… Don’t Forget the Contract, Part III

Contract Lifecycle Management (CLM) — which includes contract creation, management, analytics, and renewal — is becoming big and will likely get bigger still as organizations rely more and more on contracts to control price and mitigate risks. But, as we also pointed out in our first post, a contract lifecycle management system is not only useless without contracts to manage, but is also useless without good contracts to manage.

And good contracts are more than just specifications of product, price, and a few boiler plate T’s & C’s provided to you by legal. As we described in our first post, it’s understandable — by both parties, and, especially, by a party whose first language is not the contract language. Then, as we detailed yesterday, it clearly describes the need, which is first captured in a detailed statement of work that the contract will be created around.

But do you start writing the contract as soon as you have the Statement of Work drafted? Definitely not! Remember, there are two primary reasons you create a contract. One, to get what you want. Two, to mitigate risks associated with getting what you want. So, the next thing you have to do is:

Define the Risks
… and how they are dealt with

What are the risks? Start with the product. What are the risks in quality? In transportation? In import/export? In use? In recovery? Then move on to service. What are the risks in performance? In delivery? In quality or acceptance criteria? Then to the supplier? Will they be around? Are they financially stable? Are they sustainable? Are they located in a relatively risk free zone or risky zone?

Then, assess what are the impacts if a risk situation comes to pass. Additional Costs? Customer dissatisfaction? Brand damage? Regulatory fines or injunctions? Do they need to be mitigated? By who? When? Is there a penalty if the impact of the risk is not mitigated and could have been? What risks are excluded from mitigation because they can’t be, the risk is too low, or the mitigation too costly?

Is Force Majeure allowed? When? How long can it be claimed for? What documentation or proof is required? What happens if one party tries to claim it for longer than is reasonable under the circumstances? (E.g. if a power outage shuts a factory down for two days and the average line restart time is one day, and the supplier is still trying to claim Force Majeure after 10 days, that’s not reasonable.) What is the recovery if the product or service must be obtained on a regular basis or within a certain timeframe but the supplier cannot provide during the Force Majeure period? Can the buyer use another source? For how long? Can the contract be cancelled if the supplier cannot recover within a certain time frame?

Remember, generally speaking, a contract is not needed when everything goes according to expectations. It’s needed when things go to hell in a hand-basket and one or more parties that need to take responsibility for their actions don’t want to and/or still demand payment for products not delivered or services not rendered.

If something goes wrong, you need to make sure that the responsibility for remediation, recovery, and restitution lies with the appropriate party and that if the responsible party doesn’t own up, you have other options. Being locked into a sole source contract when a supplier can’t deliver for three months when you only have two weeks of inventory left is not acceptable. Nor is the ability for a supplier’s lawyers to tie you up in court for months because responsibility was not clear, remediation or penalties were not clear, or vague terms were included.

So, just like it’s critically important to specify what you want before you start writing a contract, it’s also critically important to specify what the risks are and what will happen if, and when, they materialize. (And we say when because your chances of not being hit by a disruption in at least one important contract every year are less than 15%, and since you don’t know where that disruption will come from and which contracts will be affected, it’s just best to assume they all will be.)

So can you start writing your contract now? Stay tuned!

 

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>