contract negotiation terms

How do we assess less tangible elements of a deal?

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The tangible financial risks of any contract or claim must be assessed in every instance but, in a similar fashion, the assessment of intangible risks surrounding reputation, good will and future relationships are equally significant and thorough assessments should be undertaken when assessing potential deals, settling claims and making key business decisions.

The COVID-19 pandemic has infiltrated the business world with a sense of volatility, most certainly accelerating company collaboration and greater need for alignment, however, in some instances, the uncertainty has cultivated litigious environments making it more important than ever for organisations to improve their commercial and contracting practices. Relationships can become more intense as a result of additional pressures and concerns and old habits must be adapted for organisations to successfully develop, adapt and transform.

Traditional practices tend to focus primarily on measurements of tangible factors such as costs, whilst such practices are imperative as statutory accounting requirements, organisations should also consider measuring the potential risks of intangible assets. Although it may sometimes appear difficult to directly link intangible assets to the profitability of a company, many elements of intangible assets can be undoubtedly commercially beneficial and are often dominant determinants of shareholder value. A Harvard Business Review found that in today’s economy 70% to 80% of market value comes from hard to assess intangible assets and so organisations are particularly vulnerable to anything that damages their reputation.  The following article highlights the growing importance of carrying out risk-based assessments of reputational risk, good will and customer relationships and how organisations can carry out such assessments when assessing deals, settling claims and making key business decisions.

Reputational Risk

Damage to an organisation’s reputation has the power to tarnish a company’s name and lead to potential financial and social capital losses, or even cause the collapse of a company, thus exemplifying the significance of intangible risks. When assessing deals or settling claims, professionals should keep in mind that business failings may be magnified by the media and across social media as both now possess the influence to play a huge role in setting the agenda surrounding a company’s disputes.

Despite the threat of reputational damage, organisations often do not do an efficient job at protecting their reputation and often only face such problems once they have already arisen and sometimes when it is too late. This is not risk management but, instead, crisis management.

A reputation is to be protected to avoid negative impacts such as bad media press, but professionals should also make organisations aware that maintaining a good reputation can add to an organisation’s profitability. Weber Shandwick Research found that a global executive on average reported their organisations’ reputation accounts for 63% of a company’s market value.

Reputation risks may prevail where an organisation’s performance falls short of the expectations held by its stakeholders (for example customers, shareholders, investors, politicians, employees, the media or the general public) and concerns ripple down through the media to the public and employees.

Levels of risk resulting from a tarnished reputation have been categorised by Denni Arli from the University of Minnesota, into two: Direct and Indirect. Reputation risks stemming from the direct performance of an organisation materialise where the organisation in question is in control of the conduct carried out that has caused the negative impact.  On the other hand, reputational risks can arise from the indirect conduct of an organisation’s third parties, distributors and supply chains, despite the organisation in question being unaccountable and having no direct link to any damaging actions.

However, there are various actions organisations can carry out to mitigate both categories of reputational risks.

  1. Identify and prioritise highest value stakeholders who drive the most value across the organisation. Both value and risk can be measured through losses in revenue, increased operating, capital or regulatory costs or even destruction of shareholder value which could lead to consequential decreased outside investments. If you can identify a potential risk, then you can actively formulate a mitigation plan.
  2. Audit your position against your highest valued stakeholders’ expectations and identify vulnerabilities and gaps. Once vulnerabilities and gaps are identified, set a strategic plan to strengthen your organisations position and avoid falling short due to such vulnerabilities.
  3.  Break down traditional ineffective processes and adapt to the modern times. Response times to issues is paramount to limiting negative impacts. The digitisation of the business world has increased significantly over the past decade, but the pandemic has increased the need for virtual communication even further. An IACCM study showed that face-to-face communication was preferred by 96%. However, this form of communication is fast becoming the exception to alternatives like email and video conferencing and organisations must break down old traditions and create effective communication processes to ensure relationships remain effective.
  4. Draw out an ideal solution for all of the above by drawing up plans and communicate plans internally.

