Creating a Contractual Excellence Award

Anyone in sales who has worked with legal – or anyone in legal who has worked with sales – knows all too well that there can be a disconnect between what the two teams see as being a “good contract”.  Nowhere is this more apparent than in the run up to the end of a quarter.  The head of sales is known to say the only bad contract is one without a signature.  The General Counsel is bound to say otherwise.

If you take a big step back, you’ll see that neither position is objectively unreasonable.  If topline sales are not growing, the company is an uninteresting investment.  Worse, without revenue, the company will eventually go out of business.  To the counterpoint, if the company cannot achieve systematic contracting and consistently low legal risk, the company becomes burdened with unpriced, latent risk and no investor will want to touch the company.  So, now we have a tradeoff between the speed of sales and legal risk.  If there is a tradeoff, it implies some optimization between the two.

In my practice as GC, here is how I tried not only to optimize for the tradeoff but to get sales and legal to shift the efficiency frontier outward.  Consider the graph above.  At all points along the curve (A, B, C), the company is indifferent to the outcome.  It may be getting more legal risk in contract A than contract C, but it is compensated with higher revenue.  Contract X is underperforming in terms of both contractual risk and reward.  If sales and legal can work together, the company can shift the curve and obtain contract Y, improving its risk to reward function overall.

To accomplish this in real life, I used my fondness for data, creative and inventive thinking to create a data-driven Contractual Excellence Award.  Since the sales rep has some (but not full) control over the kind of contract negotiated with the customer, I would recognize the sales rep who generated the most contracted revenue at lowest legal pain and risk.  So, I ordered a trophy which bore an inscription at the bottom: Contractual Excellence Award. I knew that I would be awarding the trophy at our company’s sales kick-off meeting, I just did not yet know to whom.

In order to determine who should be awarded the trophy, I created a data-driven model based on each sales reps’ attainment adjusted for legal contract risk.  I created a spreadsheet which contained every deal concluded in the year and its type (new logo, upsell, cross sell).  I coded each deal with a multiplier based on the contract form (plain order form, order form with legal changes, negotiated MSA, counterparty MSA).  The multiplier was greater than 1 for clean contracts and less than 1 for difficult contracts. For example, if the sales rep closed the deal on a plain vanilla order form and contract, the multiplier was 1.25.  If the contract was negotiated using our terms of service, the multiplier fell to 0.85.  The multiplier was only 0.2 for contracts negotiated on the customer’s paper.  This is because these contracts are so much more time consuming to negotiate, much riskier, and harder to administer. The risk-adjusted performance of each rep (”legal bucks”) was the sumproduct of their attainment in ACV and the multiplier for each deal.

At the sales kick-off each year, I used the Award to explain why clean contracting was important to the company: faster sales, lower risk profile, better valuation.  I then presented the Award to the sales rep who had the most sales, value-adjusted for contract risk.   In the following years, sales reps competed to steer their customers to the best contract form possible to win the Excellence Award and the number of bad contracts fell.

To help our community, I have open sourced this spreadsheet to help rank your sales reps for your own Contractual Excellence Award.   The spreadsheet is relatively easy to use.  First, setup the types of contracts you have and the multiplier for each type of contract on the assumptions tab.  Second, add your sales reps’ names to the Sales Reps tab.  Finally, input the contract information on the Data tab and code each deal for the type of contract used.  The final results will appear on the Sale Reps tab.  Then, you are ready to give away your Contractual Excellence Award.  The spreadsheet distributed under a uNDA license, so you can do whatever the [expletive deleted] else you want to with it.

I am curious to know how you make out with this approach.  Please share your experiences with me.

Disclaimer: Ozeki is not a law firm, and this blog post does not constitute or contain legal advice. Use of, and access to, this blog material does not create an attorney-client relationship with Ozeki.  In other words, if this were legal advice, a bill would follow.