What Leverage Do You Have With Client Contracts and MSAs?
Blair and David share their frustrations around some contracts that they have been asked to sign, making it clear why they are not attorneys.
This episode does not contain legal advice. Get a lawyer for that:
Transcript
David C.Baker: Blair, what could we start off the next year with? What would be the most exciting, engaging topic we could think of?
Blair Enns: Positive and uplifting.
David: I doubt if you could come up with anything more exciting than this. What about talking about contracts and proposals?
Blair: I love that idea. The impetus for this was you and I sharing some frustrations around contracts that we get asked to sign from time to time. We've decided, okay, there are lessons here that we teach and we better start taking our own advice.
David: Yes, I was frustrated because I got this contract a while ago. It was discouraging, disheartening. I sent it to you and you gave me great advice. You said that you'll give them yours first. I got to thinking, "I didn't". This also reminds me back when I used to do a lot of work for large corporations. I'd do work for in-house marketing departments. I remember I got a contract, I'm not going to identify the auto manufacturer, but it was one of the top four in the US. The contract came through, this was back in the days of fax machines, and it was 28 pages long. This is was the contract for this $40,000 consulting engagement. I started reading. I got through about two thirds of the first page and it was just so boring and so not applicable to me. I just crossed out every page and then I faxed the whole thing back to them. That's how I feel about contracts.
Blair: Cross out the page, sign it and fax it back.
David: And then send it.
Blair: All right.
David: This is not legal advice, we should start with that. You and I both know some folks that do this work and they're actually competent, unlike you and I, on this subject like Sharon Torok, Candice Kirsch, Jeffrey [unintelligible 00:01:57], Michael Laskey. We'll put their contact information in the notes. Otherwise, we're just going to be talking as two schmoes here with some ideas about that. Would you start by telling us clearly the distinction between a contract and a proposal because we do both of those things? What's the difference?
Blair: I've been saying these words for years, it's just so obvious but I think back to my previous life in the agency world, I always conflated the two and most of my clients, most of the listeners conflate the two. The proposal is the words that come out of your mouth. Here is what we propose to do, here's how long it will take, here's how much it's going to cost. The contract is the document. The contract comes out once you have an agreement in principle.
As I said, in the agency world, we often confuse and combine those two things into this one mystery document called "The deck" that's got information about our firm, it's got pictures of the office dog and the espresso machine, it's got staff photos of us when we were all kids. It's got the background of the clients' challenges we understand. It's got some free strategy, it's got some free creative advice. Then, it's go a price and a place and sometimes some terms and conditions. Those things never get signed, so we're confusing these things. In the simplest terms, the proposal is the words that come out of your mouth and the document is the contract. The document should not come out until you have that agreement in principle.
David: By "in principle", do you mean verbally or in writing, in some fashion pre-contract?
Blair: I mean verbally, generally speaking. Obviously, there're pitch situations, there are larger firms in really competitive situations run by procurement departments where we're trying to change those rules and laws and bend those laws of procurement physics in our favor by pushing back on all this stuff and keeping the process more in line with what I've just said, the proposals are the words that come out of your mouth, the document is the contract. From time to time, I acknowledge that there has to be some written support for the proposal. Don't confuse that with the contract, like finding a place to sign on it, adding in your terms and conditions et cetera.
Keep the visual support for any proposal, which is an oral proposal, keep the visual support as small possible. In fact the constraint that I love and we teach is keep your written proposals to one page. There's pushback on that idea because you can't possibly communicate all of the details that you want to communicate your proposal on one page particularly if you're using options, if you're putting forward options and how the client can engage you, but by limiting it to one page, that constraint, you'll actually find it helpful. Although it will terrify you immediately, the benefit of just accepting that you can't put everything on one page will force you to just treat that one page as a highlight or a summary of your different options.
The summary is just a little bit of visual support for the conversation and then you will be following the rule or the guidance that the proposal is the words that come out of your mouth. You keep it at a conversational level. That will force you to become a better sales person in that moment. It is a helpful constraint to keep any written support for your proposal to just one page.
