Contract Numbering

How many contracts do you maintain? As a negotiator for a variety of business sizes, I would guess that if you are in an organization of over 100 people, you have more than a handful of contracts to maintain. Software licenses may be but one of many different types of documents as well. Building and vehicle leases/rentals, event/travel management contracts, employment or consulting agreements, customer contracts, too… the quantity of contractual documents can simply be staggering once they start being pulled out of desk drawers and file cabinets.

But how do you track them all? Even if you have a contract management system, trying to keep your arms around them only by their name or document type, or even by the vendor, customer or service provider is virtually impossible. For this reason, contract numbering (and a contract numbering system) is an absolute for contracting best practices.

Contract numbers have historically been used by ultra-large vendors, where a number relates to a particular sales opportunity. But contract numbers are no longer the exclusive purview of the large business. In fact, a simple contract numbering scheme can be created even if the only contract management system you have is an Excel spreadsheet.

First, remember that contract numbers must be 100% unique per document… but that you want a way to tie related documents together by the contract number so that you know which documents need to be reviewed together when you have a contract issue to resolve.

Second, contract numbers can be created in almost any form or fashion, depending on what you find easy to track. Generally, they contain some sort of party identifier (like the first few letters of the other party’s name), a unique number of some form, and an indicator of the document type (so you can watch amendments, SOWs, etc as compared to Master agreements, licenses and so forth).

Third, contract numbers MUST be consistent to be valuable. If you use them sporadically or inconsistently, it will not only not serve you, but it will confuse anyone else looking at your documents later.

With these three rules in mind, the Software Licensing Handbook details a specific contract numbering scheme that works in a variety of situations. But the goal is to simply come up with a scheme that works for you and your organization. Write the number in a consistent location on each of your documents (I prefer the upper right corner of the first page). Track it in some electronic manner for ease of search later.

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License Metrics

Technology is a wonderful thing. As a gadget geek myself, I love the latest tech toys. But some of the latest and greatest inventions have had a less-than-positive impact on software licensing. As you might have guessed, multi-processors and/or multi-core processors have tossed a wrench into traditional CPU-based licensing.

Software vendors decide how to license their products based on the estimated value the product will have to the licensee. For mainframe products specifically, and a few others as well, CPU-based licensing has been an easy way to calculate that value. The speed/type of the processor determines the quantity of processing power, thus the amount of processing cycles that can be utilized by the licensed software. So software vendors licensed the product based on the number of CPUs the licensee would want to use to power the software.

This was actually quite an easy metric to choose, both for the vendor and the customer. Easy to track/count by both groups, CPU-based licensing is not affected by fluctuations in users, helping the customer. On the flip-side, vendors could very easily manage a relatively small number of CPUs (usually monitored by CPU serial number), too.

The problem with CPU-based licensing, however, is that until recently, neither vendors NOR customers anticipated multiple processors or cores on a single chip. So once introduced, vendors predictably argued that each processor/core counted as an individual CPU, and customer obviously argued that a single CHIP was an individual CPU. This fundamental difference is a clear example of how contract definitions can prevent problems, as virtually no software license contained an adequate definition to resolve the definitional dispute.

To compound issues, consider the fact that many of these licenses are perpetual with annual maintenance contracts. If there is a lack of clarity with respects to the definition of a CPU, not only do the parties not have a way to know how many copies of the product are authorized to be used, but it also makes the computation of maintenance dollars unclear, too.

It is now imperative that CPU-based software licenses contain a clear and obvious definition with respects to what constitutes a CPU. Oh, and did I mention virtualization? 🙂 What do your licenses say?

Execution and Follow-through

Once the deal is done and the documents are ready for signature, what happens in your organization? Do the contracts efficiently move from the negotiator to the approver to signature to the other side for their signature and then back to the contract manager(s) of both organizations? Or, like most places, do the documents get stuck at various points along the way? Let’s see if we can work through some ways to grease the skids.

As listed above, there are five key steps to the complete execution of any given document.

1. Ready for Signature. The contract must reach its final stage and be “clean” and ready for signature. This, of course, is the longest stage, as the negotiation leading up to this point can take a long time. To get to readiness, at least one negotiator must take the reins and actually want to complete the document by a certain time (aka, a deadline). If you find yourself in an organization that does not have the discipline to meet deadlines, you will need to take it upon yourself to drive the documents to completion. Phone calls, e-mails, even in-person visits can be useful methods to encourage finalization of the documents.

2. Approved for Signature. At most organizations, someone other than the negotiator must approve the final contract in its “ready for signature” form. Usually this is a business owner or manager who has business authority over the subject matter of the agreement. Generally speaking, this person usually does not block or hinder the signature process as they are the person who desires the completed agreement. In the event that they do not have this vested interest, it is usually a good idea for the negotiator (or the person who has interest in closing the deal) to hand-deliver two originals of the documents for approval and wait for such approval to then hand-deliver the documents again to the person who can really sign.

3. First Signature. Assuming that neither the negotiator nor the business owner have the authority to sign, another individual will need to actually place their signature on the document. The signatory usually needs to see the authorization (many companies have moved to a written “approval” document to show this authorization) and the documents, too.

It’s not unusual for a signatory to have questions about the documents and the negotiator and/or business owner should be prepared to answer questions regarding the document, the deal and even the negotiation process itself. A lack of readiness to answer these questions can hold up signature.

Additionally, in companies of this size, the signatory is also usually senior management. This means that the availability of the signatory could also be an issue. Planning ahead (calling the manager’s administrative assistant for an appointment, etc) is essential to keep the process moving.

4. Second Signature. While this is technically a compound process (since the other side is probably repeating the first three steps on their side of the fence, too), from your vantage point, it’s a single step. Time is always a factor, so remember that your process timeline could be doubled if your counterparts have a similar methodology. It is a mistake to believe that your counterparts will simply sign and return the documents. If, however, you are the other side, you can plan ahead and print your own version of the document for approval, such that you can be ready to take the partially-signed documents to your signatory immediately upon receipt.

You can also help speed the return of the fully-executed contracts by at least providing your name and mailing address (perhaps on a business card) with the packet of paper you send to your counterpart. Sending via a trackable mail service (UPS or FedEx) is also recommended for documents of significant importance, size, uniqueness (such as those with architectural drawings, etc) as it not only allows you to know that the documents arrived safely but also offers insurance for lost documents. Some companies like to always be the second signatory. This helps with the fifth step in the process, discussed in a minute.

5. Contract Return and Management. While this would seem to be quite unlikely, many contracts never actually find their way into the hands of the two parties. Similar to the sock that always disappears in the dryer, contracts seem to go “poof” after they have been signed and sent. To make sure that your organization has a complete contract file, diligence on the part of the contract manager (or whomever is responsible for tracking the contract) is required to ensure a safe return of the fully executed contract to the first-signing party.

As stated above, providing a return address is a necessity. If you want to increase your chances of a quick turnaround, you might also try sending along pre-paid envelopes or airbills, too. E-mails and phonecalls to your counterpart are also recommended. The trick is to realize that you haven’t received the document back as quickly as possible.

The reason for the quick turn is that most people have a very short attention span when it comes to document management. It’s just human nature. As we have other things demanding our attention, jobs that have been marked “completed” are easily forgotten. For that reason, if you have a contract management system, make sure you have a way to track the physical location of the documents in this process.

By following these five steps and managing this process, you can avoid the embarrassing situation of having to explain why you don’t know where a document is, long after it was supposedly signed.

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