Why tech vendors should consider providing a written risk-factors disclosure sheet

by Dell C. "D. C." Toedt III on 2010-05-11

Table of Contents

A problem for vendors: Customer claims of oral misrepresentation

I recently wrote about why, when complex technology deals go bad and everyone starts pointing fingers, fraud claims are a weapon of choice for customers’ lawyers against vendors.

(In a nutshell, often the easiest way for a customer lawyer to win over a judge or jury is to persuade them that the vendor lied, and/or intentionally concealed facts that the customer now says would have been important.)

Customers who make such fraud claims often allege that the vendor made oral misrepresentations or omissions. That kind of allegation can be tough for a vendor to beat without an expensive, full-blown trial, where the jury listens to witnesses and decides whom to believe.

Vendors sometimes include ‘no-reliance clauses’ in their contracts in an effort to preclude such fraud claims, but those don’t always work.

Cheap insurance: Provide written disclosure of what could go wrong

An easy way for a vendor to discourage customer fraud claims – and/or to win them on summary judgment without the need for a trial – is to demonstrably disclose ‘bad’ facts before closing the deal.

One way to do that is to provide the customer with a “Risk Factors” disclosure sheet, as an exhibit to the sales contract (and possibly as a slide in the sales pitch), listing as many things that could go wrong with the deal as the vendor can think of, even the obvious ones.

Such a disclosure sheet might have helped SAP defend against Waste Management’s accusation that SAP affirmatively misrepresented “that its software was an ‘out-of-the-box’ solution that would meet Waste Management’s needs without any customization or enhancements," according to a Waste Management press release. The disclosure sheet might have confirmed things such seemingly-obvious things as:

SAP’s proposed software solution had previously been implemented only in Europe;
Customization of the software would be needed;
Time estimates for implementation are subject to uncertainty;
Not every problem can be foreseen;
Etc., etc.

This isn’t a new idea. One obvious precedent is the side-effects warnings that pharmaceutical companies include in their television commercials. Another example comes from public offerings of securities in the United States: SEC regulations require that a discussion of risk factors be provided to prospective buyers as part of the prospectus. (To see an excruciatingly-detailed example of securities risk factors that ought to be obvious to just about any investor, scroll down to the “Cautionary notes” list in BindView Corporation’s final annual report on Form 10-K, starting on page 19, which I drafted.)

Disclosure of risks may actually boost sales

Some sales execs will respond to the idea of a risk-factors disclosure sheet by screaming (maybe just in their heads), "Are you nuts? Are you trying to kill my deal? Why the [expletive] would I call the customer’s attention to what could go wrong?"

The answer is: Because you might improve your odds of closing the deal. Recent research has shown that a disclosure of negative information can helps to enhance customer trust. As reported today in a posting at the Harvard Business Review blog:

… In fact, Xu says, research has shown that when people communicate positive and negative information, rather than just positive information in, say, job interviews, they gain higher trust.
Xu asks, "Does this translate to advertising?" Maybe. She’s watching an interesting case in the field right now: Domino’s Pizza current, decidedly un-puffy ad campaign. Domino’s is admitting its previous faults; telling consumers negative things about itself and its product.
"And it appears it’s increasing their sales," Xu says. "Why is that?"

Scott Berinato, The Power and Perils of Puffery, Harvard Business Review Blog Network, May 11, 2010 (emphasis added).

This thinking is in line with some sophisticated received wisdom in the sales community: While it’s true that good sales people know how to overcome customer objections, great sales people promote confidence through ‘completed staff work,’ proactively identifying possible problems for the customer and explaining how the vendor will address them.

(It works this way in the law, too: A great advocate, "selling" his client’s case to a judge or jury, will take the initiative to point out any major problems in his own position, and will explain how his client should win all the same. If the advocate doesn’t confront the problems in his case, the other side will throw it in his face – and the problems will loom larger in the minds of the judge and jury than if the first advocate had candidly dealt with them in the first place.)

Brainstorming risks can increase the odds of a successful project

A successful project is the best defense against potential customer claims. One powerful way to promote a successful project is to spend time brainstorming what could go wrong and provide the customer with a list of risk factors. Ideally, the customer’s reaction to the risk factors will help refine the project planning.

And if the customer gets cold feet and decides to walk away as a result of seeing the risk-factor disclosure sheet, it’s entirely possible that the vendor is better off – there are worst things in life than losing a deal that ought to be lost.