Category Archives: Best Practices

SaaS Contractual Considerations: Part II

Despite the claims to the contrary from the monolithic on-premise players who are threatened by the new platform and all of the advantages it has to offer, SaaS is gaining momentum. The best evidence I have to offer is the rate at which analysts and bloggers, including yours truly, are getting inquiries into how to evaluate these offerings from a functional and TCO perspective and how to construct the contract. And it’s not just buyers who want to know what needs to be in the contract to protect their investment. Providers also want to know what clauses they should be including to protect themselves as well.

As I am not a lawyer, I cannot claim to be an expert on contract construction of any kind, but I can claim to be very familiar with IT contracts (as someone who has always handled his own and been involved in their construction and review at a number of companies) and to have considerable knowledge with regards to issues that need to be addressed on both sides of the table. Thus, I give you the doctor‘s top issues for consideration when negotiating your next SaaS contract in addition to the standard issues of term, fees, liability, representations, warranties, confidentiality, insurance, indemnity, rights, relationship, dispute resolution, publicity, and government law that your lawyers will remind you of in every contract drafting. Today, we’ll focus on the supplier:

For the Supplier:

  • We’re Not Responsible for Your Network
    You are responsible for your software and network, and not your client’s software and network. If your client’s ISP goes dead, not your problem. If your client’s router starts acting flakey and randomly blocking required ports, not your problem. Your support requirements cease the minute you are able to demonstrate the problem is not on your network.
  • We’re Not Responsible for Your Systems
    As a provider you are responsible for your software and your network, not your client’s software and network. As long as you provide the client with a complete list of compatible software products and supported versions, and the client agrees to it, you’re under no obligation to support the client should they choose to use other products or upgrade to non-supported versions before you have certified that such products are compatible with your system. I.E. if IT upgrades all the browsers before you certify them as compatible, and your system doesn’t work, not your problem if the client agrees in the contract to only use, and expect support on, pre-agreed browsers and supported versions thereof. Of course, in fairness, you should expect to have to support new versions within a certain time-window and agree to do so within a realistic time-window.
  • We’re Only Responsible for the Security of Data in our Systems
    You’re required to follow industry standard best practices around data security and insure that all confidential and personal information on your systems is appropriately encrypted to the level of security agreed upon in the contract. However, you’re not responsible for what your client does with that data once they extract it from your systems. If they decide to cut and paste out of a secure browser session into an unsecure notepad file on a hacked PC, you cannot control that and have no responsibility for the consequences of such action.
  • We’re Not Responsible for Disasters Beyond our Control
    You’re responsible for your software, systems, and data centers to the extent that you have control. Your Force Majeure clause says that you are not liable for damages if both of your power providers go black or if both of your internet connections get severed because of a natural disaster or other government or terrorist action beyond your control. That being said, if your providers stay dark for more than a short period of time, it’s your responsibility to transition to a backup facility or enable your client to set up a temporary instance of your application in their facility as per the terms that any reasonable buyer should be expected to insist on in the SLA.
  • Standard Rate for Services Above and Beyond our Standard Offering
    You’re responsible for support, maintenance, upgrades and other services you agree to — and that’s it. Although you are happy to go above-and-beyond your service requirements, make it clear that you do not do custom work for free and that any custom tasks or services will be billed at a standard hourly or daily rate on the monthly invoice. Otherwise, the buyer might say “we thought that was free” and put you in a pickle if you hired additional resources to support the buyer above-and-beyond the agreed upon service levels.

Be sure to check out the Master “Software as a Service” Managed Services Agreement in the Procurement-Based Contract Templates, Version 2, that is made freely available to you by Stephen Guth of The Vendor Management Office blog.

