Tag Archives: Contract

What Impact Will Rising Interest Rates Have on Business?

Situation: A CEO notes that the national debt has nearly doubled over the last 8 years and the Fed is talking about raising interest rates. It’s not clear what impact the debt, or rising interest rates will have. Has this impacted your business and how are you coping? What impact will rising interest rates have on business?

Advice from the CEOs:

  • Impact on business and customers.
    • The prospect of either rising interest rates or taxes increases uncertainty – customers are taking longer to make purchase, expansion and other decisions.
    • Companies are not spending the cash that they have out of concern over possible future expenses or the possibility of a downturn. Large companies have trillions of dollars of cash on hand. Some of this is held off-shore because of the tax consequences of repatriating the funds.
    • Lack of consumer demand holds back investment in production expansion.
    • Feeling of loss of control.
    • More concentration of wealth in fewer hands.
  • Other impacts
    • More people, old and young, are opting out of the business economy.
  • What are you doing to cope?
    • More involved in collections to keep this under control.
    • Delayed payments from big customers are part of the problem – conservative financial management.
    • Manage liquidity and cash – cash is king!
    • Adjust lifestyle and delay purchases – for example buy smaller cars.
    • Scrutinize contract terms – especially AR.
    • Scrutinize our business model. For example look at subscription models or Great Game of Business models.
    • Utilize those who are normally unemployable but trainable for repetitive task jobs. They work hard and produce good work.

How Do You Set Up an Office in China? Seven Suggestions

Situation: A company has an opportunity to build an office in China. Their principal objective is to reduce their cost of providing services. A partner company has offered them space in its existing office in China. What is your experience working with Chinese culture? How do you set up an office in China?

Advice from the CEOs:

  • Hire someone in your US office with an engineering background who is fluent both in Mandarin and in the subtleties of Chinese language and culture. Fluency in Chinese language and culture is particularly critical when you are dealing with difficult process issues.
    • Investigate local organizations such as the Silicon Valley Chinese Engineers Association. Through these organizations you may find candidates for this role who are also excellent engineers and additions to your team.
  • Employee loyalty issues in China will be more challenging than in the US. Chinese employees want to build their resumes as quickly as possible and perceive that job-hopping will facilitate this, just as was the case during the dot.com boom in Silicon Valley.
  • Offer a significant carrot to Chinese employees – after X years of work for us in China, you get Y months of work, at our expense, in our US office. This is a much sought-after experience for Chinese employees.
    • Be prepared to deal with departure soon after return to China, or employees declining to return to China at the end of their US stint.
  • Build a stronger process documentation system than you need in the US to assure both that work is done to your standards, and so that you can easily replace talent lost to turnover.
  • Have a recruiting program based in China to fill your personnel needs.
  • You will experience a culture clash when it comes to the value placed on equity and in understanding the meaning of a contract. For China in its current state of development, neither term is well-established by US standards.
  • Time tracking is not clean cut in China and vacation time needs differ. An example is the month of February for Chinese New Year.

How Do You Respond to Delivery Delay Requests? Four Points

Situation: A company negotiated a contract with a customer giving them a significant price break in exchange for a large committed order with extended delivery. The customer has now come back and requests additional time for delivery and payment on the order. The company has already procured extra material to produce the large order. How do you respond to requests for delivery delays?

Advice from the CEOs:

  • Response will depend on the company’s history with customer. In the case of a long term customer who pays bills it is best to work with them. Explore solutions to meet them half-way.
    • Ask for a new commitment to take delivery by a date certain. Request consideration in return. For example, request partial payment up-front to help cover the cost of managing the delivery delay.
    • Keep the conversation going. Don’t get to point where you alienate a good customer.
  • If the customer is newer with less history but good potential for future growth, also respond flexibly but ask for additional consideration in good faith to cover your additional costs. As in the case above, request partial upfront payment to cover carrying costs – maybe a larger payment than for an established customer.
  • If the customer has been difficult in the past, or has been late with payments then the situation is different. There is no assurance that the customer isn’t just gaming the situation. Because the company has already committed resources to deliver the large order, demand an adjustment on price and terms in exchange for the delivery delay.
  • Whatever the history and situation, it is important to emphasize that you want to work with the customer.

Is It Time To Change Horses? Four Suggestions

Situation: A company has a business relationship with another firm. The relationship involves co-development of technology as well as marketing and other support. Portions of the relationship have worked, however, the other firm has not kept its part of the bargain in terms of marketing and support promised. What is the best way to approach the other firm to resolve this situation? Is it time to change horses?

