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Five potential responses to a bigger company’s onerous contract demands

Here are a few different responses a small vendor can try when a large customer asks for a seemingly-onerous provision in a contract.

Androcles and the Lion - Henry Justice FordFind the pain

When a large customer makes tough contract demands, it could be because the customer has been burned before. Institutionally, it may still "feel the pain" of a past bad vendor experience. Its response is to roar at other vendors.

The small vendor being roared at can try to find out why the customer is roaring. If it can identify the source of the pain, it might be able to figure out another way to make it better, without undertaking burdensome obligations.

Cap the vendor's financial exposure for the onerous provision

The small vendor can ask the large customer to agree to a dollar cap on the amount of the vendor's financial exposure arising from the onerous provision. If the customer agrees, the onerous provision might look less dangerous than with the prospect of unlimited liability. (This is a variation on the old saying: When in doubt, make it about money.)

Impose time limits

The small vendor might try to make its business risk more manageable by imposing time limits on the onerous contract provisions. For example, if the customer demands an oppressive indemnity, the vendor might counter by asking for a time limit. Or if the customer demands a cap on pricing increases, or a most-favored-customer clause, the vendor could counter with time limits on those as well.

Explain why the onerous provision actually hurts the customer

The vendor can to try to explain to the customer's negotiators why, in the long run, the onerous provision would ultimately cause problems for customer.

Suppose, for example, that the customer demands that it receive post-sale services for free, or at a greatly-reduced price. The vendor could counter that its services-fee revenues are what pay the salaries of its services professionals. If the vendor were to give away its services, that could eventually lead to staff reductions, which would mean that the customer might have to wait longer for service. That, in turn, would hurt the customer's ability to utilize the vendor's products effectively. So in effect, the customer's demand for free services would be akin to its eating the seed corn.

Package the onerous provision as part of a premium offering

If the small vendor plans ahead, it can package the onerous provision as part of a higher-priced premium offering — with the relevant contract language being written in a way the vendor knows it can support. This approach has a huge advantage: The bargaining over whether to give the customer the premium offering is no longer about legal T&Cs: it becomes a negotiation about price. This means the vendor's legal people might not even have to get involved — which often can be crucial when sales people are working hard to close deals before the shot clock runs down on the fiscal quarter.

Another advantage: The vendor may well score points with the customer for anticipating the customer's needs and offering a solution for them. As one customer lawyer once said to me, I told our business people that if your software is as good as your contract, we’re getting a great product. Needless to say, our sales people didn't at all mind getting that 'assist' from inside the customer's own organization.

Maybe the onerous provision is worth the risk

The vendor and its lawyer should assess the actual business risk of agreeing to the customer's request — in the real world it might not be as big a problem as the vendor imagines.

Comments on this entry are closed.

  • randomjohn July 20, 2009, 7:43 pm

    can’t say that I agree with your example on the indemnity… how is the big customer supposed to feel when the vendor won’t accept the third-party risk for its own breaches? sure, as the customer, i can cap your exposure to my losses, but why should i insure you against third-party losses you cause? and if i can still be getting hit with losses from your breaches in perpetuity why shouldn’t you stand behind your behavior in perpetuity? anyway, that’s not your point, but i just wanted to comment on that particular example.

  • DCT July 20, 2009, 8:52 pm

    @randomjohn, on the merits I don’t disagree with your comment — and in fact said something similar myself at the Hacker News site.