I’ve been on a Depeche Mode kick the past few days. This happens to me at least twice a year, where I just can’t get enough (pun intended) of their songs. One of my favorites is “Everything Counts,” a song I’ve lost my voice singing countless times at their concerts. The song begins with these lyrics:
The handshake sells the contract
From the contract, there’s no turning back
The turning point of a career…
Since 1981, Depeche Mode has sold over 100 million albums and singles worldwide, a career that began with a simple handshake agreement. As detailed in the book Stripped: The True Story of Depeche Mode (Jonathan Miller, Omnibus Press, 2003), the band turned down lucrative offers from large record labels and went with Daniel Miller at Mute Records, a relatively new and small label. Here is an excerpt from the book:
To give Daniel Miller credit, the initial one-off deal he offered Depeche Mode was very fair indeed—all the more so since it was consummated with a simple handshake; no written details; no formal contracts. “It’s basically a 50-50 deal, so Mute put up half the cost for the recording, manufacturing, and everything else,” Vince Clarke [a founding member of the band who is no longer with them] openly clarified. “Then the record is put on sale, and, after paying off all the expenses, whatever’s left—the profit—is split 50-50…”
The big record labels offered the band lots of money, but with a price: bureaucracy and limited control. Daniel Miller offered something different: a flexible relationship where both parties shared risks, rewards, and interests.
I wonder where Depeche Mode would be today if it had “lawyered up” and taken the traditional contract negotiation path.
The International Association for Contract and Commercial Management (IACCM) conducts an annual study each year of the contract terms most frequently negotiated in business-to-business transactions. Its 9th Annual Report indicates that “risk allocation and avoidance continue to dominate interactions during the negotiation of formal business-to-business agreements.” Some of these terms include Limitation of Liability, Indemnification, and Liquidated Damages.
According to a recent IACCM report, Contract Negotiations as a Source of Value:
Much of our negotiation appears driven by classical legal theory that is based more on transactions than it is on relationships. Classical law assumes selfishness and that economic interest is “best served by looking after yourself, at the expense of other parties.” This assumption encourages an attitude that approaches negotiation deal by deal, rather than seeking or observing patterns or examining the potential management of risks across relationship portfolios.
Economists have move moved beyond this point, with their understanding that people and organizations are in fact able to grasp the benefits of cooperation and team behavior. The law is struggling to catch up and still appears to believe that the best way to manage risk is to allocate it to someone else and the greatest incentive to perform is via threats of dire punishment for failure.
As Steve Banker highlighted in “Winner of Nobel Prize in Economics On Outsourcing and Supply Chain,” economists like Oliver Williamson have a more enlightened and scientifically-grounded approach to structuring win-win business relationships than lawyers do. Economists understand vested outsourcing (aka performance-based outsourcing), while lawyers get paid to make sure the other side always has more to lose.
It might take more than an handshake to sell a business contract these days, but the more should be focused on defining a shared vision statement, on developing a joint business plan, and on creating an economic model that benefits both parties rather than spending valuable time drafting pages and pages of “cover my ass” terms.
The ironic thing is that the people sitting at the negotiation table already know this, yet they lack the will, power, and incentive to go against tradition, to go and knock on their boss’s door and make the case for change.
The grabbing hands grab all they can
All for themselves – after all
It’s a competitive world
So continues the rest of the Depeche Mode song, and so continues the negotiating philosophy most companies still subscribe to.
It’s time to listen to a new song.
(Note: Thanks to Kate Vitasek for making me aware of IACCM’s reports. You can read her related commentary here and here).
