6 Elements of Good SOWs

Much of the work I perform for high tech enterprises deals with Statements of Work or Scopes of Work (there may be other names out there as well – I will call them SOWs.)

The SOW can be a major stumbling block in a project if it is not properly written. One reason it often is not is that the people working with the customer to develop the SOW are usually stretched thin, and producing a clear, concise SOW takes time, concentrated effort, and expertise.

Here are some of the major SOW requirements that will be discussed below:

  1. Tie every SOW to a Master Services Agreement (MSA) that includes the key provisions.
  2. Have a strictly limited, but available, method of contradicting the terms set out in the MSA through specific wording in the body of the SOW.
  3. Take care in wording the pricing sections of the SOW to prevent pricing meant for a short term to be locked in for a much longer period.
  4. Include a change order process (actually contained in the MSA but referring to the SOW) that sets out strict requirements, without which a change to the scope of work is invalid.

Consider each of the requirements in more detail:

  1. To have a workable SOW, tie the document to a Master Services Agreement or some other document that sets out the terms and conditions under which one company will provide product and/or services to the other. Include in the MSAs sufficient detail so that the parties know exactly what to expect when an SOW is executed, and work begins. General requirements for a proper MSA will be covered elsewhere. Elements of a good MSA as it relates to the SOWs include:
    • The minimum requirements for SOWs to be valid under the MSA
    • Escalation procedures to handle minor disagreements about the services before they become major ones
    • A strict change order process for adjusting the SOW during the work term. This is frequently omitted, which can be a costly error. Without a clear, step-by step procedure, changes of scope are made in the field and on the fly. Margin erosion for the service provider and disagreements about the final deliverables are potential results.
    • The clear delineation of what intellectual property will be owned by whom when work is performed. If this section is not properly drafted, the parties may have a short and stormy relationship.
  2. There are always special cases where the particular SOW does not fit the terms of the MSA. Reasons for such deviations may be as simple as extended payment terms or as complex as a different allocation of intellectual property (IP).
    • Make the MSA rule in most cases if there is a contradiction between the documents. Then add language that allows for the SOW to overrule portions of the MSA if specific sections of the MSA being modified are referenced by section number. Then make it clear the exception applies only to that one SOW.
    • An exception would be an SOW that specifies unique parameters. For example, an SOW for the production of pictures or videos may include a “style guide” that sets out the quality of the pictures, time of the videos, the number of “talent” included, etc. In the unlikely event there is a conflict between the MSA and the style guide, the latter should rule. This can be specified in the SOW.
  3. Place pricing in the SOW unless, for example, the party performing the work will charge the same hourly rate regardless of what is in the SOW. These cases are rare.
    • Serious errors can occur in the pricing section. I have handled many SOWs stating that the price for a quoted service will apply for the term of the Agreement.” The SOWs for that company defined the MSA as the “Agreement” in the opening section (to tie the documents together, as required). The writers of the SOWs meant for the price to be good for the term of the SOW, but as they dealt with SOWs and not MSAs, thinking of the SOW as “the Agreement” was an easy error to make. MSAs frequently have a term of three years or more, or are evergreen, renewing automatically unless one party objects. Locking in the price for that term could be very costly to the service provider.
  4. Absolutely define what is going to be done by the performing party in a way that is so clear that there is no room for controversy. This requires a lot of work, and it is the place where most companies get into trouble. If the SOW is inexact, inaccurate, poorly written, and full of errors of omission, or all of the above (they go hand-in-hand), the room for disputes between the parties is huge, and project delays or even cancellations are likely.
    • One test is if someone with a moderate understanding of the service to be performed (especially when they are high-tech) cannot decipher what the services and/or the products to be delivered are, then the SOW is inadequate.
    • When the SOW is going to describe complex, high-tech operations, the developers or other technical people that will perform the work should review the schedule, each deliverable, any deliverable testing and other technical concerns for correctness.
      • In one memorable case, I finally got the CTO into a conference room, only to discover that the SOW described, in every instance, services the company could never perform. It took over four hours of difficult work to rewrite the entire SOW so that it accurately described the work that would be performed.
  5. Use good grammar and concise writing for clarity. Good grammar reduces the possibility of misinterpretation. Being concise makes for a shorter cleaner document. It also forces you to understand the point you wish to make well enough that extra words are not needed to express it. Even when there are bullet points rather than paragraphs, how those bullets convey the information is critical.
  6. Include an execution block. It is best that both sides agree to the terms of the SOW in writing.