David: When I talk with people about confusion around how to protect themselves and so on. I'll use this phrase, I'll say, "If there's too much fog around the scope, then do some sort of a diagnostic until the fog clears". In your methodology, that's something that they're getting paid for, right?
Blair: Yes. Probably, the majority of the time when you are closing on a piece of new business or a client that you haven't previously worked with before, usually that first engagement is broken up into a first phase diagnostic. The rule or the guidance here would be, if you have to do a whole bunch of work to write your proposal, you should get paid to do that work. The way you get paid is you sell a diagnostic, a first phase in the engagement where you're paid to better understand the client's situation and make recommendations. The outcome of a paid diagnostic is your understanding of the situation and the ways to move forward and your recommendations on how to move forward.
If you have to do a whole bunch of research, a whole bunch of work to scope and price in that way, then you should get paid to do that and you sell some form of diagnostic, some form of research or onsite discovery or they're just an infinite number of different forms of diagnostics that you could sell.
David: I call that paid prospect in essentially the opposite of just writing a proposal with all kinds of detail in it. I think, as an industry, we've gotten away from that although I still see it every once in a while. If the proposal, to the degree that it's not one page, then you are sometimes flirting with the idea of doing some unpaid work that's part of the point of this constraint. When can you get excited about closing a new client? The contract comes after the proposal has been accepted verbally, is it too soon to get excited about closing after they've said yes to the proposal?
Blair: That really depends on your firm, the size and nature of your firm and the size and nature of the client in the larger clients where you're dealing with professional buyers. I'm a little biased towards those scenarios these days because I recently attended a procurement conference. In that type of world, you just need to understand that it's not over until everything is signed and you've received the first payment. It's a scenario by scenario thing where some parties will actually look to draw out that negotiation even after you think you've got an agreement in principle, ready to sign, they'll come back. They'll see that as the beginning of the next phase of the negotiation.
Generally speaking, smaller firms or smaller clients or where you're dealing less with professional buyers and more with owners or executives of businesses, you can treat the contract signature as a close.
David: Okay. Now, you're negotiating, the proposal has been accepted often verbally, you're going into this, who starts this first and what's the if the client gives you something to look at versus you giving the client something to look at? I think this is a little bit the mistake I made recently.
Blair: Yes, we've talked more than once about the anchoring effect on this podcast. The anchoring effect is sometimes known as anchoring and adjusting, is the idea that the first piece of information on a subject is likely to skew the final decision on that subject. When it comes to price anchoring, it simply means you put the big numbers forward first. When you're presenting options, you lead with the biggest, most expensive option. If you don't anchor high, your client will anchor low.
It's a similar effect going on here, you get to this agreement in principle, so your proposal is accepted verbally subject to working out the final Ts and Cs, Terms and Conditions.Then, in that moment, once you have the verbal approval, you should see yourself as in a race to get your form of documentation, whether it's an MSA, Master Service Agreement or just a one off contract. You want to get your form of documentation on the table first. You want to anchor with your piece of paper. If you don't, like you just experienced, David, if the client puts a document on the table first, it's almost never perfect. It's almost never even appropriate, right?
David: Right.
Blair: I didn't ask you about the details of that contract. I've been there, I'm sure there's a bunch of stuff in that contract that's just not relevant to you and what you're being hired t do.
David: Right. Yes, in fact, sometimes you'll see in this in the NDA for instance, every single NDA that I've gotten from a client, which is what prompted me to come up with a simpler one that I sign before they even asked me to, then I give it to every client, but every once in a while they come back with a much more detailed one. Every NDA gets it and at our request, you will return everything that we have given you including all copies. I'm thinking, "Well do these people realize that Dropbox and Google Drive and box, they're making copies of everything and I don't even have access to all those copies?". In the past, it doesn't even apply. When you say anchor high, you're not talking exclusively about anchoring price, but also terms and conditions as well. Right?
