HOW-TO GUIDE

Reduce Negotiation Rates on Your Contracts by 43%

Learn how to spend less time negotiating—without exposing your business to unnecessary risk—with best practices from Ironclad's legal team.

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We’re all about reducing friction in the contracting process. That’s why we closely track our “redline rate,” the percentage of our agreements that have some negotiated change from our standard templates, and strive to reduce it.

Michael Ohta, Legal Counsel at Ironclad

Contract negotiation. It’s a key function of any in-house legal department, but for many it can also feel like bailing out a constantly leaking boat—a demanding and stressful distraction from getting where you need to go. Everyone would like to spend less time negotiating their contract templates if they could do it without exposing their business to unreasonable risk.

 At Ironclad, we’re all about reducing friction in the contracting process. That’s why we closely track our “redline rate,” the percentage of our agreements that have some negotiated change from our standard templates, and strive to reduce it.

 This piece outlines our approach and ideas for reducing redline rates, which have allowed us to reduce negotiation on our standard customer agreement by 43% year-over-year. While most of the discussion here is drawn from our experience with software-as-a-service sales agreements, these concepts are applicable to any outbound contract types.

REDLINE RATE

The percentage of agreements that have some negotiated change from your standard template

The Template

The most basic step you can take to reduce redline rates is using a template agreement that is agreeable to your counterparty. Some parties take the approach of drafting their form contracts to be heavily in their own favor, thinking that will leave room for negotiation so the contract can end up somewhere in the middle. We would rather avoid negotiation altogether by starting with a template that is middle-of-the-road, or even customer-friendly.

 We find that starting with a friendly contract signals to counterparties that you are looking for a partnership rather than just a transaction. We regularly receive compliments from prospective customers on the fairness of our sales agreement, which helps start our business relationship off on the right foot. Starting in the middle also reduces your counterparty’s appetite for negotiation. When reviewers see that our agreement is friendly on the important points, they are less likely to push on minor points.  Conversely, if a reviewer sees even minor parts of a contract that are unfair, they will view the whole piece more skeptically, leading to more redlines.

Our comments are minor because your template is unusually well drafted, fair, and reasonable. Kudos to your legal team.

-Ironclad Customer

 

Tips for making your template contract more acceptable:

You likely already have a template agreement that you are comfortable with. So how do you go about it making it more counterparty-friendly? Here’s a step-by-step guide:

  1. Identify the most frequently negotiated points first.

You’ll probably have some idea of this simply through repeat negotiations, but collecting data on even a small subset of contracts will help crystallize the issues and may produce surprising results. In the past, we have tracked redline rate by specific section of our contracts, and then prioritized changing the ones that were most frequently problematic for customers. Ironclad can help track points like these through contract metadata.

  1. Re-examine your own risk tolerance and consider alternate language.

 Once you have a list of friction points, take the opportunity to look at them with fresh eyes. Every organization’s risk tolerance for different issues changes over time. You may realize there are certain points you are always comfortable conceding, and you can cut to the chase by building those into your template. Even changing a single problematic word that is being picked up by reviewers can help reduce negotiation without increasing business risk. When we did this exercise, we were happy to be able to completely remove some contentious language because changes in our business had made it irrelevant. 

  1. Investigate what the “market” is doing.

 How acceptable a contract is to you and your counterparty will be informed by what you’re seeing in similar contracts. While there’s an unfortunate lack of market data on terms, one helpful source of intel is your own vendor agreements. We have used an intern to survey our vendor agreements and track key legal terms. That can help to level-set on what is “market” and what you and your counterparty should find to be reasonable and acceptable. Data also allows you to negotiate confidently when you know your position is standard with similar companies, being able to say, for example, “This is not off-market. Based on our research, 60+% of SaaS agreements limit liability to past-12-months payments.” 

  1. Refine over time.

 Continue to refine your templates over time to smooth out smaller and smaller sticking points. We set a quarterly rhythm for updating our templates and workflows, but can always make immediate changes if needed. The Ironclad platform makes it easy to immediately implement any template changes in all future contracts.

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The Contracting Process

Once you have a solid template, the second piece to focus on is your contracting process: how is your contract actually used within your business, how is it presented to the counterparty, how is it understood by internal stakeholders, etc.?

