Contract Redlining Etiquette – Rule #5 On Internal Redlines

Rule-5-on-Internal-Redlines-for-Contract-NerdsRedlines are an essential tool that we contract negotiators use to facilitate, manage and strengthen, contract negotiations. In the commercial setting, there are usually three main phases of negotiation in each contract negotiation.

  1. The Business Negotiation – Commercial negotiation between business stakeholders from both counterparties, i.e., buyer vs. seller, vendor vs. customer.
  2. The Internal Negotiation – Business and commercial negotiation between stakeholders and subject matter experts belonging to (or representing) the same company, i.e., buyer’s HR + buyer’s in-house legal counsel, or seller’s salesperson + seller’s in-house legal counsel.
  3. The External Legal Negotiation – Contract negotiation between legal (or contracts) stakeholders from both counterparties, i.e., buyer’s procurement/contract manager vs. seller’s salesperson, or vendor’s in-house legal counsel vs. customer’s in-house legal counsel.

When we think of the contract negotiation process, most of us think only of the external legal negotiation and often neglect the importance of the internal negotiation. According to negotiation expert Lara SanPietro, “There is a direct correlation between success in internal negotiation and success in external negotiation.”[1] The stronger the internal negotiation, the stronger the external negotiation.

This Contract Redlining Etiquette – Rule #5 On Internal Redlines focuses on using internal redlines to get the most out of the internal negotiation phase.

Rule #5 – Leverage internal redlines to build internal alignment.

If the ultimate goal is to get the best contractual terms possible for your client, then it follows that you’ll want to have the most successful external negotiation possible.

How can you do that? By having the most successful internal negotiation possible.

How can you do that? By building alignment with your internal clients.

How can you do that? By leveraging internal redlines.

External vs. Internal Redlines

What’s the difference between external and internal redlines? Simple. The audience.

External redlines are drafted by the contract negotiator for an external audience, e.g., the counterparty’s business or legal representatives.

Internal redlines are drafted for an internal-only audience, e.g., your organization’s stakeholders and subject matter experts. These types of redlines are used to gather information and requirements from your internal clients and stakeholders. They typically clarification questions, flagging risks, and requests for approval.

1. Identify your internal clients at the outset.

You, the contract negotiator, are the project manager of the contract review and negotiation process. Know who your internal clients are so you know who you are negotiating on behalf of and who to direct action items, questions, and approvals.[2]

On the buyer/customer side, your internal clients are the stakeholders who are using, managing or paying for the product or service covered by the contract you are negotiating.  On the seller/vendor side, your internal clients are the sales or product teams who interface with potential and actual customers. These days, in a world of cross-collaboration and connectivity, it is highly likely that you’ll have more than one internal client.

For example, let’s say you are negotiating a contract to purchase an employee payroll software program. Your internal clients could be HR or IT, or both, depending on how your organization is structured.  HR because they are the users of the software. IT because they manage and maintain the software.

2. Clearly distinguish between external and internal redlines.

Include both external and internal redlines in your initial round of review so that you can understand everything needed at the outset. Because the initial draft will consist of both types of redlines, make sure you clearly distinguish between the two to avoid accidentally sending internal redlines to external parties. [3]

Communicating with internal clients via email is common but not always efficient. For either of you. Instead, use internal redlines to guide the discussion. This way, your internal clients will have all the information needed (e.g., specific language references) all in one interface. In addition, they will definitely appreciate the clarity and ability to focus their time and attention on the internal redlines rather than getting distracted by the external ones. Being clear with your asks and respectful of their time will help build internal alignment.

One way to manage internal vs. external comments is to color-code your comments. Here is a recommend color-coding structure that you can use. The colors are easy to track, and you can have collaborative discussions with your internal clients through the comment and reply function. This will eliminate a lot of back and forth emails.

Color Coding Internal Redlines

3. Start with the internal negotiation first.

Lack of preparation is frequently cited as the main reason that internal negotiations are more difficult than external negotiations.[4] One of the best ways to prepare for the external negotiation is to have the internal negotiation first.

More often than not, you won’t have all the information you need to successfully negotiate the contract without having to hunt some of the information down yourself. Some internal clients may provide a summary of what they need in their request for review. Or companies using contract management lifecycle (CLM) tools may collect specific data points in the contract submission form. Either way, that’s usually not enough information for thorough and considerate contract negotiation.

The last thing you want is to ask your internal client what they think about a redline during the external negotiation. I have been the observant counterparty on this scenario several times. Trust me, you will appear unprepared and disconnected from your clients. Unearthing this vulnerability will, in effect, decrease your negotiation power.

Avoid this embarrassment by scheduling a kickoff meeting with your internal clients to review all redlines before engaging in the external negotiation. During the meeting, let the internal redlines serve as your agenda. Go through each one, one by one, and take notes on the follow-up questions, action items, and decisions within the comments. Save this version for future reference or CYA purposes. This way, you already know what your internal clients expect, and there will be no confusion or misalignment during the external negotiation.

4. Include your internal clients in the external negotiation phase.

Remember the guidance provided in Rule #4 – On Calls, “Invite the right people” to your negotiation calls. I rarely have an external negotiation call or email that doesn’t include or involve my internal clients. Why? Because I want to show and actively maintain a united front, alignment between Legal and Business from beginning to end.

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[1] Sanpietro, L. (2020, October 9). Internal Negotiation: How to Set Up For Success. Retrieved from https://www.pon.harvard.edu/daily/teaching-negotiation-daily/internal-negotiation-setting-success/.

[2] Your “client” in an attorney-client relationship sense may be different from your “internal client” for the contract negotiation at hand.

[3] If internal redlines are drafted by an attorney, they can and should be protected by attorney-client privilege. Be careful not to inadvertently waive privilege by sharing internal redlines with external parties.

[4] Wood, I. T. (2015, March 10). Internal Negotiations: The Key to Success in External Negotiations. Retrieved from https://www.kithoughtbridge.com/leadership-skills-and-best-practices/internal-negotiations-the-key-to-success-in-external-negotiations.

Nada Alnajafi currently serves as Corporate Counsel for Franklin Templeton, a Fortune-500 global financial services organization. She has been practicing in-house for 11+ years and created Contract Nerds to connect with and serve the people who love contracts just as much as she does.

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