SaaS Contractual Considerations: Part I

Despite the claims to the contrary from the monolithic on-premise players who are threatened by the new platform and all of the advantages it has to offer, SaaS is gaining momentum. The best evidence I have to offer is the rate at which analysts and bloggers, including yours truly, are getting inquiries into how to evaluate these offerings from a functional and TCO perspective and how to construct the contract. And it’s not just buyers who want to know what needs to be in the contract to protect their investment. Providers also want to know what clauses they should be including to protect themselves as well.

As I am not a lawyer, I cannot claim to be an expert on contract construction of any kind, but I can claim to be very familiar with IT contracts (as someone who has always handled his own and been involved in their construction and review at a number of companies) and to have considerable knowledge with regards to issues that need to be addressed on both sides of the table. Thus, I give you the doctor‘s top issues for consideration when negotiating your next SaaS contract in addition to the standard issues of term, fees, liability, representations, warranties, confidentiality, insurance, indemnity, rights, relationship, dispute resolution, publicity, and government law that your lawyers will remind you of in every contract drafting. Today, we’ll focus on the buyer:

For the Buyer:

  • Data Export, Backup, & Security
    It’s your data and you should have full access to it 100% of the time and the ability to extract some of it or all of it on a whim with little or no notice to a standard, open format such as CSV, EDI, or XML. Of course, if the provider is hosting your entire ERP system and you have Gigabytes of data, expect to pay a bandwidth usage fee if you plan to do this regularly, or a service fee if you require the provider to back it up to encrypted DVDs or Tape and courier the data to you. Similarly, it’s your data and you have every right to expect it to be secure and available no matter what. Insure that the provider is required to do complete backups at least daily, incremental backups at least hourly, and required to store a copy of the encrypted daily backups in an off-site location.
  • System Availability & Up-Time
    One of the attractions of SaaS is the 24/7 uptime that your average company IT shop, that works 9 to 5 in one time zone, can’t deliver. Make sure the system has a guaranteed up-time of 99.999% when you need it (e.g. between 8 am PST and 8 pm GMT if your users are predominantly in North America or Europe) and that you have at least 99.5% uptime the rest of the time, with scheduled maintenance only occurring in agreed upon time windows with adequate notice.
  • Pay For Use
    The beauty of SaaS is the scalability it offers you and the ability to add or subtract users as needed. Make sure you’re SaaS agreement only charges you for the number of users with active accounts (subject to any minimum number of seats you might have agreed to) on a monthly basis.
  • Guaranteed Response Time
    There’s no perfect software system and something will inevitably go wrong with on-demand just like something inevitably went wrong with your current on-premise system. Make sure that the provider agrees to start investigating all outages immediately during agreed upon normal operating hours for your business and within 30 to 60 minutes otherwise. Make sure they are required to get back to you with progress within a maximum timeframe of 60 minutes and to report on progress on an agreed upon schedule.
  • Escrow & Guaranteed Availability
    You generally select an enterprise system with the intent of using it for at least the mid-term, if not the long term, and if a system works well for you, the last thing you want to happen is for the provider to disappear (either due to financial failure or M&A) and take its system with it. Thus, it’s important to take precautions that will insure that, no matter what, you will have continue access to the system for as long as you so desire. The way to do this is to (1) insist on escrow and immediate access to the updated source code and related documentation which is to include required system architectural designs, complete installation instructions, and maintenance and support manuals that are kept up to date on every release and (2) forced support for a minimum period of time on material change of ownership, including the option to acquire the system from escrow at an agreed upon perpetual (annual) license cost at the end of the the minimum support period if the acquiring company no longer wishes to support the system.

Be sure to check out the Master “Software as a Service” Managed Services Agreement in the Procurement-Based Contract Templates, Version 2, that is made freely available to you by Stephen Guth of The Vendor Management Office blog.

Be Smart About Working Capital

Now that we’re in a credit crunch, articles are cropping up everywhere with “ideas” on how to win more working capital. Some are good, some are not-so-good, and some are downright dangerous. To make sure you know which method falls into which category, I’ve decided to collect the most common “ideas” into one place and categorize them for you, so you don’t have to worry about selecting the wrong method and jeopardizing what might be an already hazardous cash-flow situation.