It is important for the service provider to locate and utilize someone who can create an SOW that will serve both parties as an accurate guide for the term of the project. This will speed the process and avoid disagreements along the way.

 

Strict Data Protection Policies

Large companies are tightening up contractual data protection policies for vendors. I am seeing tough requirements in agreements that one might expect:

  • Limits on the personnel that could access the data
  • Prohibitions around the data’s storage on portable devices (including laptops as well as thumb drives)
  • Strict encryption requirements
  • Security audits by the customer

None of this is bad per se. The problem is that the large companies are not limiting the restrictive provisions to what is called personally identifiable information (PII). The definitions of “confidential information” are very broad.

The requirements can be illogical in some cases. Consider my clients who produce videos for their customers. Information about customer products is “confidential”. But “information” in this case is in the form of videos (or at least creative content) provided by the customer for the sole purpose of making it very public indeed. The data protection policies fail to take this into account.

I fear three results from this:

  1. The additional protective measures are expensive, and the consumer will end up footing the bill.
  2. The broader the definition of “confidential information” the larger the impact on the small company’s productivity and the higher the cost.
  3. The small company is put at a disadvantage. I have not researched this issue in any scientific way, but a start-up where every member of the team wears multiple hats must find these policies more difficult to implement than their larger competitors.

The need for increased data protection will cost the economy. Limiting the damage by allowing leeway for the smaller companies where the protection is superfluous could help.

Rep Commissions Agreement

An interesting dilemma arose around some new sales rep commission agreements being prepared for a client. It involved long-term commission payments by the client to the reps for making introductions and perhaps helping with the initial sale. The discussion came around to when should that stream of commissions cease in case the rep’s agreement was terminated?

The instinctive response is that the payments stop when the agreement terminates. Thinking about it, though, that is not very fair.

The rep completed his/her responsibilities up front, before the customer actually became a customer. My client was willing to pay the commissions forever when the agreement was in place. Should the termination of the agreement stop the payment stream? The answer, of course, lies in why the agreement was terminated. We had to consider a wide range of possibilities:

  • The client terminates for convenience
  • The rep terminates for convenience
  • The company breaches the agreement and fails to cure the breach
  • The rep breaches the agreement, but not by doing anything that might damage the client or the customer. For example, the rep consistently fails to submit the form to “register” its prospects
  • The rep breaches the agreement in a really material way, by violating the confidentiality provisions, the customer’s security regulations, or the customer’s basic rules such as the prohibitions against sexual harassment.

My client chose a very lenient approach. These particular “reps” were senior business people with valuable high-level connections, and they could help the client in many ways. Bringing in key accounts was just one of them. Also, the reps were signing up for non-compete clauses that would limit the markets they could work in for a period of time. My client was willing to give a lot to get these people on board, so its decision may not be what the reader would have done.

In the end, this particular client decided to stop the revenue stream only in the extreme case described in the last bullet. There were very few things the reps could do to breach other than those items, anyway. The big “giveaway” was in case the rep terminated for convenience, but the client was willing to work that way – the rep would still have earned the commissions and the client would continue to collect the revenue.

Comments are welcome.

Exclusive Agreements: A Discussion

Where exclusive agreements are warranted, care must be taken in how they are created. Exclusivity clauses can be expensive to either party if the relationship is not structured properly.

There are several types of agreement where exclusivity comes up. These include distributor contracts and Original Equipment Manufacturer contracts (OEM) to name a couple. Each brings its own justification for exclusivity. Let’s look at the issue from both sides.