Advice from the CEOs:

  • Have you have clearly communicated to the firm both what you are pleased with about the relationship as well as your level of dissatisfaction regarding lack of marketing and other support promise? To whom has this been communicated? Are you sure that your message has gone all of the way to the top?
  • Do a SWOT (strengths, weaknesses, opportunities, threats) analysis on the current arrangement and alternatives available to you to support your trade-off analysis before taking action.
  • Present a marketing option that will address the situation and ask whether the firm will support it as previously agreed.
    • If they say yes, have a contract ready for them to sign.
    • Negotiate other key items at same time.
    • Be sure to involve all parties on your side in the preparation, including the individual(s) who made the introductions that led to the relationship. Additional heads can bring more insight into the options that the firm and relationship offers. Bring the key parties involved to the negotiation, and be sure to prep them in advance.
  • Business relationships should be based on clearly stated deliverables and timelines. If deliverables are missed then it is time to make a business decision – either repair the situation or part ways.

How Do You Optimize Your Supply Chain? Six Suggestions

Situation: A company wants to improve the efficiency of its supply chain. The company produces a custom product, for which there are few qualified materials suppliers. From the CEO’s standpoint, this presents challenges, particularly when there are delays in materials and parts supply. How do you optimize your supply chain?

Advice from the CEOs:

  • In supplier negotiations, know your BATNA – Best Alternative To No Agreement. Put this in dollars and cents so that you know your negotiating limits.
  • A recessionary or slow growth environment is the perfect time to negotiate! This gives you the opportunity to work with an outstanding order on terms that either your supplier or customer needs. For example, if you are experiencing delays in shipments from your supplier, offer a purchase commitment of “x” terms for “y” years at “z” price in exchange for higher priority on their production schedule. You can work the same way with your customers.
  • If you supply a custom product, especially on a sole-source basis, tie yourself to the hip of the engineering organizations of both your supplier and your customer. This gives you leverage when either the purchasing department or a contract manufacturer intermediary tries to push you on price and terms.
  • Be a squeaky wheel on shipments or payments due – but not in an irritating way with too much pressure.
  • Europe Union RoHS and REACH regulations make it imperative that manufacturers and service companies be aware of hazardous substances in products that they design and manufacture. The list of hazardous substances being monitored and/or restricted is expected to grow to 3,000 in coming years.
  • Contracts serve two purposes: a legal tool, and a way to drive behavior. They are an opportunity to assure that both parties are on the same page and under the best circumstances serve as process documents.

Special thanks to Bijan Dastmalchi of Symphony Consulting for his contribution to this discussion.

Where Should a Company Focus – People or Cash? Four Thoughts

Situation: A small company sells consumables as its primary source of revenue and profit, and produces equipment associated with these consumables. Their challenge is that designing and producing equipment is beyond their financial capacity. They have a small, loyal staff engaged in equipment production. This is a critical trade-off that must be resolved. Where should the company focus – people or cash?

Advice from the CEOs:

  • This product/profit combination is common. HP sells printers and ink, as well as other products, but ink cartridges have long been their primary source of corporate profit. The question is how to produce the associated equipment at the lowest cost?
  • Given the shortage of financial resources, why not asks a company with expertise in equipment to build the equipment on a contract basis?
    • Offer the outsource company the designs and expertise to support the project. That company may even hire your employees who have developed expertise in this area.
    • In return for providing design and guidance, ask the contract company for a percentage of the revenue or profit on equipment that they sell. This relieves you of the payroll and cash obligations for the equipment, and provides you with a modest income stream from equipment sales.
  • There is an obvious question of how the small company retains its intellectual property position. Is it possible to look at critical sub-assemblies and retain the expertise within the smaller company to complete and install some of these?
    • If so, this will boost annual revenue. The contract partner completes all but the most critical pieces, and the small company finishes the product with its technology.
  • The small company, through its sales and marketing efforts, should maintain control of leads and sales of both equipment and consumables.

How Do You Manage Customer Change Orders? Three Suggestions

Situation: A mid-sized company has taken over management of the supply chains for several large customers. The products that the company manufactures have long lead times both for sourcing materials and manufacturing customer orders. Sometimes customers either ask for additional production on an existing order in process, or ask for deliveries to be spread beyond contracted timelines. Either situation has a significant impact on the cost of producing the order and company profitability. How do you manage customer change orders?

