Why Special Agreement Should Be Treated as a Strategic Asset

At some point in time, every organization faces a situation where the template simply will not do. A high-end client wants a more flexible approach. A strategic business partner necessitates exception handling. An emerging opportunity dictates customized obligations. This is the role of the special agreement.

Just imagine the special agreement as an engine, one that produces results impossible to achieve with regular systems. But it also needs constant monitoring, specific skills, and maintenance. Or else the same engine may malfunction at the most inconvenient times.

The problem is not in the agreement itself, but in the lack of transparency and control after its implementation. The special agreement does not exist in terms of law alone. It is a deviation from your organizational structure.

From the C-suite standpoint, the special agreements represent hidden liabilities. They operate beyond regular processes. They create obligations that are unique to themselves. And they introduce additional risk factors, which cannot be completely covered by general contractual laws.

Key Takeaways

• Special agreements involve intentional deviation from normal provisions for creating strategic advantages.
• This results in hidden risks, particularly in cases when there is no monitoring after implementing such agreements.
• Indemnities, pricing arrangements, and agents’ authority represent significant sources of exposure that should be addressed.
• Customization raises operational challenges with each individual provision and exception that is being implemented.
• Absence of monitoring results in what is known as contractual drift, where an exception turns into a rule.
• Contract monitoring plays an important role in preventing any breaches and financial losses.

Three Pillars of Strategic Exposure

Each special agreement involves inherent risks. However, these risks are neither accidental nor random in nature. They always occur in a few specific areas.

Firstly, it is indemnities and guarantees. On the surface, these provisions may seem relatively simple in nature. One party agrees to provide compensation for certain losses on behalf of another party. In actual practice, indemnity clauses act as shields against liabilities.

If poorly drafted, indemnity clauses may lead to unlimited exposure. Just one provision related to actions of third parties may turn into an exposure worth several million dollars.

The second pillar is the principal-agent dilemma. Organizations typically require agents, distributors, or intermediaries to fulfill their agreements. The challenge stems from the power provided to these agents.

The acts performed by the agent can be considered binding for the organization regardless of the lack of executive approval. Thus, they represent what I refer to as “bound acts.” These are commitments made at the operational level but having executive implications.

Thirdly, there are special pricing policies that are used to attract new customers. Such policies can include volume discounts, special rates, or incentive prices depending on certain criteria.

While this approach is effective in attracting new customers, it introduces the challenge of regulatory compliance. Any deviation from the regular pricing policy can lead to investigations of antitrust and competition laws.

The Hidden Cost of Complexity

The actual cost of signing a special agreement does not appear in any financial report. Rather, it resides in operations, procedures, and decision-making deficiencies.

One of the greatest dangers of such contracts is the concept of contractual drift. Contractual drift refers to the reuse of special clauses without reviewing them in subsequent contracts.

The legal team loses sight of what should be standard and what should not. The risk profile changes for the organization, even if it doesn't realize it. What used to be a managed exception has become an unmanageable norm.

Then, there's what I call the operational tax. Each new and unique term means additional effort in terms of execution. The finance team has to deal with custom payment terms. The operations team has to handle custom delivery terms.

Maintaining Custom Agreements in Alignment through Their Lifecycle

Organizations spend a lot of time and effort developing their agreements. They negotiate, approve, and have them signed. Once that's done, they move on.

A special agreement demands consistent attention. The enforceability of the agreement is one thing. Tracking the performance of the agreement can make or break the deal.

Another crucial factor is determining what a breach entails. Many contractual agreements feature vague commitments that lack quantifiable parameters. In the absence of quantifiable KPIs, non-compliance can be hard to determine.

Companies should formulate performance criteria that are linked to the contract in question. This could relate to deadlines for service delivery, service levels, and specific monetary amounts.

Finally, companies should have an escape clause in place. Not all contracts will always prove profitable. The market environment changes. The business focus evolves.

Without established exit options, companies will be forced to continue with detrimental agreements. This places undue financial and operational strain on companies.

What is the Solution to Data Silos in Contracts

It is difficult to effectively manage a special contract. Contrary to popular belief, managing a special contract does not just involve crafting and signing a document. It involves much more than that.

The real difficulty does not lie in understanding the terms of the contract. The real difficulty lies in ensuring the terms are adhered to at all times.

In many companies, each team has its own responsibility. The legal team writes the agreement. Finance handles payments. Delivery is done by the operations team. These teams operate independently and use their own tools.

With time, all these loopholes become vulnerabilities. An agreement about prices may not be kept. A penalty clause can be overlooked. The renewal period can expire unattended. None of these is caused by negligence; they simply are a result of miscommunication between parties.

In order to make sure that a special agreement is executed properly, a company needs to change its focus from documents to processes. Every clause should be actionable. Every responsibility should have an owner. Otherwise, no matter how perfect the agreement seems, it won’t serve its purpose.

One more problem that occurs frequently relates to a lack of insight. Some departments track everything via paper reports, and some even resort to spreadsheets. At this point, by the time an issue is detected, it’s already too late.

A more efficient strategy would include creating an elaborate framework for executing agreements. In this regard, workflows should be determined, triggers set, and checkpoints identified at every step of the process. Moreover, everyone working on the agreement should share a unified source of truth.

In this respect, consistency becomes extremely important. As processes become standardized, one can manage multiple agreements with ease while eliminating unnecessary complexity.

This way, there would be fewer mistakes and increased efficiency. Finally, leadership would be able to make informed decisions due to the comprehensive data provided to them.

Technological solutions would help at this point. However, technology should complement the existing process rather than replace it. Businesses operating in their own ecosystem could implement technological upgrades seamlessly.

This is where the utilization of Microsoft 365 makes perfect sense. There is no need to create a new ecosystem altogether. Organizations could integrate their existing tools with services such as SharePoint, Microsoft Teams, and Power Automate to make every special agreement trackable.

Thus, instead of merely meeting the requirements of compliance, an organization could manage its agreements efficiently and leverage data to boost business performance.

Achieving Long-term Value through Special Agreements

A special agreement cannot and should not be regarded as something that you need to be afraid of. On the contrary, special agreements should be recognized as an excellent opportunity for unlocking potential opportunities.

Such agreements provide additional flexibility when it comes to supply chains. These agreements facilitate the process of market expansion and ensure your organization can adapt quickly to the specific situation.

Nevertheless, one has to be careful while negotiating such agreements. In case of inefficient management, the special agreement can become the source of various risks and costs for the company.

In order to prevent this from happening, it is necessary to focus not just on the clause but on the entire agreement and its place in your strategy.

By doing so, you will get access to additional information regarding the performance and risks of this agreement. The agreement will no longer pose risks but will become a valuable asset.

That's why it is crucial to adopt an advanced contract lifecycle management system.

Dock 365, based on Microsoft 365, provides efficient tools for managing every single agreement. With Dock 365, it is possible to bring every aspect of contract management under control.

Book a demo with Dock 365 and see how you can turn complexity into a competitive advantage.

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