ContractI’ve been talking with several people recently who are looking at their business agreements.  I don’t know if it has anything to do with being at the beginning of a new year, but it’s a great exercise to do regularly.

Every business contract you have is intended to last for an extended period of time.  After all, you put an unusual amount of effort into it, so you should be getting a higher return than just a one-time transaction.  The point, then, is that both parties should be reasonably satisfied with it for a longer term.  If one of you is becoming increasingly dissatisfied, then that’s a danger signal which should be addressed.

For each of your written contracts or less formal agreements, you should be asking:

  • Are we staying true to the original intent of our partnership?
  • What’s happened in the last year which shifts what we need out of this?
  • Has the balance of power or balance of benefit changed?
  • How can we both be even happier with this agreement a year or two from now?
  • Are we both continuing to be satisfied with the structure of what we put in place?
  • Are the terms still fair?
  • Are we getting close to an expiration date?
  • Is the likelihood growing that we’ll trigger some termination condition?

Look at each of your key business relationships:  partners, suppliers, distributors, customers, and employees.  Anyplace where you are maintaining an important reliance upon someone who’s at will to leave, you have some kind of agreement which is causing you to continue doing business together.

The list here assumes somewhat that you want to continue with the relationship.  But there are times when you need to sever ties:

  • Your goals have diverged
  • The terms have become unfair to one or both parties
  • As currently structured, you’re headed for disaster

Basically, you’re trading off the benefit, cost and risk of maintaining a relationship against severing it and setting up a new one.  This is a complex undertaking, with factors well beyond just the money which trades hands.

Here’s a great example:  Let’s suppose that you’ve decided you need to let an employee go.  The immediate tradeoff is that you’ll be saving that person’s salary and benefits, but losing whatever productivity they have.  But that’s an extremely short-sighted view.  There’s many other factors which enter into this decision:

  • The positive or negative shift in morale and productivity of the other employees
  • The monetary, effort, and time costs of replacing the person
  • Unemployment insurance
  • The danger of lawsuit
  • The cost of losing knowledge, potentially to a competitor
  • The opportunity to get someone who will be far more productive
  • The reduction in your frustration and wasted effort of dealing with a low-performing employee
  • The opportunity to restructure if you want to replace this with a different kind of job

This is the kind of in-depth analysis that you should pursue anytime you’re looking at changing one of your key business relationships.  And the more cost and risk associated with it, the more thought you’ll put into it.