In this uncertain business environment, written contracts with a distributor's large customers are effective multi-functional tools that build a firm relationship, drive consistent internal contracting processes, manage risk and serve as continuing profit centers.

Effective customer contracting achieves policy consistency in pricing, rebates, warranty, freight, returns, insurance, indemnification and payment terms. Merely accepting customer purchase orders can create policy and compliance chaos. Establishing and communicating a company-wide sales policy will achieve consistency in these areas, function as a sales training tool, and serve as the negotiator's rules of engagement.

This policy provides your sales force with confidence in contract negotiation on the basis that certain issues are uniformly applied to all customers, hence not negotiable. For example, if 30-day payment terms are your national policy, this issue can be removed early by strictly adhering to the sales policy. Maintaining this stand requires courage and persistence, as customers will push back on this issue with ferocity.

In contrast to this approach, just accepting every customer purchase order creates policy inconsistency, chaos and contracting by inadvertence. This is like dying without a will where local law creates your estate plan. The reverse side of purchase orders frequently contain (in very fine print) one-sided clauses dealing with: freight, warranty, compliance with laws, jurisdiction selection, arbitration, penalties, incorporation by reference (related documents you never see), indemnification, insurance, "most favored customer", Force Majeure, customer self-help, and expansive distributor auditing to mention only a few notable provisions.

Active and thorough contract negotiation allows the agreement to be the platform that both parties use to create a strategic alliance. This process allows both sides to define and express their deal expectations. From the customer's standpoint, expectations relating to pricing, cost savings, technical service, performance metrics (fill-rate, order accuracy, reporting, on-time delivery), customer service and other areas can be fully articulated and responded to by the distributor during the discussions.

From the distributor's side of the fence, objectives involving volume, agreement mandating, information access, DSO, "preferred seller status" and relationship longevity can be explored through the negotiation.

The commercial contracts we are concerned with typically involve multi-year engagements with large national or regional commercial customers and annual sales volume exceeding $1 million. These arrangements will designate the distributor either as a "sole-source" provider for a given commodity category or categories, or as the customer's "preferred supplier." These non-governmental contracts are frequently called "national accounts." While we will discuss legal issue negotiation, related underlying business issues and processes will be examined as well.

Negotiating a national account agreement is characteristic of a military campaign. Your customer is not the "enemy", but rest assured, securing a long-term, even-handed, profitable contract with a large customer includes many elements found in battle. Distributors contemplating a new national account contract must consider the relationship's entry, operational and exit strategies before the negotiation begins.

Just as a general plans his campaign before commencing engagement, a distributor reviewing a new national account relationship should determine the relationship's potential and scope. The entry strategy should involve a single "filter" within the distributor's organization to coordinate the evaluation of the potential new opportunity.

To aid the process, a comprehensive customer account profile document should be submitted by the prospective account manager (frequently called a national account manager). The form will contain enough information to allow all of the various distributor organizational elements to add input. This customer profile will include projected volume, commodity categories, special service needs, e-commerce and EDI requirements, as well as the customer's SKU coverage and product cross-referencing requirements.

In certain instances this process may quickly demonstrate that an opportunity will not be very profitable or effectively match your business model, thus avoiding the futile use of valuable resources that can be deployed elsewhere more efficiently.

If the filter process validates the opportunity, the next move is the preliminary customer meeting or response to a Request For Proposal. Any RFP response must deal with customer terms and conditions (or a full-blown contract) that were included in the customer RFP package. Failure to do so will severely limit post-bid award contract negotiations. RFP inclusion of comprehensive terms and conditions is a common occurrence.

Here it is essential that any information provided to the customer include a very clear statement classifying the data as "confidential" and "proprietary" and for customer's use only. Ideally, before any information is presented, both parties should sign a mutual confidentiality or non-disclosure agreement (NDA).

One instance of inadvertent contracting is the distributor's careless participation in online reverse auctions. Your sales force must be counseled to avoid automatically accepting the auction site's terms and conditions by clicking "I accept". Every attempt should be made to have these terms and conditions reviewed by counsel and objections lodged with the site before auction participation.

Indicating a refusal to participate has helped alter auction site terms and conditions, in our experience. The auction site will often make provisions to maintain a distributor's participation in order to obtain more choices for its client. Do not be timid in using this leverage.

Let's review just a few of the more timely and critical issues facing all distributors. In this information age, many distributors still fail to recognize that their information is an asset that must be protected, just like patents and trademarks. A distributor's customer item purchase history is the distributor's property. Absence of a written contract or NDA allows your customer to use its item purchase history against you.

