Here’s a sanitized version of a handout I put together for a client’s sales-training presentation some time back. It summarizes 12 ways in which sales people can get themselves and the company into trouble.
1. Sales reps / managers are not to sign legal type documents without approval from [VP Sales]. This category of documents includes without limitation: • Responses to requests for proposal (RFPs), requests for quotation (RFQs), requests for information (RFIs) • Bid documents • Confidentiality agreements a.k.a. nondisclosure agreements (NDAs) • License agreements • Service agreements.
2. Do not sign purchase orders (POs) or other customer-provided documents without Legal approval. Customer documents often contain legal and economic terms and conditions that the Company did not agree to. Those T&Cs could put the Company at a business or legal disadvantage (possibly a serious one), either now or in the future. The term “customer-provided documents” includes all those listed in the comment to # 1 above, including but not limited to RFP responses.
3. No changes to the Company’s standard terms and conditions without prior approval from Legal. This is an internal-controls requirement arising from the Sarbanes-Oxley Act; it helps keep the Company from incurring material obligations without management approval. This no-changes policy applies to all contract documents, including, for example:• Proposal / Sales Quote T&Cs • Enterprise License Agreement.
4. No shipping of orders without Legal approval if the customer does not sign the Sales Quote form. If the customer doesn’t sign the Sales Quote, then any T&Cs in the customer’s purchase order might supersede the Company’s T&Cs — and might have little or no legal protection for the Company.
5. All contract documents must be timely provided to Accounting — no exceptions. Accounting and the auditors need all contract documents to confirm the proper revenue recognition.
6. No undisclosed side letters, etc. — ever. An addendum to a sales contract can be used, even in letter form, IF it is first approved by Legal, with a copy to Accounting. Even so, all agreement documents concerning sales transactions must be provided to Accounting. EXAMPLE OF WHAT NOT TO DO: The former CEO of McKesson Corporation was sentenced to 10 years in prison for concealing side letters, as well as for backdating contracts. See this news report for more details.
7. No oral commitments or handshake deals with customers — ever. All commitments to customers must be set forth in the written contract documents. See # 5 above. An oral commitment that varies the terms of the written contract could be evidence of a sham transaction, which in turn could be securities fraud. Moreover, in some circumstances, a customer might be able to enforce an oral commitment against the Company. EXAMPLE OF WHAT NOT TO DO: Among the charges brought against Jeff Skilling, the former CEO of Enron — who at this writing is serving a 24-year sentence in federal prison — was that he entered into an undisclosed handshake deal with Merrill Lynch that supposedly meant that a particular transaction was not a legitimate “sale.” See this SEC news release for more details.
8. No backdating of contracts — ever. Revenue recognition requires that the terms of the contract be fixed, which does not happen until the final contract is signed. Backdating of sales contracts can constitute securities fraud. EXAMPLE OF WHAT NOT TO DO: At this writing, the former CEO of software giant Computer Associates wakes up every morning in federal prison. He’s approximately halfway through a 12-year sentence for backdating sales contracts. In addition, the company’s CFO, its general counsel, its senior vice president for business development, and its head of worldwide sales, all went to prison (or in one case to home confinement), and the general counsel was disbarred. (With prior approval from Legal, a particular contract may be able to be dated “to be effective as of [a particular date]“; the signature dates, however, must still be the dates actually signed.)
9. No return provisions in sales contracts; do not accept returns w/o Legal approval. If the customer has the right to return the software for a refund, then the sale might not be final, meaning that revenue may not be able to be recognized. The Company’s sales contracts therefore cannot give the customer the right to return the software for a refund except as stated in the warranty provisions.
10. Future-discount provisions must be approved by Accounting. Giving a customer a pricing coupon as part of a deal can sometimes cause the revenue from the deal to be essentially unrecognizable until the coupon expires.
11. All future-pricing concessions must have a sunset. Any exceptions must be approved by [VP Sales], Accounting, and Legal. This is a Company policy to maintain operational flexibility in future deals.
12. No post-sale concessions. Once a sales contract has been signed, the Company cannot make material concessions to the customer — not even to get the customer to pay the invoice. If the Company were to make a post-sale concession, it could indicate that the original deal was not final, which could affect revenue recognition for the original deal. (The Company can agree to an amendment to an existing sales contract if there is new consideration involved. New consideration could take the form of, for example, additional licenses, additional products, new licenses, new services, or a maintenance renewal not previously committed to. ALL SUCH AMENDMENTS must be approved by Legal.)