Daily Archives: February 2, 2010

The Purpose of a Contract is Easy to Define

A recent post over on Contracting Excellence on “the purpose of contracts” indicated that it can be difficult to describe the “purpose” of a contract. I have to disagree. While the definition may vary slightly depending upon the role contracts play in your business and the importance placed upon them by your personnel, the fundamental purposes is unwavering: the purpose of a contract is to define both parties’ responsibilities with respect to a desired scenario outcome to the level of detail necessary to make both parties comfortable with respect to the relationship.

Now, while this may seem like a bit of a cop-out because “responsibilities”, “level of detail”, and “comfortable” are open to debate, this is the slight variance I mentioned. The fundamental, unwavering, purpose is the definition of the desired scenario outcome. This, of course, means that before you start contract negotiations you need to not only have your goals for the negotiation defined, but your goals for the relationship. Do you just want 10,000 units delivered to your warehouse in Omaha in 10 equal shipments on the 21st of every month? Or are you looking for a limited type of partnership where your supplier will partner in research initiatives to replace harmful chemicals with environmentally friendly substitutes in your product designs, to reduce packaging requirements, and to reduce the number of SKUs you need to deliver your products?

If you haven’t defined your desired end-state for the length of the relationship, then you haven’t defined the true purpose of what you want the contract to help you achieve, which means you can’t define the purpose of the contract and what you’ll end up with is a bunch of ‘legally acceptable’ words on paper that don’t please anyone, even if you manage to bring it down to an acceptable reading level.

If you figure out what you want, and get your supplier on the same page, I’m sure that you’ll find the contract will fall into place quite nicely and that you’ll have no problem achieving plain english, which is the best policy.

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Will Private Equity Players Offer You Better Value Than Public Equity Players?

Last June, I pointed you to an article in the McKinsey Quarterly on “the voice of experience” where not a single executive respondent ranked public equity better than private equity. This report, which surveyed 20 chairmen or CEOs from the UK who had served on both public and private equity boards, found that 75% of respondents firmly believed private equity boards had more value.

Then in December I pointed you to a piece in Supply Chain Digest on the intersection of Wall Street and Private Equity with the supply chain that printed that:

one large retailer had the opportunity recently to save an expected $50 million from a supply chain network redesign project, included shifting from a number of smaller distribution centers to larger ones. The project had a great ROI and the capital was available — but the company delayed the project just because of the potential for Wall Street to view the project as too risky operationally and financially.

And then a week or so ago I came across this piece on The Myth of Ariba on The Baseline Scenario by James Kwak who was reading Past Due that used Ariba, which at one point had a market capitalization of over 40 Billion on quarterly revenues of roughly 100 Million, for his case study of the internet bubble in Chapter 2.

According to Kwak, Goodman says that “there were obvious limitations to how much money Ariba could make selling its software. It was aiming its product at the big Fortune 500 companies” and asked “what happened when Ariba ran out of customers”? And that, during the boom, “the stock was the only thing that mattered. A valuable stock gave Ariba currency it could use to buy other companies”. Now, while Goodman’s book, as per Kwak’s summary, might blame the executives of technology companies like Ariba for consistently making unrealistic claims and projections, it’s important to note, as Kwak pointed out, that, back in 1999, industry and financial analysts were talking up the Business-to-Business e-commerce boom at a time when B2B e-Commerce didn’t really exist. And, in Ariba’s case, since, with the launch of the Ariba Network, it was as close as anyone else, big, and public, the analysts latched on like leeches. Then market expectations rose, and everyone started watching the stock price, because that’s what Wall Street told everyone the indicator of whether or not you were meeting expectations and being successful was.

And the end result was a massive market crash that wiped out, in Ariba’s case, over 97.5% of their peak market capitalization, led to a temporary revenue loss, and, most likely, stunted their growth for years. Why? All that focus on the stock price, and the marketing and public relations that went around it, shifted focus away from the true value of the offering, which was the platform itself and what it could do for your business, especially if taken to the next level. Imagine where the platform could have been today if all of the money that went into marketing, industry, analyst, and public relations, and all the money that went into patent filings and lawsuits to defend those patents — which could get tossed at any time with a proven claim of prior art or a decision to abandon software patents altogether (like they have done in Europe), had went into research and product development. I’m sure we’d be better off for it.

And if they had stayed private, and were run by a private equity firm interested in steady, profitable growth over the long term, we could be looking at a very different Ariba today. And that’s why private equity players can offer you a lot more value than a public offering. When you have the room to breathe beyond next quarter, real innovation happens.

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