Business Transformation
When non-compete clauses become non-complete headaches
Editor’s note: This posts on a non-compete clause is the third installment of our ongoing series on protecting yourself from unscrupulous consulting practices.
There are times when the innocuous non-compete clause that was included in your original consulting contract becomes more mountain than molehill and suddenly, your project’s completion is threatened.
The non-compete clause
Suppose for a moment, that you hired a consulting company to help you with your ERP or business transformation. You hammer out all the important details, including specifically how the work to be done is outlined in the engagement letter. You are asked to sign a non-compete so you cannot hire any of the consulting company’s contractors or subcontractors for a specified amount of time should you decide to part ways. This is pretty standard stuff. The temptation is to sign it without a second thought and move on.
A non-compete clause makes sense; if a service company uses contractors to do some or all of the work, what’s to otherwise stop that contractor from taking the business away from the company that employed them and work the project on their own? So on the surface, a non-compete clause in your ERP consulting contract should not be alarming. Really, it should be expected.
Except.
There is a question almost no one asks because the definition of a contractor seems like common sense. Based on your own experience, if you were asked who your consulting company’s contractors are, how would you answer? The logical answer would be the consultants themselves. Consulting companies generally work with consultants in one of two ways. Consultants are either W2 employees of the company or they are contractors hired to represent and work as a consultant for that company.
The assumption is that the definition ends there. The problem is that in reality, it doesn’t. A contractor can be anyone or any company that works with another company.
Enter the unscrupulous consultant.
The unscrupulous consultant adds more to the contractor/ subcontractor definition. They include any company and anyone used in your business transformation. This includes the software companies, software vendors, implementers, VARs, and any other person or company that could be involved in your project. This equates to putting you over a barrel.
If you decide to part ways with your consulting company in this situation, then you will have to put your entire project on hold until the non-compete time has lapsed. That’s not good any way you look at it. What if you have chosen your new ERP system but you just don’t want to work with that consultant for the rest of the project? Looking at your contract on the surface, that shouldn’t be a problem. But wait, the software vendor you chose is technically a subcontractor of that consulting agency unbeknownst to you. So are other vendors who supply that software. So are all the implementers. See that barrel rolling toward you yet?
Ask questions
The good news is that there are things you can do – as long as you haven’t signed the engagement letter/contract yet. Make sure every detail is spelled out. Require the consulting company to define and list every contractor and subcontractor that would be included in their non-compete. Make sure that they disclose to you that the list they supply is all inclusive so they can’t ‘forget’ to mention a few. Make sure it is in writing and as part of the contract. If the consulting company refuses, brushes it off, or downplays it, you should hear those warning bells in your head ringing loudly. Hold your ground. If they refuse or hedge, then walk away. If the consulting company is truly independent and transparent, they will share this information with you.
You hire consultants to help make your project run smoothly and successfully. Good consultants will do that. Don’t put your company at risk by signing a contract that puts you at the complete mercy of your consultant.
Next Time: This short series on recognizing unscrupulous consultant practices wraps up with one more red flag of which you need to be aware. It’s a doozy, so please stay tuned. Sign up to receive a notification when we post so you don’t miss out.