Long-term cooperation contracts: the value of a good balance sheet determination

Scooperation contracts are often entered into for longer periods of time (>5 years). Voften a defined degree of exclusivity is agreed uponbut that can also start to pinch. How do you ensure that the mutual collaboration remains balanced, that you can manage dependence on your collaboration partner? This article provides practical tips on how to manage that balance 

Importance of a good governance appointment 

Naturally, a good governance arrangement is very important. A governance arrangement is an elaboration of which interlocutors discuss which issues with each other during the term of an agreement (and often who gets to decide what). Many long-term contracts lack such an arrangement or go no further than an agreement that the boards of both parties will evaluate annually. Punt.  

Often that doesn't happen or that evaluation doesn't get much further than having a cup of coffee and talking about what parties are working on. Of course that is good, but really good evaluation means: what is going well, what can be improved and how do we proceed? And this has to be done periodically. Not at shop floor level (account manager visiting) but also at board level when it comes to substantial cooperation.  

Collaboration is give and take. A certain degree of imbalance may occur; that's not a bad thing as long as over the long term there is balance. But what do you do if you notice that there is a structural imbalance in the mutual relationship, that there is too little consideration for you, that you feel you are too much in a straitjacket, that the collaboration is much more of a supplier/customer relationship (which it often is), or that the supplier is too focused on being able to make extra sales?  

A good balance determination might help then. 

What does a good balance determination look like? 

A balance provision consists of (1) a commitment of effort to keep the collaboration in balance, (2) a clear understanding of the core interests of parties facing each other that you must therefore take into account, (3) a listing of any uncertainties that might come up in the future that could materially affect the collaboration, and (4) any "buttons" to restore the balance.  

Ad 1. Effort commitment:  

Parties enter into an effort commitment to keep their cooperation in balance. If one of the parties gets the feeling that there is an imbalance or that it is imminent, he can call on the other party to restore that balance, or at least to discuss it.  

Ad 2. Interests of parties: 

Essential here is that the parties mutually put their (core) interests in the cooperation on the table and that these are written out as principles in the agreement ("Principles of cooperation"): 

• The buyer's interests could be access to state of the art technology at a competitive price (certain guaranteed discount). But also consider other interests such as predictability of costs and expenses (planning for costs), efficiency improvements and optimization of labor productivity through innovation (e.g., through deployment of AI or other technological developments); 

• The corresponding interests of the supplier would then be: revenue certainty which is needed to fulfill discounts (volume is needed to give volume discounts) and to cover investments (to keep systems state of the artor to bring new products to market). The interest could also be to have a regular partner with whom technological developments can be reviewed and tested so that they can be brought to market.  

 Ad 3: Foreseeable relevant circumstances: 

In addition, it is important to address foreseeable circumstances or risks, for example: 

• Assignment of systems depends on future circumstances that cannot be controlled by either party: think demographic trends or political change that requires the buyer to adjust its policies and changes the original scope of the collaboration. This then often translates into a need to include some level of flexibility in the agreement (earlier/later/more/less/other/not - purchasing).  

• This, in turn, is counterbalanced by the supplier's interest (given revenue certainty) to do get commitment from the customer. This in turn often translates into a certain degree of exclusive purchase (supplier, unless), whether or not combined with a certain minimum purchase (x% of the contract volume is needed to justify these prices).   

 Ad 4: Control buttons (dashboard) 

Following that, for foreseeable conditions/risks, you could include thought directions on how you might deal with them:  

• With less/more revenue certainty, you would adjust prices on an interim basis (lower discount rate for less purchase than anticipated, and vice versa for larger purchase);  

• Adjusting the scope of supply: if there is no longer a need for product line A, but there is a need for product line B and C then this should not have to have a negative effect on revenue security. This would then require that the supplier be able to offer those lines. And if the partner supplier can't supply them, perhaps he can source and manage them? Or if that's exactly what you don't want (too expensive), then the revenue volume for him becomes smaller. 

• If the volume gets smaller, the contract could be extended so that this still brings more sales under the contract. Or you could possibly reduce the service package (is platinum really necessary, or can you get by with gold/silver/bronze?). 

It is certainly not the intention to be exhaustive in this, it simply cannot be done. But you can, of course, include some lines of thought and perspective that can serve as inspiration for the executives who need to work on this. Also keep in mind that these are usually (due to the passage of time) not the people who have been involved in the creation of the agreement and thus have no knowledge of what the parties discussed with each other in that phase. So you have to give them some guidance.  

Of course, these agreements need to be worked out in a concrete situation. My advice, though, is not to hide this in the preamble of the contract (by which you say at most in generalities what the parties' interests are) but to really give this a place at the beginning of the contract. By doing so, you put a certain set of glasses on yourself that helps in drafting and explaining the other provisions of the contract.  

To conclude 

Over the past 20 years, I myself have had good experience with the inclusion of balancing arrangements in this type of contract, especially in technology partnershipcontracts sometimes involving many millions and where the threshold is high for switching suppliers (retraining people). But such a provision would also fit well in (exclusive) distribution contractsor other multi-year collaboration-contractsin which there is a high degree of dependency between buyer and supplier (unilateral or multilateral). 

The great advantage of such arrangements is that, on the one hand, it forces you to delve into the (real) interests of your partner and, on the other hand, you also have concrete opportunities to restore the balance between the parties. The advantage of the word balance is that you can't actually be opposed to it if you want to work together.