Blair: Yes, in this case, I'm not talking about price at all, you would have covered that off already although there might be some price negotiation that comes afterwards. I really am talking about the terms and conditions. The same thing goes with the NDAs.There's some standard contracts that you should have and those contracts should be favorable to you because your default assumption should be the client is going to open with a piece of paper whether it's an NDA and MSA or a contract. They're going to open with a piece of paper that's entirely skewed to them. Then you're going to have to go back and forth, but what this anchoring effect says is that starting point, the point at which you start, that's going to affect the outcome. That's the beginning position that you have to counter against. It's far more powerful if you are starting from your beginning position.
Just to understand that clients have NDAs, they have MSAs, they have contracts. Once you have an agreement in principle, they're going to put their document on the table. What you want to do is you want to have standard versions of those three documents yourself and you want to put your version on the table first and then have them have to counter against that.
David: Right. Even while you're on the phone sending it to them clack, clack, clack.
Blair: Yes.
David: We're not in the business of writing all these specifics of contracts and so on, but we could illustrate a few of those here. Things like IP ownership and transfer like who owns it and what happens if something comes up before they paid for it.
Blair: Let's just talk about that one for a minute. Because that's a really big one. Because the standard client approach especially a lot of clients might be using the ANA contract or MSA template, it's about 50 pages long. I don't remember if that one specifically advocates this but the beginning position is typically that the client says, "As soon as you develop IP when working on our behalf, we own it", and that is just an unacceptable position. Again I'm not a lawyer getting proper legal advice but basically IP doesn't transfer if it transfers at all, it doesn't transfer it until you've been paid in full for it. That should be your starting point on that topic.
David: Yes, absolutely. One of the things that you do in a collection setting is that it's not then just about the fact that they haven't paid you what they were supposed to about which there's some dispute, but they're using something that's not theirs and that's under a different category of theft.
There's important things to think about here. This is where you would work with your own attorney or one of the ones that we've heard of, to come up with it. Then other things like terms, E&O insurance. Most agencies don't have E&O insurance, the only ones that do are the ones that bought it years ago and haven't thought about it or because their clients demand it.
Insurance is something that you're never really going to get a claim paid back for because if there's a dispute, then they're going to say, "Well, you have to follow it all of these procedures, you're going to have to pay for the litigation on your own". If you lose the suit, then you can go to your insurance company and it usually never gets that far.
Blair: There are other forms of insurance though too. There's just general liability insurance and some client contracts will ask for a huge amount of liability insurance. The guidance I've seen Sharon Torok given a couple of talks is that you really should limit your liability to no more than whatever the total compensation that you're being paid by the client.
David: General liability usually they're asking for 2 million nowadays all those things. Other things like if there's a dispute, what do we do? Do we take it to court? Do we force it to go to mediation? Who gets to choose a venue? We don't need to get into all of that stuff, but obviously, you think through this and decide what you want in your contract and keep it as simple as possible.
Blair: When you have to respond to the client's contract, when they send it to you first or when they are reacting, walk me through this back and forth, this cadence here.
David: The textbook way to play this is for you to have standard documents and to put your standard document on the table first. You don't even have to modify it because again, it's just a starting point in a negotiation. If you don't use yours, the client will use theirs and again, they see theirs as just a starting point in the negotiation.
That's the textbook way to do this but the reality is just like your situation, not so long ago, you found yourself you've got standard documents but the client went and put one on the table and you look at it and it's ridiculous. It's a little bit, I don't know but it's disheartening, it kind of sucks the wind out of your sales because it's like, "Here's one more battle I've got to fight". I thought I was an expert and now I'm being treated like somebody else.
Blair: It does. It gets you like less excited about the engagement when you see the contract and that's not a good thing.
