03035 Contracts: The Letter of the Law

When that lucky time comes where your company is drawing up a contract with a soon-to-be customer, the whole team is in a state of heightened anxiety. People are worried, tempers flare. What if we botch this sale? Are we being too picky? Are we betting the farm?

If you’re lucky, as Product Manager you have had the opportunity to carefully craft a master contract ages ago that presents the agreement neatly and positively, and saves your company’s assets.

But in the real world, you may find that you’re called upon to make strategic decisions that drive the master contract terms and conditions only after the next big customer has requested the contract. Even if you already have a contract template, there’s always something new coming into the product that needs your attention.

The wrong contract can lead to unprofitable deals that lose money with each additional order it covers. This is serious business.

Read on for some useful tips to help the team navigate that part of the sales cycle where you are helping draft a very special letter, a “Letter of the Law.”


If you take a look at the tips below, you can see how some of the decisions about terms and conditions are not just the purview of the folks in Finance. The Product Manager needs to ensure that the contract matches the strategy for competitive marketing and selling of the product.

Take a Deep Breath And Relax

First, it’s important to understand the psychology at work when a contract is being negotiated. You have reached that point in the sales cycle where focus on risk is at its highest level. The buyer has made his choice, and is now worried that it may be the wrong one, so he worries.

Meanwhile, the salesman is petrified that the slightest little misstep is going to send months of work down the tube.

What you need to do at this point is take a step back and realize that everyone is likely to have hair-trigger reactions to small events. It helps you relax a little if you understand that this is natural and all part of the sale.

That’s Not a Threat, That’s a Promise

If documents were animals, marketing brochures would be cute, cuddly little bears. And contracts would be porcupines. Mean ones. Unfortunately, that’s the impression you get.

Legal language is intimidating, obtuse, and even hurts the feelings of the sensitive ones among us. That’s because it is designed to be clear and precise (not to mention that it’s handed down through hidebound tradition from an era whose language we barely understand anymore).

Don’t worry. These long, precise, but repetitive clauses are designed to be promises, not threats. No need to agonize over making the wording sound nicer, unless it’s unclear.

The Contract Admin Is Not Out to Get You

The job of a contract administrator is to make sure that promises aren’t made in the contract that cannot be clearly explained in a court of law. Because a contract administrator who has been around awhile may have vivid memories of when she (or he) had to get up and testify in court, and explain what the contract meant.

It’s the administrator’s job to be picky. It’s the salesman’s job to smooth things over afterward. It the Product Manager’s job to make sure that the contract terms are easier to sell to the customer.

Anybody Recognize That Revenue?

Talk with the Finance team to understand the rules for revenue recognition. These are important, because it’s a shame if you sign a contract for a heap of money, yet you can only tell people you made that money 18 months from now. Yes, it can happen.

Revenue can be recognized when your contractual obligations are met. Those obligations follow very different timeframes for standard product versus customizations or services packaged with that product. For standard product, you have met your obligation when you have shipped it and it has been accepted (as soon as a month after signing the contract). For services, you have met your obligation when you have delivered them and they have been accepted (could be over a year from now). Therefore, you may want to have two separately signed agreements for standard code, on the one hand, and custom code and services on the other.

Guaranteed Confusion

Most contracts have a warranty clause, 90 days, for example. But it can be really tough to specify just what you are guaranteeing for services or customizations. If the customer requests changes to the code that make the software run too slowly, are you guaranteeing the same performance as in your standard code? That could be implied, especially if customizations and standard code are in the same signed document. Be clear what you are and aren’t guaranteeing for services.

Promising the Moon

Promise the moon in a contract, and you owe it. Be aware that committing to too much in the contract can hobble your company for years to come. It doesn’t take large changes in fees and charges to make a contract unprofitable over time.

A Beautifully Wrapped Package

As Product Manager, your goal for the contract is to have a presentation that fits with the product strategy (services just barely cover cost, and the license revenue is where we have the margin. Or just the opposite). If certain services are critical to acceptable ROI on the product, make it very difficult for them to be cut out of the contract.

You want the standard contract to present all the components of the product as a whole, in a nice, neat bundle.

Cards In the Hip Pocket

Most successful negotiations, including the feel-good, win/win kind, require give and take from both parties. So sprinkle the standard contract with a few terms that you’ll be happy to give in on during the negotiations. For example, a clause committing the customer to hosting so many reference visits a year. And one granting permission to use the customer’s logo in your company presentations. And one committing to approving a user story that specifies the customer’s name.

Those things, while nice to have, are there so that you can give them away in order to preserve the more important clauses.

Better Luck Next Time

The main goal for any given contract negotiation is to sign a contract that is acceptable for this customer at this time. So it’s bound to have its quirks and custom clauses. Don’t dig your heels in when it could jeopardize the sale. But take away ideas from the just-signed contract to change in the standard terms in the new master version, for next time.

— Jacques Murphy, Product Management Challenges


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