In many organisations, the salesperson has a heavy burden on their shoulders. Not only do they have to generate new opportunities, they need to develop them, oversee the preparation of proposal documents, deliver presentations, organise demos and help the client find budget for, and obtain approval for, your product or service.
The push to close
‘Closing’, or ‘getting the client to agree to buy’ is an art of its own, and is the subject of much sales training. What is less clear, however, is at what point do we consider that a deal has been ‘closed’?
- Is it when the client has said “Yes, I like your product and I want to buy it.”?
- Is it when they confirm that they have the budget, and that your price is acceptable?
- Or is the deal not properly ‘closed’ until the contract is signed?
From a commercial perspective, I would argue that a deal is not closed until a contract has been formed that obliges the client to buy, and the seller to sell. That could be, in low-value deals or commodity markets, on the submission of a quote and the receipt of a purchase order. But in many higher value, or more complex deals, it requires the signature or formal execution of a written contract.
So that brings me back to my original question. Given that the salesperson is the one tasked with closing the deal and rewarded on their ability to do so, if the deal’s not closed until the contract is signed, should the salesperson also be responsible for getting the client to sign the contract?
The lifecycle of a contract negotiation
A typical contract negotiation has a number of clearly distinguishable phases:
- Agreement in principle
- Exchanging terms
- Reviewing terms, assessing risk and identifying issues
- Communicating issues to the other party
- Negotiating detailed legal terms in risk areas
- Negotiating detailed commercial terms
- Reaching final agreement on all terms
- Executing contracts
A well-managed contract negotiation will ensure that the negotiation of detailed legal terms and commercial terms take place together, or at least in a closely-coupled fashion. This ensures that the deal works as a whole, and that any assumption of additional risk by a party is adequately addressed in the contract value and commercial terms.
Another feature of a well-managed contract negotiation is the initial ‘agreement in principle’ phase. If this is done well, then the key commercial and legal terms are identified up-front, and both parties have the opportunity to discuss them in some detail before contracts are exchanged. This makes the whole process more collaborative and speeds up the negotiation phase, as the top-line issues are already agreed.
So who does what?
If we look at these eight phases, the typical distribution of activity tends to go along these lines:
|Contracting Phase||Primary Responsible Function|
|Agreement in principle||Sales|
|Reviewing terms, assessing risk and identifying issues||Legal|
|Communicating issues to the other party||Sales|
|Negotiating detailed legal terms in risk areas||Legal|
|Negotiating detailed commercial terms||Sales|
|Reaching final agreement on all terms||Sales and Legal|
While this is by no means the only way to do things, and takes no account of the ‘commercial’ function in some businesses, which is distinct from both legal and sales but contains elements of both, it represents a fairly common allocation of tasks.
The part of this table that will, by now, be flashing at your subconscious in neon lights is the one that shows negotiation of legal terms being done primarily by legal, and negotiation of commercial terms being done primarily by sales.
The separation of commercial and legal points is very common in contract negotiations – many times, I’ve been told by a lawyer that “this is a commercial point, for the business to decide”, and by sales people that “this is a legal issue – I’ll get our lawyer to call you”. If we are to negotiate effective contracts, we need to address the legal and the commercial points in the round. And that requires better understanding of the commercial issues, by the lawyers, and of the legal issues, by the sales people.
Early perceptions are hard to shift
The other line on this table that will be giving the lawyers among you a chill is the very first one – the agreement in principle (often captured in a “This is our proposal”, “Yes, we like it” discussion) is usually reached by the sales person.
As you will know, if parties have come to a particular understanding early in the process about what their respective rights and responsibilities are going to be, this can be very hard to shift as you move through the detailed negotiations.
A simple example of this is with regard to the price. If a proposal (made subject to the seller’s standard terms) includes a stated price, then trying to negotiate that price upwards when the buyer asks the seller to accept more risk than the seller’s own terms do, is extremely tough.
At a more complex level, we are occasionally called in to negotiate a deal where the buyer and the seller have ‘agreed in principle’ a deal that is simply unworkable in practice, or contains deal points that are not permitted under the law. Profit sharing is a common example of the former, while price-fixing is a good example of the latter.
When it falls to us, as commercial contract negotiators, to explain that the deal cannot be completed as originally envisaged, both parties may be disgruntled – but the sales person in particular. Why? Because as far as they were concerned, the deal was “in the bag”, only for us to come along and explain that actually it was some way outside the bag!
So surely, it pays to make sure that the sales team understands the impact of all elements of the deal prior to making that initial offer, and having their initial discussions with the client. This will result in more reasonable agreements in principle, and better establishment of the rules of engagement between the parties, making the whole contract negotiation a smoother and less adversarial process.
Giving away the family silver
If all indications so far are that closer relationships between sales and legal, and better understanding of contract matters by salespeople, are likely to result in smoother negotiations and better outcomes, why don’t they happen on all deals?
One reason is that, historically, salespeople have earned themselves the reputation of wanting to close deals ‘at all costs’. They are often seen by the legal and commercial parts of the business as being willing to sell their grandmothers (and certainly the family silver!) if it will close a deal in time for year/quarter end.
Is this reputation justified?
Yes and no. If a salesperson is rewarded on the total value of deals they’ve closed, you can reasonably expect them to be focused on closing as many high-value deals as possible. This is sensible behaviour from a sales perspective as surely, if closing high-value deals is what the business rewards, it must be what the business wants.
However, most mature and experienced sales people will understand that a deal has to make sense for the business, and will appreciate that if they regularly close deals that send the company into apoplexy they are unlikely to be in their role for long. For these sales people, making contractual concessions that create significant risks for their employer is less likely to result from a devil-may-care attitude, and more likely to be down to lack of knowledge and understanding of their impact. If your Sales Director or Manager could benefit from brushing up their contract law and negotiation skills take a look at our practical workshops. Alternatively, if you need to create tailored contracts quickly and easily you would benefit from our contract automation service.
Founder and Managing Director, Devant