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  • Writer's pictureRobert Kalinoski


The Effective Use of Business Contracts

The seventh in a series of articles on contract management.

Would you start a business if you weren’t sure it could be profitable? If you are already in business, would you continue if you seriously doubted your ability to make a profit? As a business person, presumably you believe you will be profitable. Indeed, you must believe it. But can you guarantee it? Or must you proceed on a wing and a prayer?

A million things could happen that would prevent you from being profitable. After all, Murphy's Law exists: "If something can go wrong, it will." And remember, Murphy was an optimist.

Here are just a few of the things that can torpedo the profitability of your business:

· Natural disasters, such as fires and floods.

· Man-made disruptions, such as strikes and supply shortages.

· Health problems, for you or your employees.

· Changes in business conditions, either in the business environment at large or in your specific situation.

· Competition, especially when your competitors are willing to charge an unrealistically low price in order to seize market share.

· Inability of your customers to pay you.

· Unreasonable or unrealistic customer expectations.

· Poor performance on your part, due to lack of expertise, lack of internal efficiency, or lack of adequate time to perform up to quality standards.

Trying to control all these factors, in order to insure profitability, may seem hopeless. Then too, even if you could gain control of all these factors, your control would be short lived, since the business world is ever changing, and it’s changing at an accelerating rate. So the question remains: Can you control enough of the relevant factors to guarantee profitability?

Charting a course to profitability involves three major aspects: identifying the obstacles, assessing and minimizing the risks of those factors you can't control, and actively managing those you can. This requires a clear-headed analysis of your business environment and a realistic assessment of your own capabilities.

You can't really control such things as natural disasters or man-made disruptions. Nor can you exert much control over health problems or changes in business conditions. For these uncontrollable factors, you can only assess the degree of risk and procure adequate insurance to enable you to operate even if these obstacles arise. This is a topic unto itself, for a future article.

Changes in business conditions and the actions of your competitors are also largely beyond your control. You must constantly be aware of how your business is positioned in the marketplace and be ready to take the steps necessary to protect your position. This is a matter of business strategy, which is also a topic unto itself.

The remaining factors, however, are within your power to control and can be the key to your profitability. These factors are your customers' expectations and your performance. If you can manage your customers' expectations, to make sure they are realistic, and if your performance can meet those expectations, you can go a very long way toward assuring that you will be profitable. This assumes that you have identified a bona fide customer need and are able to fill it with a quality product or service within the time required by the customer. This also assumes that you have the necessary experience and expertise to perform adequately in the marketplace.

The way to match your customers' needs and expectations with your performance is through your contract. Ah, you say you don't have a contract and don't need one, that you proceed on trust or on an oral promise, not a written contract. This attitude, however, reflects an overly simplistic and shortsighted view of the role and function of contracts. If you're in business, you already have a contract with your clients or customers, even if it's unwritten. When you create customer expectations and promise to fulfill them, and when your customers then rely on you to meet their needs, you have an enforceable contract, even if it is oral (unless performance cannot be completed within one year). The question is whether that contract helps or hinders your success.

To be effective, your contract must be coordinated with the promises made by your sales people. Your sales proposals, whether written or oral, must not promise more than you are willing or able to deliver. Conversely, your contract must accurately reflect what you are committed to deliver. Your contract should be an affirmation of the promises made in your company’s proposal, not a flight from responsibility, where you retract or limit the promises made in your proposal. This means that your sales staff, your proposal writers, your contract writers, and your operations personnel must all be communicating with each other.

If your contract takes back or significantly limits what was promised in the proposal, your credibility is greatly diminished and your entire business relationship with the client may be destroyed. If, however, your proposals are realistic and your contracts acknowledge the promises made in them, your proposals and contracts will work together to increase your credibility with the client and establish a sound relationship, one where you can perform to your client’s expectations and earn the profit you envisioned.

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