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The purpose of a contract


ContractPremise: The key to success is entering into a contractual agreement with your client, not working for free in the hope that something comes of it.

Many consultants fail to enter into a contractual agreement with their clients before engaging in work on his or her behalf in the hope that they will reap their reward later. What it does, however, is that it creates a lot of confusion and uncertainty down the road for both parties. A consultant that knows what he or she is doing should not work outside a contractual agreement for that very reason.

In Betting on Equity, I raised some issues regarding working for a stake in a business instead of operating on fixed fees and commissions. I am still in favor of the latter scenario as the former usually begins with the parties not entering into a contract in the first place. For some reason, many consultants forget that they actually invested in the process that enabled them to acquire their skills when approached by a potential client. This makes them literally avoid the contract issue altogether. Often, they start helping the potential client – a non-paying client is not an actual client – out for free, fantasizing that they will reap the rewards with interest later. That sets the stage for a major headache later on when the contract issue really becomes imperative. When that point is reached, this is usually what happens:

  • Seeing the business reap the rewards of the work done on its behalf, the consultant suddenly realizes that he or she is not sharing in the gains or even future prospects. That is a dreadful experience that often makes the consultant act erratically. In a worst case scenario, the consultant attempts to charge the client retroactively without realizing that the client has never agreed to pay for the consultant’s services to begin with. The relationship can go very sour very quickly if this is not resolved fast. Basically, we are looking at two halves of a boiled sheep head (“Many Icelanders consider the eye to be the best part of the head.”) wondering how they got on that plate.

  • The potential client offers the consultant a seat on the Board, a minor stake in the business and, perhaps, a promise of future work that will be paid for. In my opinion, a consultant should never be on any client’s Board as that is a major conflict of interest. If approached with that type of offer, the consultant should advise the potential client that doing so creates a volatile situation whereby the consultant can – and probably will – attempt to block competing consultancies using his or her Board member vote. It does not matter if the position is non-voting; having a consultant on the Board is an ethical violation that is likely to affect the company’s growth strategy by eliminating other – and often very competent – consultants.

  • Without a contract, no real work is actually done, especially in terms of business strategy. It is mostly talk and taking care of minor details. Without a contract, the client is not a client and the consultant is not really doing any solid work. A good consultant may help the business by making minor adjustments and suggestions, but he or she does not engage fully until a contract has been signed – be it for fixed fees and commission or equity (and I maintain that equity consultants do less for their clients than fixed fee and commission consultants; please do a study on that, market researchers – it would be great to have an actual measure to confirm or rescind my gut feeling on that).

When working outside a contract, entering into one is only delayed. Eventually doing so is unavoidable or the relationship fragments. I have detected two main reasons (there are probably many more) why consultants fail to present a potential client with a contractual agreement before doing any work:

  • The consultant is insecure. That does not mean he or she cannot do the job; on the contrary, the consultant is quite likely to understand own field far better than the potential client but lacks training in closing actual sales. That weakness will not interfere with the consultant’s work early on, but it can easily lead to a challenging situation later.

  • The potential client has insufficient funds to commit the company to such an obligation in order to secure the consultant’s services. If the consultant believes in the company and its offerings, he or she usually offers to work for equity. That translates to a consultant working for free for one client and having to sustain own operations and personal well-being by working for other, paying clients or even an employer. Another – and a very serious – problem that arises is that the consultant has no budget to work with which limits current and future activities and planning. Of course, this depends on in what field the consultant operates (I deal mostly with go-to-market and exit strategies which require a well-defined budget that needs to be allocated to the right channels at the right time) but having a contract frames the project and sets the rules of the playing field (and determines the playing field itself).

Waiting to enter into a contract is a bad idea due to the problems it creates at later stages. It also tells the potential client – although he or she may be consciously unaware of it – that he or she is dealing with a struggling business. And if the consultant is struggling, how likely is it that he or she can help the potential client succeed?

It would be great to get your experiences on both sides of the fence.

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9 Comments

  1. This article is very insightful and contains more than just the occasional truth. I may have a few more to add.

    A contract serves the purpose of laying bare the obligations, duties and rights of the parties to it. In exceptional cases it also regulates the behaviour of third parties. But in synthesis a contract required to bind parties in a consultancy agreement serves not only to secure payment for the contractor but to also provide specific performance to the contractee.

    There can be no doubt that without a contract “… you have nothing”. In fact, I would venture to add, without a contract you have less than nothing. The reasons listed for which a contract may not be offered or taken up are correct of course, but that is hardly an exhaustive list though I understand it was never intended as such. In the south of Europe things may differ somewhat. Indeed not much value is attached to consultancy and the investment made by professionals in a particular field is undermined chiefly by a prevailing mentality.

    Given that what the consultant offers is more often than not, intangible prospective clients do not attach a value to it…. hence do not expect to pay for it. This renders the consultant insecure in that he knows from the outset that more often than not he is offering an unappreciated service to an unsophisticated paradigm. Now, it is from this stage onwards that the development of the situation into one which spirals out of control lies within the remit of the consultant.

    The consultant should always remain a freelance independent, not only because if he doesn’t his advice becomes subjective and conditioned by those with whom he has a vested interest, but also because his strength lies in his capability to renounce his client’s brief.

    I suppose I could write an entire article of my own kn this and post it on my blog.

    Maybe I will.

  2. etiennecalleja says:

    Reblogged this on The Legal Pad and commented:
    Great article Snorri!

  3. Hi Etienne and thanks a million for this! Great to get the legal insight into the contract matter. The sentence “without a contract you have less than nothing” is really noteworthy and summarizes the situation really well. If you write a post on your blog, let me know! 🙂

  4. […] and friend – Snorri Gudmundsson. He recently contributed the collective in his piece titled The Purpose of A Contract. There are, naturally, a few things that remain to be said, a few purposes that he didn’t […]

  5. […] arrangements have to be in place where roles and responsibilities are clearly outlined. In ‘The purpose of a contract‘, I stressed the importance of entering into a contractual arrangement with a client before […]

  6. […] arrangements have to be in place where roles and responsibilities are clearly outlined. In ‘The purpose of a contract‘, I stressed the importance of entering into a contractual arrangement with a client before […]

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