Welcome to my “3 ways to” series. With this series of articles, I aim to share some traditional and some creative solutions to everyday business problems. Today we’ll be looking at some ways to structure a new product development agreement with a supplier.
It is said that ideas are pretty easy to come by. It’s the journey from the idea stage to the execution stage that takes much of the work. Even then, once you have your idea in physical form, you need a method to manufacture it and market it. Often, you can accomplish this with an existing supplier. Or, if not, you may need to conduct an RFI (request for information) to find the right manufacturer to help you bring your idea to fruition. The goal of this article is to help you structure an agreement with a supplier. This article assumes that your supplier can engineer and make the product for you or the relevant industry segment at the scale you need.
You own everything outright – Every once in a while, a new idea does have the potential to be a major gamechanger. In those rare cases, it is worth the time and effort to set the groundwork for exclusive ownership and control, especially when the idea will create a new segment to the market or business unit within your organization. An example scenario may include that you are the dominant player in the industry, and you are looking for a differentiator to help you advance your profile among the competition. In these cases, you should establish strict confidentiality terms with the suppliers you plan to work with and give yourself extensive protection. If you own everything, it will be the most expensive option because anyone you work with will be along for the ride and will not be able to exercise control or likely be willing to absorb any of the costs to develop, engineer, or manufacture the product. Prepare your business units for this reality and help them plan accordingly. Meet with your legal team and subject matter experts to discuss the risks you foresee in the process.
Exclusivity period – In most cases, the idea is simply an excellent basic idea or is an enhancement to a supplier’s existing product. Chances are it will be a differentiator for a while but isn’t a major long-term gamechanger. In those cases, outright ownership may not be the best and most-efficient route to bring your idea to fruition. You may be able to accomplish all of your goals with an exclusivity period. Exclusivity periods can require the supplier you choose to work with to agree that they won’t sell the product or market the product you co-create to any of your direct competitors or their other customers. It ensures that you are the only party bringing the idea to the market. Having exclusivity gives you the differentiator you were looking for without all the cost or risk. Prepare your business team that this option may still be costly or require specific committed purchase volumes for the supplier to justify the engineering and manufacturing investment to create the product.
Supplier owns, but you get a discount – Sometimes your employee’s lives would be more comfortable if the new product existed. The idea isn’t a gamechanger, but is a lifestyle upgrade for your team or solves an annoying problem that everyone has grown accustomed to managing. In such cases, you can see if a supplier is willing to take on the engineering and manufacturing investment in exchange for giving you a discount on all new products you purchase for a time. These discounts can vary greatly depending on how easy it is for the manufacturer to implement the product. Your supplier and internal subject matter experts will be able to help you plan for and develop reasonable terms.
I hope these ideas give you some great ways to tackle your business challenge. Some of these ideas may create additional risks that need to be solved when designing a solution. This article is written strictly for informational purposes only and is not a substitute for sound legal advice. However, if you do want some great legal counsel, have I got a deal for you! I happen to be available at the time of this writing and would love to chat about your organization’s needs and how I can help. Please DM me.