By Tiffany Kemp
Part of the challenge of running a business is being able to ensure your staff always act in the company’s best interests. Of course, we have various management tools at our disposal to help achieve this — quality standards and processes to increase consistency of results, commission structures to motivate sales teams to sell, and appraisal and review mechanisms to provide performance feedback to our employees. These all help us to monitor and control ‘visible performance’ — i.e. the actions of our staff that we can see, either directly or through their results.
But in many companies, employees (and even Directors) routinely enter into commitments that are not obvious or visible to the CEO — and may remain invisible for years until a problem occurs, when they can rear up and cause untold damage to the company, its reputation and its financial situation.
What are these sleeping dragons? They are manifest in every commercial relationship that your company has with third parties — every client, every partner and every supplier. They are the contracts that your company enters into, either explicitly (i.e. written down) or implicitly (through its actions). And while good contracts can add value to, and create stability in your business, bad ones can increase risk, create liabilities and reduce your company’s worth.
Firms across many industry sectors without even being aware of it, have:
1. agreed to assign all intellectual property rights in their software products to their client, so they cannot make future sales without breaching the client’s rights;
2. accepted indemnities that, if a problem arose, could result in their company being put into receivership;
3. put themselves at the mercy of their client with regard to payment for work done, on the basis of an unspecified ‘acceptance’ process;
4. agreed to do work for a share of profits where ‘profit’ is undefined, resulting in the other party being paid in full for their efforts before any ‘profit’ is calculated and leaving little or nothing in the pot to be shared out;
5. built a business on the basis of a ‘relationship’ that has no legal substance and could fall apart on the whim of one individual.
It’s easy to fall into these traps. It usually happens quite unintentionally, with even competent Directors putting the business at risk in the course of ‘doing deals’.
So what can you do to manage these risks and tame the sleeping dragons? How can you stop your business value being compromised by unseen liabilities, or hamstrung by awkward or non-performing partners and suppliers?
Follow this checklist of essential steps to establishing sound commercial relationships:
1. Make your staff and directors aware that each third party commercial relationship carries risks, liabilities and opportunities;
2. Ensure that before entering into any such relationship, they determine what your company needs from the relationship, and what risks and issues it might create for you;
3. Document all commercial relationships clearly and ensure that all parties (including the Board where appropriate) have the opportunity to review, approve and comment on the results; and
4. When you are happy that the opportunities, risks and issues have been properly addressed and agreed, have the agreement put into a legally binding contract by a professional with appropriate commercial and legal knowledge and understanding of your business.
It’s time to bring those commercial relationships kicking and screaming into the daylight, and see how they stand up to scrutiny. Because as the CEO, the buck stops with you — whether you signed the contract or not.
Tiffany Kemp is the Managing Director of Devant