For simplicity’s sake, the party providing the product is the “provider”, while the party doing the final sale to the end user customer is the “seller”. In sales and marketing agreements the parties may fill both roles, but please don’t get tangled up in that differentiation. Typically, the seller is selling into a particular territory or market segment.

Assume you are the seller in a distribution arrangement.

  • You will incur significant costs adding the provider’s product to your sales suite – creating marketing collateral, training your sales force, etc.
  • Once you start selling the product you do not want to find that the provider has engaged so many partners that the market is overcrowded.
  • Depending on the way the agreement is written you may be the exclusive distributor (meaning the provider can continue to sell the product where you do) or the sole distributor (even the provider cannot compete with you in your territory or segment.) Be sure to get what you need.

So, as the seller you have an incentive to be the exclusive, if not the sole distributor of the product in your territory or market segment.

If you are the provider you may not want to be dependent on this distributor for all of your sales in given territory or market segment, especially if it does not perform. For the provider:

  • Any exclusivity should have a price, and it should be a pretty high one
  • There should be a way to end the exclusivity if the seller does not sell the forecast amount, or even if it fails to create the collateral and train its sales force in time
  • There should probably be a time limit on the exclusivity so you can re-consider its value after a period.
  • There are legal implications around exclusivity – be sure to check with your attorney!

Exclusive agreements cut both ways. If you are the provider, there should be a high cost for exclusivity. If you are the seller, you may need to have exclusivity to realize your ROI. Both parties need to watch for the pitfalls.

Agreement Templates

The creation of agreement templates is one of the more difficult tasks for any company. The problem is that many small- to medium-sized companies fail to recognize the inherent problems.

The easiest way for a company to get a template is to use one that some executive brought over from a previous life (metaphorically). That document may be unsuitable for many reasons:

  • It came from a company with a different business model, so how can it fit the current company’s practices? I have seen companies try to convert a sales agreement to a service agreement, with predictable outcomes.
  • That re-used agreement is the end point of a previous negotiation. Key provisions may have been conceded in the initial negotiation for something of value, or because the point just could not be won. Using the template now as a starting point means that those concessions have already been surrendered without receiving anything in return. That violates one of the prime rules of negotiation.
  • Key people may not have been included in the process of preparing the template. Perhaps protection of intellectual property was not a problem at the old company but is at the new one. The old template is often used without consulting people in development, maintenance, finance or engineering to determine what new provisions or major changes are required.

Starting your draft with an old agreement template is sometimes a good way to save money and speed the process. It is a pitfall if the adopter does not understand the issues involved and how to modify the agreement appropriately.

10 Tips on Negotiating a Simple Sales Agreement

10 tips on negotiating a basic sales contract from the seller’s viewpoint are provided below. The information is written for the seller, but the buyer can easily extrapolate useful information. Some of this material is covered in more detail in the whitepaper “Small Company Don’t Sign That Contract Yet: 5 Tips for Dealing With a Larger Company.” Download a free copy of the whitepaper here.

In regards to the simple sales contract:

  1. Make sure you are negotiating with the person that holds the checkbook. The author once worked for a company that thought it had wrapped up a sale to Cisco Systems. The company not only bent over backwards to fulfill Cisco’s technical requirements, but negotiation had begun on the sales agreement for the first few copies of the software. Then it was discovered that the people with whom we had been dealing had no real say in the matter – another manager made the buying decisions. She said ”no.” As a result:
    • The company suffered from the internal cost of the lost hours in the sales effort
    • The specialized development became a sunk cost; and
    • The whole company suffered because management’s attention had been distracted from the core business.
  2. Be certain that a basic sales contract is what is really needed. If there are going to be many sales orders with lengthy discussions on each and significant variations in terms, a Master Sales Agreement might be appropriate. A Master Sales Agreement defines the basic commercial terms and conditions, but it cover more ground and also sets up the mechanisms for changing the Ts and Cs.
  3. Have a purchase order process. That means stating what must be on a purchase order to make it valid. Include a purchase order acceptance as a requirement if you are dealing with something that takes you time to produce. You do not want to be working at maximum capacity on an order for five hundred units and be hit with an immediate order for a thousand; you wish you could take the order, but might not be able to do so without a large capital investment.
  4. Be sure to cover when ownership of title and risk of loss transfer to the buyer. Allow some leeway for the buyer to specify shipping agent, etc., but be sure title is transferred only when payment is received.
  5. Be sure the terms and conditions of the sales agreement specifically overrule the buyer’s purchase order. Purchase orders have two sides, and one of them has onerous terms and conditions to which you do not want to agree. The author once led an acquisition due diligence team that discovered the targeted software company sold on other company’s purchase orders alone. The verbiage on the back of one or more of those purchase orders placed the software in the public domain, making the company worthless.
  6. Do not forget training. If you sell some very common widget or a service, this does not apply. If you sell software or equipment, be sure that you offer a given number of training seats per unit sold, and anything else is extra, as is training at the buyer’s facility.
  7. Refer to the written maintenance policy in the sales contract. If you do not have one, create it. It is far better to have established answers concerning 24/7 support, levels of problems or errors and the affiliated response time, etc. Use the maintenance policy to make maintenance a profit center.
  8. Include a warranty period that is appropriate for your product and industry, unless you subsume it in the maintenance agreement. The warranty period is how long you will make needed repairs for free.
  9. If you are dealing with software, be sure you include the software license, effective only upon full payment being received. Make sure important issues like the right to sub-license are covered.
  10. As with any contract, even the simple sales agreement should have a term and termination section; at some point the deal will need to be re-worked.

A free outline is available that lists all of the points to be covered in an OEM Agreement. The outline would be useful for a sales agreement as well, though it covers some superfluous areas. The outline may be downloaded here.

Agreement Payment Terms

Are you concerned about when you get paid for your product or services? You should be, as the payment terms affect the profitability of the transaction.

The longer the period between the sale and when you get paid, the more working capital required to maintain your business. Working capital is never cheap, whether or not you have to borrow any part of it. There is an internal lost opportunity cost for money tied up
in accounts receivable – it cannot be used for growing the business.

I advise my clients to try to make invoices payable upon receipt. It is not a point you win all the time, but for the small company in particular, it is worth a try. After that we try for thirty day terms as opposed to forty-five days, and so forth. Some of the large companies will try to impose forty-five, sixty or even ninety day terms. Sometimes the point is negotiable and sometimes not, but the small company needs to push hard on this point.

If an agreement’s payment terms are not drafted carefully, they can cost you money and/or cause unnecessary confusion. A client’s salesperson recently sent me a Statement of Work attached to an email. The SOW said the client’s customer would pay $2,000/month for the client’s services. The salesperson wanted to emphasize that $2,000/month was a really good price. The email mentioned that the fee was actually payable annually up front. If it were not for that comment, I would have ignored the payment terms. The customer could have paid in monthly installments rather than a lump sum up front, no matter what had been negotiated before. Even with very low interest rates, $24,000 spread over twelve months is worth less than $24,000 right now.

Close attention should be paid to the payment terms to prevent confusion and to conserve working capital as much as possible.

Effective Contract Negotiation: 12 Tips

There are organizations that teach nothing but negotiation skills. You are urged to take advantage of what they offer. This post should help you better negotiate in some cases, but it should also cause you to consider formal training in negotiation. Such courses will provide much more insight into the kind of role to adopt, reading cues from the other side, etc.

