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Getting vendor contracts right

Working with vendors is often a necessity, the reasons may vary but the common ones are quick time to market, lower costs, better access to skills, unique technology and perhaps even proven intellectual property. Whatever the justification the objective is to create a fair contract which represents an exchange of fair value and the needs of both organisations. I hate one-sided contracts as there ends up being a lesser incentive for one party to honour their obligations. The contract is a risk management document to secure delivery of what has been agreed. The document serves as a tool to document the intentions of the arrangement with performance obligations outlined and their consequences stated.

Today many engagements are done with fintech’s work with clients to co-create solutions and evolve along the journey. The classical contractual model is not a good fit for this. As there are likely to be many moving parts on the product roadmap it’s a good idea to stick in a vision statement in the contract. This makes it clear that while the deliverables may be uncertain the business intent revolves around the delivery of the vision and the expectations will be in line with that vision.

Start-up’s typically have some intellectual property. Define who owns which aspects of the intellectual property. General business process and market practices do not qualify as IP. The application of knowledge and expertise to develop a specific proposition could quality as IP if you know no one else in the market can do it the way you are doing it. If you believe what your bringing to the table qualifies as IP then it helps to define it and get agreement. Forcing this conversation and agreement will save you many sleepless nights.

Set clear milestones to make it easy to track progress. Define what success for each milestone looks like. Delivering these requires resource commitment and it’s wise to detail out what each party will bring to the table - it can be a combination of people, technology and other resources. Having this creates a better chance of success and increases your odds to create a win-win model and hopefully allows you to build a story of collaboration. The commercial pricing is tricky and this has to be done looking at your business model and balancing it with making sure the other parties have some skin in the game so that they can’t just walk away and leave you hanging when you need them the most to do something.

All relationships start with the best of intentions, there is energy when people get together and grand plans are created. At the beginning people get along just fine and projects chime along. Eventually there comes a time when the relationship and gets strained. We dent get along anymore, we don’t communicate, we start to point fingers, this is how relationships evolve. It is for these unpleasant times that we need to have deterrents in place in the contract to protect from non-performance. Some measures are escrow, license fee clawbacks, late delivery penalties, revenue sharing. One approach some bigger firms have taken with fintech’s is to takes an investment stake in the service provider to allow them to grow with the company.

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