By: Andi Stark
Contracts are essential in business to set rules for deals and partnerships. However, a new report from World Commerce & Contracting (WorldCC) in partnership with Icertis, reveals that complex contracts cost companies billions annually. The report explores how negotiation priorities often miss the mark, the struggles of small businesses, and the push for simpler contracts.
Misaligned Negotiation Focus
The report from WorldCC highlights a significant issue: businesses often need to focus on the right terms during contract negotiations. Important terms like limitation of liability and indemnification are frequently prioritized, yet they do not always lead to business success. WorldCC president Tim Cummins explains: “This report shows the critical disconnect between negotiation priorities and actual business success. Many organizations overemphasize risk mitigation, potentially hindering value creation and growth.”
The WorldCC report shows that 69% of respondents believe simplifying contracts would make them easier to understand and negotiate. However, many negotiators still concentrate on complex terms that deal with potential failures rather than ensuring successful outcomes. This suggests a need for businesses to rethink their negotiation strategies to better align with their goals.
Challenges for Small Businesses
Small and medium-sized enterprises (SMEs) face significant challenges when negotiating with larger companies. The WorldCC report indicates that 88% of SMEs find big businesses inflexible, and 78% feel pressured into accepting unfavorable terms. This power imbalance often leaves SMEs struggling to secure fair deals.
Bernadette Bulacan, Chief Evangelist at Icertis, notes: “Oftentimes, we are negotiating in a particular type of market with big trends and macroeconomics that are imprinting on our negotiation stance. I always expect that to have a greater imprint on most negotiated terms.” SMEs focus on practical aspects like scope and price, while larger companies prioritize risk-related terms. This difference highlights the need for more balanced negotiation practices.
Economic Impact of Complexity
Complex contracts have significant financial implications. Research by WorldCC suggests that processing contracts, especially those with moderate to high complexity, can incur significant costs due to factors like legal reviews and lengthy negotiations.
These inefficiencies not only increase costs but also prolong negotiations. Cummins notes: “We need to be clear with our executives about the consequences of not empowering negotiators: more disputes and disagreements, and a loss of potential economic value.” Simplifying contracts could lead to substantial savings by reducing time spent on negotiations.
Strategies for Improvement
WorldCC suggests that businesses adopt strategies emphasizing simplicity and clarity in contract negotiations to tackle these challenges. This includes integrating negotiation processes across departments to ensure alignment between business objectives and risk management strategies. Additionally, using technology such as AI-driven analytics can streamline contract management.
Bulacan highlights the potential for data-driven negotiations: “I see data will help map and create data-driven negotiations. We can be data-driven, and we can still be relationship-driven.” Businesses can build stronger partnerships by embracing technological advancements and focusing on mutual goals.
The Push for Simpler Contracts
The report from WorldCC strongly advocates for simplifying contracts to improve business outcomes. More straightforward contracts are easier to manage and help prevent disputes, fostering better relationships between parties. According to the report, most respondents believe simplifying contracts could improve clarity and streamline the negotiation process.
Tim Cummins stresses the importance of governance in achieving success: “Achieving success is about more than just your contract. We need to think about the governance procedures and standards and the nature and quality of the relationship.”
Contract complexity is a legal issue and a financial burden affecting performance. Companies can unlock significant economic value by simplifying contracts and aligning negotiation priorities with business objectives. As organizations take on increasingly complex markets, embracing these changes will drive growth and maintain competitive advantage.
Disclaimer: The information provided in this article is for general informational purposes only and is not intended as legal, financial, or professional advice. While we strive for accuracy, we make no representations or warranties, express or implied, about the completeness, accuracy, reliability, suitability, or availability of this information. Use of this information is at your own risk.
Published by Elle G