David: That's one of my beefs with marketing procurement, in general, is like the marketing department in these large companies, they're working very closely with their agencies, they're almost always seen as important strategic partners that are helping to drive growth and other change across the organization and certainly in the marketplace. Then procurement comes along and treats them like a vendor. Even the marketing department kind of values the agency's expertise respects the values that and was willing to pay for it. All that goodwill goes out the door. It's allowed to be eroded by the procurement department. This is a bit of a tangent. I've got a real bee in my bonnet, man, I sound like I’m 80…
Blair: I love it when you get…
David: I've got a bug up my ass. How's that? I've got a bug up my ass about marketing and procurement. I'm going to write about this or we're going to do a podcast about it. I'm so struck by how bad it is. How wrong these people are getting things and the detrimental effect that they are having on the quality of the marketing, the creativity and the innovation in their companies.I think it's just having this big carry on effect on their businesses and the agency world. We'll come back to that. Now, what was the question?
Blair: I don't know.
David: We'll come back to that in a future episode. When I've calmed down a little bit.
Blair: You need to go to your therapist a couple of times before we come back to that topic.
David: Well, it's about being treated as a vendor and how disheartening that is and you are saying, "Okay", so you've got to respond. You were in this situation recently and it sucks the wind out of your sails, but you do have to respond. The way you respond is you pull out your red pen.
Actually, let me back up. The proper way to respond, if you have standardized your own documents, is before you even open the document, whether it's the NDA, the MSA or the project contract. Before you even open what the client has sent you, you realize, "I've made a mistake here, I haven't put my document on the table first". You send yours and say, "Thanks, I meant to send you mine, I haven't looked at yours yet, have a look at mine, I'll have a look at yours and then let's have a conversation". At least you're attempting to counter that anchoring effect and then now you're in a negotiation.
Ideally, what you want to do, somebody is going to have to write over top of somebody else's whether it's done digitally in Adobe Acrobat, or whatever or with the good old fashioned red pen. I love a red pen and then scanning it and sending it back. Somebody is going to have to write over somebody else's contract. Ideally, the client's writing over yours, so you have effectively anchored and if you can't do that, and if you have to write on theirs, then just cross out everything, but I've had similar situations where you just end up crossing out two-thirds of everything in there and that's just a negotiation.
Get your document on the table first, if one shows up in your inbox before you've put yours in the client's inbox, then send yours before you open the client's. When it comes to do whatever you can to see that you're negotiating from your document and if you can't use your red pen liberally.
What I would say is, especially to the smaller agencies or younger agency principals who are encountering this for the first time, or the first few times, I've had lots of calls from my clients over the years where they've just called in a panic. The first call is, "Oh my God, you won't believe I just closed some Fortune 500 company, biggest client we've ever closed". Then the next call is a panic. "I just got the contract and I can't believe it is totally onerous. It's just untenable". I just calmly say, "get out your red pen, read it to me, cross it out, cross it out, cross it out". That's what you should do. Just cross out everything.
It's a negotiation. Don't get attached to it emotionally just cross out the stuff that doesn't work, cross out the 120-day terms and put your terms in 30, whatever it is, cross it out, send it back. If you're not dealing from a position of your own document, then you really have to be just liberally eviscerating the client's document.
Blair: Are you okay if we keep talking? Do you need to take a walk first or are you okay?
David: [laughs]
Blair: I don't want to stretch your heart or anything.
David: It's been like four or five weeks since I've been in this conference and I still haven't calmed down.
Blair: One of the things that probably makes sense, I would guess, is that you'd want to have somebody who's objective and patient but also has a ruthless streak to them. Do the negotiation on your behalf especially if you're the principal, you've got other things to worry about. We want you leaving the cave, going out, killing something else and dragging it back. How do you talk about things like payment terms? How do you remind them of some of the leverage that you hope to bring to the table around cost savings and all that sort of stuff?
David: If yours is a small business, I think you just counter their ridiculous terms. 120-day terms are ridiculous. I don't care who you are, what business you're in, it says a lot about your suppliers if you're asking for 120-day terms. I'm hearing 150, I've even heard 180-day terms. You need to push back on that. If you're a small business, there's no shame in saying, "Listen, we're a small business. Our terms are 30 days, we're not your bank. We're not in the banking business. You want to negotiate on something somewhere else. Maybe we can find some more common ground. There's no common ground here. These are our terms".
