The Elephant Clause

Published On Jan 9, 2023

Imagine a young, ambitious startup. They have no customers yet, and they’re scrappy. They close their first buyer, and their contract is simple: Give us money, and we’ll satisfy your needs.

Things go well, with one exception: The client brings an elephant. An actual elephant. The startup hadn’t anticipated the elephant, but it soldiers on. It makes less profit, but the customer is satisfied.

The next client gets a slightly more complex contract. It has one new clause: No Elephants. Things go well, and the company grows.

From time to time, clients do something unexpected:

  • They record and publish something they shouldn’t.
  • They share their password.
  • They want a custom color scheme.
  • They need custom payment terms.
  • They bring their own drinks.

As they do, the startup—now slightly older and a bit more risk-averse—updates its contract. The document becomes longer, and more unwieldy. Lawyers get involved, and correct the imprecise language with proper punctuation. They number the clauses, and indent things, and replace the simple words with longer ones to standardize legal terms.

More intimidating contracts mean more senior sign-offs. Executives are summoned, and calendars consulted. The sales process draws out. Everyone resents the meetings, but everyone attends, because the contract is packed with risks and expectations and their jobs depend on it.

 


The elephant doesn’t matter any more

That elephant was probably a one-off thing. Many of the clauses don’t even make sense any more:

  • Nobody uses fax machines.
  • The business model has changed.
  • Everyone can use online payment.
  • Once-unconventional terms are now the norm.
  • Everybody has a camera on them at all times.

The world has changed since the time the large, incumbent business was a bright-eyed, naive upstart.

And the contract didn’t notice.

Despite the fact that these clauses are unlikely, irrelevant, or outdated, they remain, each one adding cost, friction and—let’s face it—disappointment, to the experience of doing business. But the incumbent is risk averse, the lawyers are invested, and the contracts are just how things are done.

 


The transaction is the channel is the product

The nature of many services has changed dramatically, in ways that have snuck up on us. Take, for example, the act of exploring a city.

I was in Berlin recently. I used ridesharing and scooter apps to get around. Google Translate helped me parse menus. Google Maps showed me my destination, whispering Straße into my airpod. My iPhone authenticated my face; Apple Pay handled the currency exchange. AirBnB helped me message my host to work out the wrinkles of my stay. Wikipeda explained my surroundings. Travel agents and tour guides need not apply.

Everything has changed, and the role of agreements isn’t what it once was. When you order food from a delivery app, the app controls what you can do:

  • It won’t let you move to the next step of a transaction until you complete the previous one.
  • If something goes wrong, you can message the driver.
  • There’s a rating system, and social pressure for both parties to behave.

Unlike sales agreements of old—which needed to be constrained by words, because they happened between humans—modern services have guardrails. The offer, the payment, the terms, the fulfillment, and the customer support are all one and the same. The contract is the app, and updating the app updates the contract.

 


Old contracts grow moss

And so, one day, while the incumbent is in the middle of interminable back-and-forth negotiations with another customer, the customer gets a call from a young, ambitious startup. Their contract is simple: Give us money, and we’ll satisfy your needs.

This pattern happens all the time in business. The innovator resists change. Risk replaces opportunism. The contract grows moss.

This is a tipping point often ignored by large organizations until it’s too late: The moment when the friction of working with them outweighs the cost of handling rare, novel cases.  The simple truth is that you can’t write your way out of the unexpected. This gives a smaller, nimbler, less experienced organization a tremendous advantage over a big, legacy incumbent. So what’s the incumbent to do?

 


Rip up the contract

Plastering clauses and rules and conditions onto outdated systems just makes the systems harder to use. So much of the modern world is new, and there’s simply no way to bring the old up to date. We need to rethink what we’re trying to do, from the ground up. We need to design first, and choose technology only once we’ve decided what our goals are.

We need to rip up the contract.

Consider Adobe’s recent acquisition of Figma. For decades, Adobe has rolled up every design tool in sight: Flash, Dreamweaver, Freehand, and more. Adobe’s file formats—PDF, PSD, AI—are ubiquitous in the design world and beyond. But these products belong to an older time when design was a discipline, practiced by designers, alone, on high-powered machines. Adobe’s tools are file-centric, and that makes them inherently single-user.

Figma, on the other hand, is multiplayer. It’s built from the ground up to run in a web browser, on the Internet, with many concurrent users.

In Figma, several people can edit the document simultaneously. If you’re changing the font on some text while a colleague halfway around the world is moving that same text to another page, you’d naturally expect the text to appear on the new page with the new font.

With conventional file-based editing, that’s quite simply impossible. That’s why your Microsoft Word projects have filenames like research_study_AC-final-version-7-Sep 21.docx. Meanwhile, there’s no such thing as a “file” in Google Sheets or Figma or Miro. The file format of Google Docs is actually a series of transactions and timestamps, allowing anyone to move forward and backwards in time to see the creation of the current document. When you download a Google Doc, you’re actually downloading a snapshot of that document at that moment in time.

Adobe paid $20B to rip up the contract. And whether you’re a large incumbent, or a Byzantine public institution, you probably should too.  Naieveté is a feature, not a bug. It gives you fresh eyes. It’s a reset. Start from scratch.

Nobody brings an elephant any more.