This week, Sharon Toerek, Principle Owner of Legal + Creative, joins Marcel to discuss how to create more profitable and less risky relationships via faster and easier client contract negotiations.
About Sharon Toerek
Sharon Toerek is a marketing law and intellectual property lawyer dedicated to serving agencies. She’s also the host of the Innovative Agency Podcast. A former President of the American Ad Federation (AAF) Cleveland, she serves on the American Association of Advertising Agencies (4A’s) Legal Consultant panel.
In the advertising and communications industry, Sharon writes and frequently lectures on the topics of intellectual property protection, marketing agency relationships, and the legal implications of social media.
Points of Interest…
- Defining the Client Contract Negotiation Phase 3:02
- Things to Consider for Contract Negotiations 9:00
- Ownership Vs Licensing in Contract Negotiations 15:20
- Pushing Back During Client Contract Negotiations 23:05
Defining the Client Contract Negotiation Phase
There is one thing that you, as an agency owner, will encounter at some point – putting a contract in place with a client, which you’ll invariably have to negotiate.
I’m interested in learning how Sharon defines the contract negotiation phase, and why it’s important to be well versed (or at least have some frameworks to operate in) when you get into closing a deal with a client. Afterall, it’s fundamental to the flow of money through your firm and setting the expectations that you and the client have of each other. How are you going to collaborate?
“It’s a legal document, first and foremost. There’s lot of legal terminology in terms and conditions, but the negotiation process of putting your MSA or your professional services agreement in place really sets the tone for how your relationship will unfold overall.”
Oftentimes, and I hate to admit this, but I do feel like the lawyers get in the way when making a deal. I know, it’s an unwarranted feeling – they need to be there – afterall, their job is to protect their clients from risk. They’re there to identify what’s important, not so important, as they understand the process or the scope of the work that’s being undertaken.
Who’s on the agency side, for contract negotiation process, and how might that change as the company scales?
“I favor a as centralized approach as possible on the side of the agency team when you’re doing contract negotiations. And I know this runs contra to what a lot of small agencies do; which usually involves applicable account rep or the salesperson on the team who’s handling the business development work will be in charge of getting the agreement done. This is not a successful recipe in most cases.”
Why is that? Well, you’ll wind up with a patchwork of deals from client to client that have no semblance of any kind of policy about how you, as an agency, negotiate the things that matter to you. As for who Sharon does believe should be involved in proceedings?
“Typically, in the early days, it’s the agency principle. As you get bigger and scale, most agencies at that point will add an ops or a finance lead into the agency. This is probably the most appropriate person to be involved in negotiating and signing off on these agreements. They understand the agency’s margins often better than the account team. “
***Sharon devles into this further from 6:50***
Things to Consider for Contract Negotiations
I’m sure there’s a lot of things that get redlined and thrown back and forth in terms of negotiations. It can be tricky to discern the hills one should be willing to die on. What exactly should you be paying attention to?
“Pushing the Three D’s aside – those being Deadlines, Deliverables, and Dollars – you need to address payment. You need to ensure you’ve a really clear idea of what the payment terms actually mean in real time for your agency.”
Agencies are great at setting their terms – “we’re a *insert applicable timeline here* agency”. Caution is advised with regards what exactly triggers the payment term agreement that you sign. Often, clients will sign a contract that doesn’t obligate that time to start running until they’ve approved the invoice. ***Sharon provides additional cases in terms of budgets and expenses from 10:22 minutes***
In short, it’s not just the payment terms, but what triggers them. You really need to consider the risk around how that language is laid out in the contract.
In addition to defining the Payment Terms, you also need to ensure clearly define what the Client Responsibilities and how they’re reflected in the agreement. You want the client to have a healthy set of responsibilities, such as giving you required information/approvals in a timely manner. If that doesn’t occur, they should be held responsible for any additional costs that result from not fulfilling those stipulated obligations.
In Sharon’s experience, some agencies even need to consider putting a dormancy fee clause in their agreement because they’ll have clients who just. sit on work. They’ve got their team members on pause and they can’t deploy them onto other accounts or for profit elsewhere. As for her personal passion point in terms of contract negotiations?
“I think agencies give it away too often around the timing of the transfer of intellectual property rights to the work that the agency does. Most of the time, agency and client ultimately intend that the client’s gonna own the intellectual property rights to the work product. And that’s fine, but make sure you’re creating a perception that they won’t own it any sooner than the date on which they pay you for your work – because you need to hold that as leverage.”
Side note: our Agency Profit Toolkit is a one stop shop for you to be able to outline some of these crucial profitability numbers to a potential buyer. Spreadsheets, templates and training videos, you name it, it’s all in the toolkit. Grab yours free at the link below:
Ownership Vs Licensing in Contract Negotiations
Ownership versus licensing; they often get conflated as being the same thing. However, they can also be two separate things and work together. How common is it for agencies to write into the contract a license back to them for the work? In other words, the client owns it but they then get a license back thus potentially modifying it and reusing it going forward?