Advice from the CEOs:

  • The issue is one of managing contracts and customer expectations. Because this is hurting the company, prime the customers now that things will need to change in the future. Depending upon the level of comfort the response can be reactive or proactive.
  • A proactive response: because this happens with some frequency, establish a change order schedule and share this with the customers. Your message will be that you are happy to accommodate changes in orders, but you need to recover the cost of these changes in order to be able to continue supplying the customer. Include the change order schedule in future customer purchase contracts. This may cause them to have second thoughts about requesting changes in orders.
  • A reactive response: the next time a customer makes these demands the response can be: “We’ll take care of you this time but when we draft our next contract we have to adjust the terms of the contract so that it is a win-win.”
  • The appropriate response depends on value of each customer’s business to the company – both revenue and profit – and your confidence in the relationship with the customer.

How Do You Optimize Supply Agreements? Seven Guidelines

Situation: A company wants to add off-shore manufactures to its supply chain. This is a new experience and the CEO seeks guidance on how to negotiate supply agreements. They want win-win agreements with their new suppliers. How do you optimize supply agreements?

Advice from the CEOs:

  • No supplier relationship is risk-free, especially if you are a small company. Be sure to cover ownership of new IP developed during the relationship. For example, assure that the supplier adds no new developments without communicating these to you in writing. You may want to fund new developments selectively to assure protection of your IP. This is essential if you need to switch or add suppliers rapidly to maintain adequate supply.
  • A service agreement is not always about cost. It’s about deliverables, and quid pro quo is important.
  • Manage your key supplier relationships as diligently as you manage your key client relationships. They are equally critical.
  • In a contract negotiation between supplier and OEM or customer, both sides need to clarify customer needs and supplier capabilities. The greater the transparency on expectations, deliverables, and contingencies, the better the agreement and contract.
  • In negotiating an agreement with a Chinese company, make the enforcement jurisdiction either Hong Kong or Macao. Why? So that courts can enforce terms of the agreement on the Chinese party in the case of a dispute.
  • Post-termination obligations are a key to any negotiation – you want this clarified in advance.
  • Contracts serve two purposes: a legal tool, and a way to drive behavior. They provide an opportunity to assure that both parties are on the same page and, under the best circumstances, serve as process documents.

Special thanks to Bijan Dastmalchi of Symphony Consulting for his contribution to this discussion.

How Do You Negotiate Milestone Contracts? Three Suggestions

Situation:  A company’s contracts are based on milestones versus time and materials. This is common for their industry.  However, end products are poorly defined at project outset and product requirements frequently evolve and change, making milestones squishy. How do you negotiate milestone contracts and payment schedules?

Advice from the CEOs:

  • In addition to payment schedule, there are four elements to a project negotiation – specifications, schedule, project flow, and budget. Tell the client that to hit their budget target, they need to give you control of any two of the other three factors. This means that if they want to specify budget and schedule, then they have to yield you control of the specs and project flow. Any change to these means that they have to be willing to change budget and/or delivery date. Finally, to keep the project going on a timely basis, they must make milestone payments on time and on schedule.
  • Try to transform the project, as much as possible, to time and materials. Here’s your talk line:
    • To give you 100 hours of effort on a fixed bid basis, we have to budget 110. Time and materials, in the long run is less expensive because you only pay for what we need to deliver your product.
    • Your credibility to deliver on a time and materials basis will be based on past performance and the relationships that you have developed with your clients.
  • Milestone contracts are especially difficult in low margin industries because of project variability. One solution is to bid 130 hours cost for 100 hours work. The challenge is that this looks uncompetitive, especially compared with offshore resources. Therefore, an option is to develop offshore capability so that you can deliver your projects using a variety of resources with variable costs. Price everything based on domestic prices, but use offshore resources to improve your margins and your ability to cover project overruns without killing your profits.

What’s the Best Way to Sell a Domain Name? Five Suggestions

Situation: A company has a domain name that they no longer use. They have been approached by a domain reseller that wants rights to sell the name for a percentage of the sale price. The reseller is talking big money for the name. What are the best options for selling a domain name?

Advice from the CEOs:

  • The offer may look interesting, but you want to compare it with other options. These include Godaddy.com or buydomains.com. Compare both the price for selling the name and the estimates of what the domain name is worth. Look at how each would market the name, and their record for selling names. Compare their responses with the offer from the reseller that contacted you.
  • Get an appraisal on the name. Valuate.com offers a free tool to appraise a domain name, or you can look at GoDaddy for assistance in valuing your domain name under their Support section.
  • Have a contract attorney look at the reseller’s contract for hidden traps.
  • Get references from this reseller and check them out before signing anything.
  • If you move forward, make sure that you choose the escrow company. One CEO recommends Escrow.com for domain name sales.