Unprotected, a distributor may find its customers using their purchase histories to create RFPs that allow your competition access to information they would not have if your contract contained a confidentiality clause. As noted earlier, a well-drafted NDA can be a cure for this problem if you cannot get a written contract.

Many sophisticated customer contracts contain expansive distributor technical support and product recommendation obligations. This approach fails to recognize that the distributor is not the products' manufacturer. The events of September 11 and the following Anthrax threats have made this issue very serious and timely. Basic items such as filters, respirators, Hazmat clothing, and facemasks present high liability potential to distributors who volunteer product application information.

In many cases, even manufacturers are unsure of their products' performance levels. Although it is difficult to sell, your contract must contain provisions insuring that your customer is not looking to you for detailed product application advice or specific product recommendations. The distributor can direct the customer to the supplier for expert technical advice on product application and performance criteria.

The agreement can provide that the distributor will facilitate supplier technical support, advice and even training. Most suppliers are very willing to assist in these areas as a function of their marketing process.

Closely related to technical support, the written contract can fulfill a critical risk management role. Included in this category are warranty, insurance, indemnification, and intellectual property issues. If you have branches or service centers, those field locations must be aware of your standard warranty-return policies and procedures. These concerns must be detailed in the agreement to provide consistency and manage customer expectations.

If you include a one-year warranty or extend a "no questions asked" return policy, those policies must be spelled out by the document. It is also preferable to stipulate that manufacturers' warranties will be passed through to the customer. Disclaiming the implied warranties of merchantability and "fitness for a particular purpose" is essential. You don't want a jury or judge determining your warranty for you. Consistently applied warranty policies also assist in determining your warranty reserves for accounting and tax purposes.

Indemnification is a risk management issue frequently contested in nearly all contract negotiations. Your negotiating team must clearly understand that you will not indemnify for "consequential damages." These are damages (sometimes referred to as "lost profits") a customer suffers if a product causes a facility's shutdown or other business interruption. Even the most basic items can create consequential damages exposure.

For example, in one situation a customer-selected light bulb caused every lighting fixture in a large hotel to smoke, resulting in that facility's one-day closure. Fortunately, the hotel was not hosting a major event at the time. However, just the loss of one day's revenues could have resulted in a substantial consequential damages claim.

This exposure was avoided because the contract disclaimed responsibility for these damages. This is an essential risk management challenge, as nearly all comprehensive general liability policies exclude consequential damages coverage because they cannot be quantified for all of a distributor's customers (particularly a national organization).

However, from the customer's point of view, buying "business interruption" insurance can insure against loss from such incidents. This is the position of the American Institute of Architects on risk shifting for this problem as reflected in their standard construction industry forms.

In the insurance arena, you should not be required to provide copies of your policies to a customer, nor should the customer be permitted to deal directly with your carriers. The agreement must not allow the customer to approve your insurance carriers, your policy limits or self-insurance (deductibles) obligations. This is your confidential business.

Providing your customer with the normal "Accord" certificate of insurance and listing them as an "additional insured" should be the limit of a distributor's contractual obligations. Waiver of subrogation should be avoided. It is recommended that you consult counsel or the risk management department on this issue.

National and large regional distributors will frequently have national account customers that have substantial government contract business. These customers will frequently insist that distributors source from five percent to 10 percent of their purchases from minority and women owned businesses (MBE/WBE's). Failure to meet these minority purchase targets is frequently a basis for breach of contract and some customers try to impose financial penalties as well in this area.

This can be a significant distributor problem because it is the customer who makes the product purchase decision. Your agreement must stipulate that the customer will be your equal partner in meeting these goals and make fully available to you its own minority business and diversity coordinators. An obligation should be placed on the customer to recommend to you second tier MBE/WBE suppliers to help you meet the contract's goals.

Any good military campaign requires an exit strategy. Although long-term customers are highly valued, the distributor must have the flexibility to get out of the deal if it no longer makes business sense. Insistence that every contract contains a mutual 30-day "termination for convenience" clause insures both sides are treated fairly.

Profitable contracting is like victory in battle; it results from planning, preparation, persistence, and clearly perceived goals and objectives. Equip your negotiators with well-defined rules of engagement, fortify them with good negotiation skills, provide clear success targets, and they will return with flowing banners of enhanced profitability and strong customer relationships.