I got this from Tom Kinnaird who used to run procurement at WPP and he now runs, I think it's Kinnaird Consulting. He trains agencies on how to negotiate with procurement. He says, "There's really five main forms of savings that the clients' procurement team is looking for". I would say not just procurement, any client. The first one is cost, just the price that's paid, so you're prepared to negotiate on that. Just decide in advance, "Are you willing to give in on that or not?".
The second one is cash flow, which is terms, the paymentterms. With a small good client who is going to be a good partner and is going to recognize and value your expertise who maybe has affordability issues, I think extending more favorable terms is a perfectly legitimate negotiating point as a way to help a client afford you. When they say, "Well, we recognize the value of this, we just can't afford it", then terms is a great way to bridge that gap. Extending terms to the world's largest companies is ridiculous. I think that cost and cash flow or price and payment terms, I think those are the things that you generally don't want to give on. Maybe you'll end up with a little bit of price negotiation but the next three areas are the ones where you really want to do the negotiating if you're negotiating.
The next one is value add. What can you throw in for free, that isn't going to cost you much or anything. The next one or the fourth one is knowledge transfer. I think we've talked about knowledge transfer before. A lot of clients really value knowledge transfer, the idea that you're going to go into a client organization or work with a client organization and by doing whatever you're contracted to do, you're going to improve the ability of the client-side creative or marketing team to be able to do that in the future.
Now, if we don't value if we don't talk explicitly about knowledge transfer, and that the client value is knowledge transfer, and is going to get knowledge transfer, then it's always going to feel like the client is stealing it from you.They value it, you need to put it on the table and say, "We do this for you a couple of times. It's going to improve your people's ability to do this in the future. If that's important to you, we can actually build in a little bit more training for your people. We will undertake the engagement with the explicit understanding that part of our objective is to increase your ability to do this in house in the future".
Then the fifth thing that they value is risk reduction and there are various types of risk. There's financial risk, there's personal risk, there's opportunity cost, there are other forms of risk. Those are the five things that the client values. Price terms, something for free, train their people, or risk reduction of various kinds. Those first two, I think you don't move too much on those things, especially terms from big clients, don't be pushed around by them. If you need to find some common ground, if you need to give something up, give it up in the last three categories.
Blair: Those are great reminders. As we wrap this up, I want you to talk a little bit about this notion that we've already spent a lot of time on in the past, but it's so relevant here again, and that's the notion that you talk about frequently about investing in the sale. In fact, we did a whole podcast on that. It all boils down to this, remember that one. Investing in the sale here could also mean deciding when you're going to care and how much you're going to care. For instance, one example of that would be when they draw it out, when they try to wear you out. Meanwhile, you've literally invested so much time that you might be tempted just to give up. That's legitimate here.
David: Yes, it is legitimate. Your larger clients and professional buyers, in particular, they draw the process out, they try to get you over-invested in the sale, they draw the contract negotiation out. There's all kinds of stories of contract negotiations going on for a year. Just as a matter of policy, you should never begin working on a new client before everything is signed off and you've received the PO, you've been paid in advance or have a purchase order for the initial payment. As a matter of policy, you should never violate that. They'll try to get you to violate that, they'll try to drag it out. Well, getting you to start the engagement. As soon as that happens, all your negotiating power is gone. Make sure you don't do that.
You mentioned a little while ago the idea of having an impartial third person negotiate for you. If you've got a full-time finance person, that's the ideal person, they're not emotionally attached to the work. It can be somebody else in the team if you don't have a full-time finance person. If you've just suddenly closed a big deal, bigger than you usually close with a client that's bigger, and you're finding the contract negotiation part more onerous, you should think about hiring somebody on a temporary basis, on a contract basis to negotiate on your behalf.
I think too many agency principles, in particular, especially if they come from the creative side, we fall in love with the work, the sunk cost bias sets in because we over-invest in the sale, loss aversion bias kicks in, we feel like we've won it already now. We value losing something about twice as much as we value winning something. Once we feel like we've won it, and now we're on the verge of losing it, we're going to raise our level of stupidity in terms of the things that we're going to do to try to save the business. Be careful of all of that.
