Big sporting occasions, such as the Rugby World Cup kicking off next week, inevitably bring joy for some and misery for others. To minimise the prospect of a painful failure, competitors train hard. They analyse what they are about to confront: weather, opponents’ past form, terrain conditions. Anything that may yield advantage is absorbed in the pursuit of success. Theirs is the example to follow when paying out the marketing spend that makes sports showcases possible.
Getting sponsorship right can transform a brand, attract new customers, hide bad news, displace rivals and motivate employees. On the other hand, putting hefty funds into sport is full of likely disappointments and perplexing imponderables, and presents risk to reputation and fortune. A look back over the past few months of summer sport will show the variety of, and sometimes unpredictable, threats to highly valued properties: the death of a cricket coach, doped cyclists, injured footballer’s feet, rain-soaked tennis, and many more.
Broadly speaking, a risk can be defined as something that has the effect of changing the size and shape of the sponsored event. Further, such risks can be put into two categories: those that are tangible and quantifiable, such as rained-off matches or teams failing to field the strongest players, and those that cannot be measured by any direct means, such as the failure of a favoured team to make the latter stages of a major tournament.
Also within this second category is the situation where official sponsorship rights may be usurped in terms of exposure by competitors from different sources. Broadcast partners, particularly, are often perceived by customers as being more closely linked to the event than the actual sponsor. Further, sponsorship of individual players can often erode the main sponsorship’s dominance. For instance, Pepsi ran successful campaigns with England team members consecutively to Coca-Cola being the headline sponsor of the 2006 FIFA World Cup.
The right sort of sponsorship opportunity is not easily found. The brand has to match, the audience must be correct and the price must be right – often meaning months of research and analysis. So when the right property becomes available, there can be a tendency to lavish too little attention on gloomy forecasts of trouble, which might degrade a proposed alliance. Too often the initial negotiation centres almost exclusively on the rights package, with risk management being left to the lawyers to include in the drafting of the final documentation. Miserable though it may be to the marketing team that has engineered the dream sponsorship, risk needs to be discussed as early as possible. After all, it would be reasonable of the chief executive to ask what might be the best and worst possible outcomes of the investment.
A sponsor’s most effective defences against loss in sports are termination, the rebate of licence fees and damages claims should the contract be breached. There are obviously certain risks that cannot be hedged against with contractual provisions. Such risks are generally considered when deciding whether or not to sponsor the event in the first place – or at least when deciding how much the property is worth. Those that can be put into the contract must be carefully considered. The people round the table must decide who it is that carries the risk; the rights-holder, the sponsor or both. The sponsor – the person with the money, after all – must decide pre-contract if a certain risk materialises whether to walk away from the deal, take a rebate or reduction in fee or to rely on a damages claim.
Inevitably, negotiations will be skewed by the relative bargaining positions of both sides. Like anywhere else in business, there are buyers’ and sellers’ markets and the amount of protection allowed may well depend on just how hot the opportunity is. A sponsor would always want money back if rain stops play. But if there is a queue of other brands willing to pay the price and take the risk, that may not be an option.
Regardless of any bargaining, risk should be assessed from the outset. The minutiae of potential remedies will always need to be worked through in detail in the long form agreements. But smart questions from the marketing department and strong analysis of past disasters will help ensure sponsorship is more joy than misery.
Patrick Mitchell is sports and media lawyer at DLA Piper