The Good

  • Cash-Flow Forecasting
    Identify the periods where you will need cash well before they happen so that you can dialogue with your customers, suppliers, and bankers to get you through those periods of cash-negativity.
  • Move to More Sustainable Product Lines
    Make sure that even if you’re in trouble now and have to “weather the storm” for the next few months, you’ll be in a state of financial health to take advantage of the opportunity when the market comes back — because history will compete and it will come back strong when it does.
  • Customer Relationship Management
    Understand your customers’ cash-flow situations, when they can pay, and how this will affect you. If they can’t pay on time, and you need cash, you need to know in advance so that you can arrange to borrow against, or sell, the payable. If they can’t pay on time, and you can wait an extra 30 days, agree to treat it as a “cash loan” and charge a fair interest premium. It will save your customer money while improving your future cash situation.
  • Inventory Optimization
    Inventory costs you overhead. Up to 30% or 35% of the product value. Streamline your supply chain and take out as much inventory as you can. It will improve your cash flow by reducing cost and improve your cash flow by reducing the amount of working capital tied up in inventory.

The Bad

  • Identify Cash-Thirsty Areas
    Knowing where you need cash isn’t good enough. You need to know why. If it’s a failing operation or product lines, you need to axe it and refocus on more profitable operations or product lines.
  • Focus on the Biggest Projects First
    This might sound good in theory, but the biggest projects might not yield the largest cash savings opportunities. If it’s a people intensive project, you can’t just cut people and expect to reduce cash-flow. In the short term, with legal costs and severance pay, you’ll increase cash-flow. Then, when you need to hire them back, you’ll have recruiting costs, HR costs, and ramp-up costs. Sometimes the smaller projects, such as replacing a telecommunications infrastructure when you might be able to save money just be renegotiating a new support agreement with a lower-cost service provider, might have larger savings opportunities.
  • Shift Inventory to Suppliers
    While VMI is good if done right and implemented up-front (so that products are not produced until needed), forcing your suppliers to hold your excess inventory (without warning) is bad as your suppliers will be counting on your payment to pay their raw material suppliers and payroll, which could worsen their financial situation to the point of bankruptcy.
  • Factoring as your Main Financing Strategy

    Although factoring sometimes makes sense if you can get a good deal and it will cost you significantly less than a loan, relying on it as your primary fall-back strategy is problematic, especially if a number of your suppliers all of a sudden get their credit worthiness downgraded.

The Ugly

  • Extending Days Payable Outstanding Across the Board
    If a strategic supplier is hurting, and you’re its largest customer, this might force it into bankruptcy. What’s that going to do to your already ailing cash flow when you have to rapidly switch to a higher cost supplier and expedite shipments?
  • Use a Debt Collection Agency
    Nothing improves supplier relations like a third party collection agency that will call your supplier everyday and threaten to sue its deadbeat ass off. Just don’t do it.

Managing The Purchasing Factory


Today’s guest post is from Pierre Mitchell, Director, Procurement Research and Advisory for The Hackett Group.

Dave Nelson, the CPO from John Deere, co-authored a book titled “The Purchasing Machine“. The book was good, but never explained the meaning of the title. It did however get us thinking about the analogy of a factory to a Procurement function, and how Procurement can apply Lean Manufacturing principles to its operations.

Many companies are currently implementing Six Sigma methodologies, and both Lean and Six Sigma emphasize a focus on the customer and the elimination of waste. Six Sigma’s “DMAIC” methodology can very easily be applied (and is being applied at some progressive organizations):

  • Defining the needs of procurement’s internal customers,
  • Measuring the criteria of success (e.g., supply assurance, savings, supplier innovation, etc.),
  • Analyzing the current situation (e.g., too many suppliers, too many ways to buy, etc.),
  • Improving the processes (i.e., the “opportunity identification” step in a sourcing methodology), and
  • Controlling processes to “hold the gains” (e.g., contract compliance) through fail-safe processes.