“There are two points to consider here. One is making sure that if there is preexisting or agency proprietary work – that gets plugged into deliverables for multiple clients – that it’s carved out in the agreement. Make it clear the agency’s retaining the ownership but licensing it to the client for the purposes of the services that it’s rendering under that contract. “
And what of that equally important second component?
“Ensure you hold back a license as an agency to use or display the deliverables you create for the client. Why? For your own marketing or promotional purposes as an agency!”
Amazing advice there. This is usually referred to as a Publicity Rights Clause and some MSAs, however, it truly is an IP carve out for the agency. Display rights and the rights to copy or share and show your work are an IP right. ***Sharon elaborates on the importance of reserving this right in your agreements, and more, from 16:57***
In short, such clauses are vital not just to showcase that you as an agency know what you’re doing, but it equally provides a comfort blanket for your client. They want to assurances you won’t share anything that’s proprietary or anything they may have rejected and don’t wish to be associated.
Therefore if you can write a clause that is empathetic to their concerns and addresses them, you probably have a better chance of getting that through and then actually being able to leverage (hopefully) big, amazing brands on your website. Being able to do this will really have an impact on your ability to land other big brands that seek this level of trust.
Another thing Sharon is increasingly seeing, which is a double edged sword of exclusivity. Some agencies might see it referred to as a non-compete – even though it’s absolutely not an noncompete! ***More on this from 19:05 minutes ***
Pushing Back During Client Negotiations
The thing that I’m sure is in a lot of people’s minds is the client’s paper versus ours. The more up market you go and the smaller you are as an agency, the more likely it’s going to seem like – “If you don’t sign our paper, we’re gonna walk away from this deal.” I’m curious, in Sharon’s experience, how often is it safe for an agency to push back?
“Agencies might be be surprised at how often getting their own contract on the table first results in that paper actually being used versus waiting on the clients. This is especially true if you’re working on a project or a relationship that is within the financial authority of your marketing counterpart.”
They have certain protocols or limits, and if the project or the relationship is priced right, they then don’t have to through such an escalation. Therefore, it’s not always true that they won’t sign your contract – so please don’t default to that assumption!
Secondly, even if they’re gonna require as a condition of doing business that you do sign their agreement, it’s still smart to have your own MSA. It’s even better to get to the table with it first! This sets the table differently for the negotiation. It also predetermines your agency benchmarks against what you’re going to evaluate the MSA that the client presents to you.
Consider it a mental checklist of what’s most important; what you value as an agency, etc. It’s a compare-and-contrast opportunity to see if what you’re doing is totally out of the norm. It’s a great benchmarking tool which, by extension, creates a different dynamic during the negotiations.
“To every agency who has said to me, ‘We do business with really large companies, and we typically sign their agreement as we’re not worried about the state of their MSA’ – I don’t think that that’s productive thinking for most agencies.”
So there you have it. Sharon is the expert and she advises agencies to go through the exercise of having your own toolkit, and of having thought through your own positions on these issues. Then, at least you’re making a knowing decision if you want to compromise on any of them – and that you’re getting a fair return for that compromise from the client.
***I dig into this a bit further from the 25:48 minute mark***
Your agency’s ability to show what it can do is necessary to its continued viability. Therefore, showcase your capabilities and your smarts to the next client who you want to sell to.
Additionally, a legal contract is a string of logic statements, so it’s essential to have somebody facilitating the process and ensuring all the necessary questions are being asked and answered in everyone’s best interests. Being able to provide that feedback. Going forward, it’s really helpful going forward to try and guide client engagements in a direction that is better for the agency.
Lastly; long contracts aren’t a deal breaker. In Sharon’s experience…
“I would say don’t stress so much about the length of your agreement. It have never seen a deal go sideways because the agency had a contract that was too long. I can’t tell you how many conversations I’ve had on this point! The document should be as long as it needs to be to reflect both parties intent and to protect both parties.”
See more from Sharon…
- Sharon’s LinkedIn linkedin.com/in/sharontoerek
- Sharon’s Twitter twitter.com/SharonToerek
- Legal + Creative legalandcreative.com
- Innovative Agency Podcast legalandcreative.com/the-innovative-agency
Did you learn anything new from this episode? Let us know in the comments below! We have helpful blogs designed to bolster your agency profitability, such as How To Calculate Your Billable Employee Cost-Per-Hour.
Our next installment of #APP, on December 28th, will see Marcel chat with Jhana Li for our 103rd edition. Our previous blog – Episode 102 with Brad Farris – can be viewed here…
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