Tips for building a contracting process that discourages redlines:

  1. Put the agreement online.

 One of the most effective ways to reduce negotiation is simply defaulting to an online version of your contract. For example, our Order Forms reference a URL with our Enterprise Services Agreement rather than an attached document. Based on our data, switching to an online agreement alone resulted in a 16% decrease in redlines. Putting terms online reinforces the concept that they are standard and adds a bit of a barrier to making edits. 

With Ironclad’s terms management features, we’ve been able to seamlessly integrate this concept into our sales process. Terms are hosted on an online legal center and controlled directly by the legal team, and containing an immutable record of all historical versions of terms. Importantly, business users can smoothly transition from online to negotiated agreements, reducing the need for manual legal input. With one click, a user can automatically generate a Word version of the desired document, change the document references appropriately in related documents, update the contract’s metadata to track redline rate, and even loop in the right approvers.

  1. Institute a “no negotiation” threshold.

 This involves setting (and publicizing) a threshold, such as a dollar value for sales contracts, under which the legal team won’t accept negotiations. It should be done collaboratively with business teams to ensure interested stakeholders agree with the trade-offs involved. If you’ve followed the steps above to refine a reasonable and easy-to-accept contract template over time, this process will be much easier.  Through instituting a dollar threshold on our sales contracts, our redline rate under the threshold decreased by 89% year-over-year, with no loss of deals. We’ve found this approach to be popular with our sales team as it gives them a very firm foundation to push back on redlines. The threshold can also be moved up over time as your company’s risk calculus changes.

Through instituting a dollar threshold on our sales contracts, our redline rate under the threshold decreased by 89% year-over-year, with no loss of deals.

  1. Teach your business users why and how they should avoid redlines.

 Often the individuals who own counterparty relationships and are best positioned to avoid contract negotiation aren’t members of the legal team, and don’t realize the value of sticking to a template agreement. As a legal team, it can be hugely beneficial to expressly explain this value to them. Avoiding redlines helps get their deals done faster, protects them from deal risk, and frees up legal resources for more important issues. For example, we were able to present to our sales team that, in one period, accepting counterparty redlines added an average of 3.5 days to a sales cycle. At Ironclad we like to say “When legal moves fast, business moves fast,” and legal moves fastest when the right guardrails are in place so it doesn’t need to be involved at all. We publicize an internal “Service Level Agreement” of contract review turnaround times to set expectations for how long they may need to wait for redline review. We also explain why our template agreement is fair and standard, showing the compliments we receive from customers. Since better educating our salesforce on the value of avoiding redlines, we have seen salespeople think of contract negotiation more as a commercial term that they can help to circumvent in order to speed up and de-risk closing, rather than an inevitable part of the process. We regularly appear in front of our sales team to re-emphasize these points. 

We were able to present to our sales team that, in one period, accepting counterparty redlines added an average of 3.5 days to a sales cycle.

  1. Create a cover letter for your agreements.

 While providing training is important, it can also be helpful to equip business users with a template email or cover letter that can be deployed when a counterparty asks to negotiate. Working with our sales team, we prepared a template cover email that gives context on our sales agreement and what it contains. The note is intended to be transparent—summarizing key points in the contract, our reasoning for including what we did, and why we prefer to avoid negotiation if possible. We have found that sales teams enjoy having this tool in the tool box. It can also serve as something of a script for a verbal talk track on the contract.   

  1. Turn frequently negotiated legal points into business issues.

 If there are certain frequently negotiated points in your agreement that have to be addressed, consider whether they should be removed from the legal terms and surfaced as commercial issues. For example, instead of negotiating language around term length or auto-renewal in a customer contract, consider including a checkbox for the salesperson to indicate the customer’s desired term length and whether the contract will auto-renew. While the issue will still need to be addressed, it will be included in general commercial discussions and won’t need continuous legal input.

We hope that these tips will help you to reduce negotiation on your standard contracts, freeing up bandwidth for more strategic and valuable work.

Ready to see the latest innovation in contract negotiation?

Join us at State of Digital Contacting to see how Ironclad’s latest feature release makes it easier to collaborate with your counterparties, get to agreement faster, and drive the best possible outcome for your business.

 

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