Why collaboration contracts are popular

Business owners and executives worry when fortunes decline as competitors enter their former stable market. They worry over fewer calls from customers, lower sales and their best staff leaving one after another. The response is typically cost cutting.

What is it that nimble competitors are doing differently?

Looking at that on the outside we often see that they have cost structures that circumvent many of the overheads and troubles of those in decline.

Looking deeper we see new types of contractual arrangements help lower costs. To achieve this the new ways often involve contracts for what we categorise as “collaborative arrangements”.

For example, instead of buy-sell or hire-pay arrangements more and more we see licences, alliances, and partnering arrangements. These are between parties described as licensor-licensee, allies and partners. These terms describe collaboration between people, entities or enterprises. Their use has been increasing for decades.

Joining them are new species of collaborative arrangements.

Consider online contracting. This category contains terms of service for social media, websites and cloud computing offerings. Each of these types of contracts can facilitate the use by various parties of each other’s content, software and services on a pre-agreed, non-negotiable, standardised basis.

One contract does all this for all parties working in collaboration. That reduces delay, removes back and forth negotiations, and automates record keeping. That is an enormous efficiency gain!

Online contracts join types of collaborative contracts which have proliferated since the early 1990s, eg:

• Outsourcing – work done by a third party, in law an example is legal process outsourcing
• In-sourcing – work done in-house, eg in-house counsel does drafting
• Co-sourcing – work done in shared services or facilities
• Open-sourcing – work done in a commons, segmenting public and private interests
• Crowd-sourcing – work applying the wisdom of the crowd, ie volunteers
• Near-shoring – work done in a less costly region abroad but in same time zone
• Off-shoring – work done in a less costly region abroad

How have we got to this point? What are the causes? Where is it taking us? In this article we’ll focus on those first two questions.

Recently, I delivered a seminar paper to train lawyers on contract clauses involved in a conventional type of non-collaboration contract – business sale and purchase agreements. It is not a collaboration, one party goes in, and the other gets out. If all goes to plan there’ll be no further relationship.

For the paper in our firm we brainstormed as to why collaborative arrangements are a popular alternative to buying or selling a business. We stumbled on six points as discussed below, an extract from seminar paper.

Six reasons why collaboration contracts are popular

Contemporary business developments shape the types of transactions people in business contemplate will deliver value for them. From the perspective of contemporary legal practice in Australia, the “Priestley 11”[1] set of compulsory law subjects taught in law schools in Australia is looking less and less like a comprehensive or completely workable foundation of knowledge for contemporary business law practice. This observation has particular resonance as regards business sale transactions and more broadly the creation of value through business law relationships. Buy-sell relationships are seen in the contemporary context to be one of many alternatives.

It seems from anecdotal evidence in legal practice that aside from retail shops and similar traditional enterprises, fewer business sale and purchase transactions are taking place than in the recent past. In place of selling or buying a business many in business are adopting alternative arrangements for which the skills of contract drafters are often in even greater demand.

Below is a short list of bullet points, speculation on such alternative arrangements and why they are often preferred to traditional buy-sell arrangements. This is especially the case for businesses in which the core offering is digitised information or entertainment products, software and communications services.

• Weakened geographic monopoly: The dramatic increase in the level of e-commerce via PCs, the web and mobile devices has weakened the natural local geographic monopolies enjoyed by many bricks and mortar businesses. This is especially relevant to the operation of restraint of trade clauses.
• Average business lifespan has fallen: The competitive advantage of different types of businesses is lasting for shorter periods of time. The rate of business collapse or closure has increased significantly among listed companies. The average S&P 500 company lifespan in 1937 was 75 years, in 1960 was over 60 years, and is now in the mid-teens.[2]

S&P companies are listed companies. This is their average lifespan (how long they survived) during the five decades from 1960-2010. The longest surviving were in excess of 60 years, that average declined dramatically subsequently

• Cheaper to start-up than buy: Business start-up costs have fallen considerably in the last half decade due to many factors including outsourcing, digitisation of business processes, cloud computing, use of social media like a virtual industry association, and use of business incubators, tech start-up accelerators[3] and crowdfunding.[4] This is at least the case for those businesses which involve the sale of content or which have digitised processes or business functions (eg marketing, sales automation and accounting).
• Shift from fixed pyramids to flexible hubs: A traditional metaphor for a business was a pyramid. Pictured into that were layers of management at the top, in-house business functions and processes below them, and employees at the bottom. Today, for businesses which are highly digitised a hub and spokes metaphor is more appropriate. This new metaphor mirrors the design or functionality of the base technologies of the internet, which has long been defined as “a network of networks”. With this change, management structures have flattened; insourced, co-sourced and outsourced business functions and processes have proliferated; and personnel are increasingly engaged and remunerated as independent contractors working flexibly rather than as fixed cost employees (and even here often on a part-time or casual basis rather than a full time basis).
• Development of professional expertise and resources: A considerable body of expertise has evolved in recent decades among lawyers and related professions to offer to clients and put in place various types of contract-based collaborative arrangements instead of buy-sell deal. A growing variety of options include licensing, franchising, joint ventures, shareholder agreements, alliances and partnering arrangements. These can often be alternatives to buy-sell arrangements. Lawyers and related professionals can offer them support with in-house or externally sourced libraries of template agreements, clause libraries, checklists, guides and related tools for knowledge management and delivery.
• Decline in bank lending to business: Debt capital from financial institutions seems to have become harder to secure for small businesses unable to offer the easy security sought by financial institutions – a mortgage over real property.[5]

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Noric Dilanchian

Noric Dilanchian is a lawyer, author and educator practising in areas of business law for almost four decades, with a focus on contract drafting and review, and the commercialisation of content, technology, digital assets and intellectual property. Linked In |YouTube

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