Published : 4 weeks ago, on 15/11/2024

By: Andi Stark

A recent report from World Commerce & Contracting (WorldCC) in partnership with Icertis sheds light on a growing issue in commercial transactions: the hidden costs associated with complex contracts. As contracts become increasingly intricate, companies are bogged down by rising costs, wasted time, and strained partnerships.

Based on data from thousands of contract professionals, the report emphasizes the need for simplified contracts that focus on the terms that drive business success rather than legal intricacies. WorldCC leader Tim Cummins and Icertis’ Chief Evangelist Bernadette Bulacan discuss how the excessive focus on liability and indemnification over practical, performance-related terms can hinder operational efficiency and elevate business risk.

Complex Contracts: A Financial and Operational Burden

For many companies, complex contracts represent more than lengthy documents; they bring significant financial and operational costs. WorldCC’s report indicates that around 69% of survey respondents believe contract simplification would improve clarity, reduce negotiation time, and instill greater confidence among the parties involved. This highlights a need for a shift in how businesses approach contracting. The report shows that highly negotiated terms often include limitations on liability, price adjustments, and indemnification, none of which are directly tied to the day-to-day operations of the contract.

“Many organizations overemphasize risk mitigation,” says Tim Cummins, President of WorldCC, “which can detract from the potential value that contracts are supposed to bring to the business relationship.” When companies pour resources into negotiating and managing these complex terms, they incur hidden costs—legal fees, stalled negotiations, and even lost opportunities—while failing to address the contract elements that directly impact performance and operational success.

The Disconnect Between Negotiation Priorities and Business Needs

WorldCC’s findings show a disconnect between what companies negotiate and what they actually need to achieve successful outcomes. While risk terms such as indemnification and liability limitation frequently dominate contract discussions, many companies consider scope, delivery, and service levels the most crucial for ensuring business continuity and satisfaction. The report shows that about 72% of respondents believe that prioritizing simpler language and business-centric terms would reduce the risk of disputes and prevent operational slowdowns.

“Oftentimes, we see a fixation on legal terms that protect the downside but don’t promote growth or partnership,” explains Bernadette Bulacan, Chief Evangelist at Icertis. “The terms that enable the success of a contract—like timelines, service levels, and scope—are often overshadowed by this focus on risk.” The disconnect is evident in the data: while liability and indemnification terms are top priorities in negotiation, they are rarely the leading causes of disputes during contract performance.

SMEs: A Struggle for Equitable Terms

The report also highlights how small and medium-sized enterprises (SMEs) face unique challenges in contract negotiations. According to WorldCC’s data, 88% of SMEs feel that larger companies are inflexible, pushing them into unfavorable agreements. Around 78% of these smaller businesses report pressure to accept terms that do not align with their operational priorities or financial stability. This power imbalance often results in contracts that benefit the larger entity while disadvantaging SMEs.

“Many SMEs struggle to push back against terms that don’t support their business needs,” says Cummins. “The imbalance means they frequently concede on key operational terms, which can limit their ability to deliver value and remain competitive.” WorldCC’s report suggests that one solution could be to tailor contract templates to match the capabilities and needs of SMEs better, allowing for greater equity in business relationships. Simplified contracts could facilitate negotiations, making it easier for both parties to align on terms that matter most to performance rather than only legal protection.

The Call for Simpler, More Functional Contracts

One of the report’s strongest recommendations is for companies to adopt simpler, performance-focused contracts that are easier to negotiate and understand. WorldCC’s data shows that surveyed professionals believe simpler contracts would reduce negotiation times, improve understanding, and minimize the likelihood of disputes. The emphasis on plain language and functional terms could lead to contracts prioritizing clarity, mutual understanding, and flexibility in changing business needs.

Cummins highlights the importance of alignment within companies themselves: “We need to be clear with our executives about the consequences of not empowering negotiators to focus on practical outcomes, rather than just legal risk.” Companies can ensure that contracts support their business goals instead of detracting from them by emphasizing terms that drive value creation—such as timelines, specifications, and responsibilities.

Data-Driven and Relationship-Focused

Bulacan expects a future where data is crucial in crafting balanced agreements. “If I see anything changing,” she notes, “it’s that data will increasingly guide us in mapping negotiation priorities, helping create data-driven but relationship-oriented contracts.”

WorldCC also recommends segmenting contracts by complexity. “A crucial step many teams forget is to identify the level of contract complexity,” Bulacan explains, “and to match it with the right people, training, and tools.” By doing so, companies can focus resources on high-value contracts that need greater attention while simplifying less complex agreements to expedite negotiations and reduce costs.

Reimagining Contract Negotiations for Success

WorldCC’s “Most Negotiated Terms” report provides an eye-opening look at the hidden costs of complexity in contracting. Companies face mounting pressure to remain agile and efficient, so the call for contract simplification grows louder. Organizations can reduce costs, prevent disputes, and foster stronger business relationships by shifting the focus from exhaustive risk terms to practical, business-oriented agreements. For SMEs, a shift toward equitable terms could level the playing field, enabling them to negotiate contracts that support their growth and operational success.

In a business environment where clarity and alignment are critical, WorldCC’s findings serve a reminder that complex contracts are often a costly obstacle, and the path to success may lie in a simpler, more transparent approach.