There's all kinds of stories I've heard from my clients. I heard one couple of weeks ago, it almost broke my heart about this agency principal from the UK saying, "We competed for this really big piece of business. It was the most perfect brief I'd ever seen. The client had lots of money. We competed against some of the hottest agencies in the UK, we were told we won. Then the client showed up and said, "The fees are half of what we said they were. Take it or leave it, we're going to the next agency."
Blair: What'd they do?
David: Well, he said, we have to take it. I had written an article about a similar situation, and I forget what it's called, but we'll post the link in the show notes. Two different agencies in exactly the same situation. One said, "Well, we had no choice, we had to take it". The other one pushed back and said, "Screw you, we're walking." Then in that second scenario, the client called back later and said, "Okay, you can have it at full price". That's usually a negotiation tactic.
I was surprised when this agency principal told me the story a couple of weeks ago, he did such a good job of building up the story of how great a client was, and when he told me the negotiating tactic at the end, I kind of lost it. I just absolutely lost it. I felt his pain. He said, "What would you have done in that situation?". The proper answer should have been, "I would have said, "I'll get back to you and then I would have calmed down. Then I would have called back and said, "We'll pass". " in some version of that language.
What I said to him was, "My reply would be a two-word reply. Then I would look that person in the eye and say, "You have become my project, I'm going to make your career, a project of mine. I'm going to follow your career for as far as you go for as long as you're in this business, and I'm going to do everything I possibly can to destroy it". "
Blair: [laughs] That would be an alternative to relaxing.
David: That's me, I'm willing to blow off a nuclear bomb to solve a small problem. It's a character defect and it's not the right answer. It's not the right answer our listeners should give. The right answer is, "I'll think about it", walk away, call back and say, "No". Procurement calls that playing chicken, and maybe they really will go to the next agency but if they do, then the marketing people never really valued you, to begin with. It's likely they're not, it's likely they're going to come back to you. I think in those situations, you should die with honor.
Blair: I was working with a firm in Canada this year, they work for a particular segment that's really slow-moving, and it takes a long time to get all these contracts written. It was a very similar story to what you just related. They told me that in their typical engagement, they are halfway through the project before they finished negotiating the price. They asked me what I thought about that, and I told them in not all that kind language. Then I tried to explain how they'd lost all their leverage and they acknowledged that.
Then I just didn't know what to say at that point. It was like, "I can't help you. If you're willing to spend two months on a project unpaid, what could I say that would change your life and change your thinking because you don't need more information from me, you have the information. You had it before I even came into your life. What you need is some courage". I think that's part of what we're talking about here.
As you were talking earlier, I was thinking to myself, "You know what, some of our listeners really ought to just get out of this business entirely. If they're going to be compromised to this degree, they ought to just get out of this business". I'm not talking about a huge percentage of them, but maybe 1% or 2% should if they keep getting steamrolled over the issues like this.
David: I have good clients that we've trained for a long period of time that do a lot of things well, and then I hear from their coach, "No, they routinely start work on a new engagement before the price has been agreed to". I think that's what you learn in day one of whatever variation of business school, listening to this podcast, and I recognize most of our listeners don't go to business school, but that's one of the first lessons you learn. The idea that somebody would be in business for years and still be making that mistake, I'm dumbfounded by it. To your point, if you can't draw the line on that issue, good luck with everything else downstream.
Blair: What it comes from is a panic that, "We don't have a positioning that's leading to enough opportunities. My people are just going to be sitting around, so they might as well be sitting around doing something that we might get paid on", that's how they think about that. It's tough. Well, we have just finished an episode that we could retitle, why Blair and David are not attorneys and why they do have therapists.
[laughter]
David: I don't have a therapist, but it's clear I need one. [laughs]
Blair: This is my therapy.
David: Thank you, Blair.
Blair: Thank you, David.