Good Will

The Institute of Business Ethics claims as the business world adapts to modern times, a company’s values and ethics grow in importance and determine more of a company’s worth. The challenge for organisations is not to merely define corporate values and standards, but to ensure they are practiced consistently, day-to-day. Companies that have open dialogue about values, beliefs and behaviours are more adept at managing reputational risk. Be overt in describing how the intended culture will impact decision making across the organisation. Such actions may narrow the pervasive nature of possible reputational damage.

Collaboration works best with open and clear dialogue. Clearly outline what you want to achieve, make the process as simple as possible and align all objectives to one common goal. Create a strong culture story and communication methodology.

Future Relationships

Ensuring customer’s perception of value through efficient customer relationship management is arguably difficult to measure but, if risk based assessments are carried out correctly, should prove profitable and could even be regarded as one of a company’s primary assets. Customer relationship management is certainly becoming a core business strategy and should be valued highly, if done properly.

Over the past decade, the use of CRM (Customer Relationship Management) software has become an essential to most companies for helping to analyse customer risk and opportunity, temperature of the relationship and thereby take steps to enhance the shareholder value. However, research carried out by a Professor of Strategic Sales and Account Management otherwise suggested that 20% of users of recent CRM installations reported a negative impact to long-standing customer relationships. Such failures are usually caused by a company’s failure to enforce a successful new business culture with the use of the new and expensive CRM software. NI Business emphasised companies’ to lack commitment to a business’ cultural changes often results in failure when CRM software is implemented.

  1. The business risk and returns of CRM investments must be fully quantified: As firms invest time to develop marketing strategies focused on particular customer retention and forge deeper and closer relationships, risks and returns of such relationships must be assessed more systematically.
  2. Software Advice, an independent company invested in helping organisations transition to the modern digital world, states that for a smooth transition into a new business culture using a modern CRM tool, companies must ensure they choose the right software correctly, provide adequate training to ensure employee adoption and to not rush the implementation process.
  3. The World Commerce and Contract Institution laid out several viability dimensions to be assessed when companies are considering suppliers for new partnerships or deals. Such dimensions include the following:
  • Financial: the wherewithal to stay in business;
  • Operational: the capacity to provide the level and quality of supply required;
  • Structural: a planned or involuntary organisational transformation;
  • Technical infrastructure: the supporting technologies used to conduct operations; and
  • Supply chain: the supplier’s own supply base.

The Chartered Institute of Procurement & Supply added a number of important factors to analyse when assessing a potential relationship (all deriving from the Strategic Supply Wheel) which include:

  • An organisation’s structure;
  • Theirs and the organisations own relationship portfolio;
  • Cost/Benefit analysis;
  • The organisations skills and competencies;
  • Corporate policy & supply strategy; and
  • Finally, their strategic performance measures.

Ultimately, there are numerous benefits to ensuring your organisation protects its reputation, ensures good will and acts to protect current and future customer relationships. Some benefits include the attraction of bigger and better customers who are more loyal, such customers may then go on to contract for a broader range of products or services and the organisation as a whole will be perceived to be much higher value.

Efficient change management within all areas of a company are currently paramount as the business world is in a constant state of evolution and adaptation to the post-coronavirus world and so all organisations should currently be analysing their practices to maintain their reputation, good will and build future relationships. Face the pandemic head on where possible, with greater focus on change management and cultivate resilient relationships to ensure business continuity and effective communication channels.

Business decisions and strategy regarding deals and claims must take into account these less tangible factors or ignore them at your peril. An organisation that does not put sufficient value on these factors will be far more vulnerable to the impacts of unpredictable and unexpected issues such as COVID-19 as well as cycles of recession and evolving markets. You might run the risk of business decisions that look good on the balance sheet but take an unexpected turn when you factor in the power of public opinion and the tsunami of social media influence.

Look out for the 3 remaining articles across this current Thought Leadership series ‘Future of Contracts and Contracting’. Next week we explore the pros and cons of diagram and image based contracting agreements as an alternative, particularly where there is no common single language between the parties.

The COVID-19 pandemic has affected all of us, across all sectors and continue to impact at a macro and micro economic level, including the current government negotiations with Europe. See titles below to read more on the impacts of the pandemic and follow us on LinkedIn for future updates and new articles..