Prepare for the Negotiation

Young caucasian businesswoman with african american man

An attorney once paid the author what he considered a very high compliment,”he is always prepared for every negotiation.” He was referring to the following effective contract negotiation tips:

  1. Read the contract a number of times until you are very comfortable with it.
  2. Analyze the sections so your are sure of their meanings. Do not forget the definitions.
  3. Look for and understand the relationship between key sections, such as indemnifications and limitations on liability.
  4. Consult with the right people – not just management and other team members, but also subject matter experts that will have to make the contractual relationship work from day-to-day.
  5. Develop a written negotiation plan, usually a mark-up, but with copious marginal notes on:
    • What concessions should be made for what changes to the terms
    • When those concessions should be made in the negotiation

Have the Right Negotiating Team

  1. Effective Agreements advocates a three member team other than the attorneys. The team members should be:
  2. One person who is the main negotiator and the only one who speaks officially for the team. Everyone else should feed information to the negotiator by note, during caucuses, etc;
  3. One person who only takes notes so that, at the end of the day, the team knows the status of
    every issue;
  4. Perhaps the most important member: the one who remains silent and takes no notes, but is free to listen to everything that is said. This is a very powerful technique. This person has time to:
    • Listen to everything that is said by personnel on the other side, even if they are not active in the negotiation;
    • Think through what he or she has heard in relation to the negotiating plan;
    • Call for breaks and fill in the negotiator on what he/she has heard and his/her analysis of the current situation. Remember, the prime negotiator must be thinking about what to say to the other team next; this person does not.

The above structure may not be optimal in every case, depending on such variables as the size of the other team, managements wish to be involved, and items requiring subject matter experts, such as highly technical issues.

Behave

  1. Do not get emotional and raise your voice, unless you have decided in advance to do so (hey, sometimes it works;)
  2. Never, ever correct something one of your team member says in front of the other team with the possible exception of correcting a technological error;
  3. Do not talk if that is not your role.

1. Some portion of the information in this post comes from the Karrass books and other materials. Providing a footnote for every point would be incredibly time consuming, as the author does not remember where every idea came from. Hopefully the Karrass organization will consider this adequate attribution.

Work Stoppage and Delay Fees

What are work stoppage and delay fees?

Assume you are a service provider and you are taking videos of clients’ products for their websites. You have camera people, production staff, voice over talent and other staff all ready for the day’s shoot, and you have booked the studio for the day.

What happens if the Client prevents the work from going forward on time? Perhaps the product to be shot does not arrive in time to be assembled properly. Or the client decides on one more script edit at the very last minute.

It does not matter if the client stops the work arbitrarily or if work grinds to a halt because

the client failed to meet its obligations on time; you, the service provider, are going to feel the pain.

OLYMPUS DIGITAL CAMERA

What is needed is protection in the form of work stoppage and delay fees in the Statement of Work (SOW) executed with the client:

  1. A provision passing on the unavoidable costs incurred because of the delay; and

  2. A significant hourly fee for the time the work is delayed.

This is a fair arrangement. The hourly fee provides an incentive for the client to keep to the schedule it agreed to. The charge for unavoidable incurred costs is clearly fair. If the service provider can take steps to reduce those costs, it is obligated to do so, so the client pays only for what costs the service provider could not postpone.

Perhaps these provisions do not fit every arrangement, but work stoppage and delay fees payable by the client can be important protection for the service provider.

Contract Termination For Convenience

Termination for convenience is like having the other side pick up their football and go home. If you are the seller or service provider, a unilateral termination for convenience can bring a lucrative arrangement to a sudden halt.

Assume you have a deal to provide services to a customer. The Master Services Agreement would set out the terms and conditions and there would be a Statement of Work (SOW) for each project or portion of a project. Now, the buyer terminates either one for convenience:

  1. What were your up-front costs in preparing to perform the services? Are there set-up costs, targeted development, or just costs of deploying resources? In other words, do you incur a lot of costs in the early days in the hopes of having reduced costs when you perform the services down the road?

  2. Did you hire extra people or enter into a subcontract with them? What can you do with those people if the customer terminates early for convenience?

If the customer just cuts off the business on a corporate whim, you will suffer financially.

There are some ways to protect against damage from early termination:

  • Do not agree to termination for convenience at all.

  • Insist that the termination cannot occur before a certain amount of the work has been performed.

  • Set it up so that the buyer has to pay to terminate, perhaps on a sliding scale over time.

  • Have a long period of notice required before the termination so you have time to adjust and hopefully replace the business.

Early termination by the other party is a serious matter that should be negotiated carefully in any agreement.