Every company, large or small, strives to conduct business ethically, honestly and in full compliance with all laws and regulations. I mean, really, a company’s success is based on creating innovative, high quality products and/or services while demonstrating integrity in every aspect or decision made in the company.
Ah, but there is the rub: decisions. In order to be ethical, honest and demonstrate integrity you need to make the ‘right’ decisions and that implies judgment. Again, most companies give their employees guidance to use ‘good’ judgment by applying the company’s code of business conduct, or reviewing policies and legal requirements, or discussing pending decisions with your manager or other trusted resource (e.g. human resources, legal, finance).
Unfortunately, there are plenty of examples in business where poor judgment was used and specifically with respect to interactions with customers and business relationships. In the technology industry the two that are the most ‘tempting’ in the sales environment are kickbacks and side deals (or side letter).
so what is a kickback? and what are side deals?
Most companies provide discounts to certain customers. However, if the customer gets an unusually large discount, and a sales rep gets a payment from the customer in return for this discount, this is a kickback.
A side deal is an agreement, either written or verbal, which is made to modify any written agreement with your customer that are outside the normal contract process and does not have the standard approvals. Examples may include:
- a verbal guarantee to accept back unsold products to encourage customers to place a larger upfront order;
- accepting returns that were not required to be accepted under the terms of the original arrangement;
- verbally offering a larger than normal discount on the next purchase that was not part of the original arrangement;
- allowing other products not specified in the original arrangement to be included without additional consideration
Side deals can impact a company’s potential liability with respect to that transaction, create dangerous ambiguities with your customers, and will affect the company’s ability to recognize revenue (it is considered a concession under GAAP rules for revenue recognition) affecting the accuracy of the company’s books and records and puts your internal controls seriously in question.
How do I know if this is happening at my company?
Well, to be honest, you don’t until someone trips up but the more you can emphasize that kickbacks and side deals are unacceptable the more you can help your sales reps/managers make good decisions. No sales rep should make any oral or written commitments that create a ‘new agreement’ or modify an existing agreement without approval through the formal contract process (e.g. amend the original written agreement).
How can I let our sales people know that side deals and kick backs are unacceptable?
Large companies, like Apple, include explicit guidance on gifts, kickbacks and side deals in their code of business conduct and make it very clear that they have the right to discipline (up to and including termination) or end working relationships (e.g. with contractors/consultants) with those who do not comply. To further emphasize this, the auditors will potentially randomly select a sample of sales representatives and make them sign a letter to the auditor expressing all terms have been appropriately documented. Below is an example that Ernst and Young uses:
In connection with your review of the consolidated financial statements of Company Ltd., as of December 31, 2008 and for the year then ended, I have made available to you all agreements regarding sales to OEMs, distributors, resellers, end-users, and other customers. These agreements represent the entire arrangements and are not supplemented by other agreements either written or oral. Upon completion, please fax your response to Ernst & Young LLP, at …
Small companies may not have the luxury of having an in-depth code of business conduct nor are they using a ‘big four’ for their auditors. In this case the best proactive course of action is to provide them a letter that outlines the conduct is unacceptable, discuss the ramifications and get them to sign that they acknowledge that this is not good practice. If you’re struggling for what this should look like, Business Ready has a template for a Side Deal Memorandum to get you started.