mistake in negotiations

13
Negotiation Approaches
No or Little Leverage Moderate Leverage

• BATNA
• Win over the locals
• Use your bullets selectively
• Consider not negotiating (software)

• Pricing levels
• Use your best negotiators practices
• Limit and exclude risk where ever possible

14
Negotiation Team

• United front to Customer
• Set expectations with customer early
• Team communication
• Negotiation plan, e.g. strategy, priorities
  progressions
• Dont get sandbagged
• Unyielding confidence in the commercial terms
  leader
• What works well in your negotiation process?
  What would you like to do better?

15
How do we Approach those Heavily Negotiated Risky
Terms?

• Indemnities
• Intellectual Property
• Limitation of Liability
• Liquidated Damages
• Price Payment Terms
• Service Levels
• Termination
• Warranties
• What are your concerns and how do you approach
  them?

16
Sample Approach to Unfavorable Liability Terms

• Spend the time to explore / discuss the issues
• Aim to close off the unknown, assume specific
  risks
• Get discussion to specifics - specific risk, its
  issues and reasoning
• Tightly tailor language to customers
  justification
• Dont --
• Settle without working the details (grace
  periods, caps, conditions, etc.)
• Accept third party liability
• Expand causation

17
Example Innovative Approach to Risk Management

• Traditional positions for IP Indemnities
• Customer Indemnify against all claims,
  damages, losses, etc.
• Seller only Defend and pay judgment, right to
  notice, right to modify or replace
• Trademark indemnity compromise
• . . . Seller believes that use or distribution
  may be enjoined . . . right to modify or replace
  
• Right to early intervention reduced this sellers
  risk

18
Final Comments

• Our risk management planning starts before
  unreasonable demands arrive
• Discussion areas
• Organizational Capabilities
• Negotiations
• Approaches to Individual Risky Terms
• Your views ? Areas for research ?