Navigating Contracts: A CFO’s Tactical Playbook

In the intricate landscape of contract management, the Chief Financial Officer (CFO) assumes a pivotal role before a contract becomes a subject for signature. In this fast-paced game, the CFO isn’t just a signature; they’re the strategic gatekeeper. In this newsletter, I outline what I usually look at as financial game-changers rather than legal jargon, and the multiple questions and thought processes going on in my mind before clearing any contract.

Commercial Model

What is likely to be the future state of business over the course of the contract period? Will the current commercial model stay relevant? If not, does the contract allow for a change in commercial model within the contract period? If not, then determine at what point the proposed model may cease to be relevant, and offer to adjust the contract period up to that point to trigger renegotiation of the model at that point of time. Revenue share versus fixed fee or both? It’s not a coin toss; it’s a strategic move to stay ahead in the competition. You start with a revenue share model (perhaps, with a small fixed minima) if you are penetrating a mature market, to then pivot fully to fixed fee model when you are at growth stage for a better unit economics. You have the leverage as your counterparty would read there is more to lose by refusing than to gain by accepting.

Pricing

In general, pricing is formulated after considering certain dynamics, and tends to become fairly standardized especially if you follow a transparent pricing strategy. However, in my view, there is always a possibility to price discriminate in a way that enables market creation and optimize revenue realization. And when this possibility exists, and the opportunity it presents is game-changing, you would want to see if this was considered by your pricing team. Do not get dragged into half baked discussion on any transfer pricing risk. When you are an underdog entering an oligopolistic market, you are set to disrupt many things, pricing being one of them.

Duration of Contract

Long-term or quick in-and-out? It’s not just about locking in; it’s about being agile. Short contract duration with a silent renewal nod? A secret weapon for strategic flexibility. You lock in for a long duration only when your whole existence depends on the performance of the other party. You lock in when the contract is blood to your killer product.

Termination

Termination clauses aren’t just paragraphs; they’re financial chess moves. Decides when to play the ‘with cause’ or ‘without cause’ card, weighing risks and gains. Premature termination is not a misstep; it’s a calculated dance with financial implications. Does anybody even negotiate termination clauses? Obviously, nobody enters into a contract to exit. You enter into a contract to perform. However, a well thought exit clause opens you up to numerous possibilities to plan or seek an exit. I remember vividly of a case when a premature exit was a way for both parties to actually continue working together. That being said, you rather spend a few seconds on this. You read your termination clause together with several other clauses including what aspects of the contract would survive post-termination, and especially with clauses like Limitation of Liability. I once saw a very candid termination clause in one of our super-agency contracts that read as follows: “either party may choose to terminate the agreement at their convenience, by giving a 30 day notice to the other party.” I asked for this to be removed from that specific contract because there was far more to gain in staying by force than to exit at will.

Conclusion

So, here’s the thing — often you would swim through the pages in seconds. Yet you’ve got to be surgical in your swim. There is obviously more to consider and this varies between contracts. For example, a share purchase agreement is a whole different canvas. It calls for balancing interests, applying safeguards in a non-standard manner, often involves potential contingencies, not to mention the not-so-usual indemnities. We dwell into this in the next article.