This is foundational and fundamental stuff. However, applying lean manufacturing techniques to the “white collar factory” of sourcing and P2P (Purchase-to-Pay) is a mostly untapped area of opportunity.
Interestingly, some procurement organizations have named themselves “Supply Chain Management” even in non-manufacturing environments (e.g., Bank of America), but yet they always haven’t taken to heart key practices that manufacturing organizations have put in place on the shop floor. This is unfortunate, because it can be done.

Managing the “sourcing factory”

One way to view strategic sourcing is that of a Configure-to-Order business that “manufactures” highly profitable services. How profitable? For every $1 invested in procurement, world-class procurement delivers $7 to the firm, and that number goes even higher when looking at strategic supply processes. Unfortunately, there is a backlog of work because there is not enough investment in the bottleneck work centers (e.g., commodity managers), and not enough profitable services are getting out the door. So, attacking the bottleneck is critical, but funds are not unlimited to purchase more capacity, and must be freed from other areas (e.g., transactional processes) while improving “yield” through better work methods and measured doses of appropriate automation (e.g., freeing up commodity manager’s time via better spend/supplier analytics).

Another issue within the sourcing factory is aligning capacity to customer expectations via a “Capable-to-Promise” model. Various types of standard sourcing services, and their associated lead times and quality levels, should be offered up to customers based on finite capacity, and then configured to order. Without segmented “flow lines” (e.g., simple negotiations versus complex ones), standard lead times, capacity planning, and demand management (e.g., setting rules by which procurement must be involved in sourcing), the factory is going to be backlogged, quality will suffer, and customers will be very unhappy.

Designing what you can manufacture

The end of the sourcing factory is not the contract. A sourcing service is only profitable when preferred agreements are actually utilized within the “P2P factory” (where orders are placed and bills are paid). Unfortunately, they often aren’t. For the average company, our benchmark data puts overall bypass/maverick spend at 10%; but the real problem lies within indirect spend. A custom study that we did with 200 firms on contract management revealed a 23% maverick spending figure for influenced indirect spend. This translates to $11 million in lost savings per billion in indirect spend for the typical company. The problem with this $11 million of “scrap” is that the design of the Source-to-Settle process didn’t adequately consider the downstream processes of P2P (or supplier management and development). Strangely, every strategic sourcing methodology includes a “stakeholder management” process, yet the methodologies rarely explicitly define how P2P processes and systems will guide users to preferred supply sources and optimal buy/pay methods. It’s important to make strategic sourcing staff accountable for maverick spending (and not just savings). Treat P2P process users as customers – key stakeholders – and utilize thoughtfully designed downstream processes such as P2P and supplier management and development.

Converting the P2P job shop to flow lines

Most companies claim they have a defined P2P process, but if you scratch the veneer, you’ll find issues — e.g., only one-quarter of typical firms have single accountable P2P process owners. Frankly, some companies’ P2P processes are positively medieval, with each transaction handcrafted in a manner befitting the purchaser trying to get it through the system. If a firm has moved into the industrial age of P2P manufacturing and does have any P2P methods defined, it is likely the venerable three-way match. In manufacturing vernacular, this is known as a “job shop” — a “one facility fits all” general purpose processing capability, where everything goes in on one side and hopefully makes it out the other. If it’s an ERP environment, it’s “one system fits all”. In Lean manufacturing environments, flow lines (or “cells”) are set up based on families of similarly-made parts; for P2P processing, firms should define tailored transactional flow lines beyond the 3-way match, to include p-cards, assumed receipts, Evaluated Receipts Settlement (ERS), invoice-to-contract matching when POs not required, etc.

Papers from Hackett’s Purchase-to-Pay advisory program describe these concepts: “”Using an Optimized Transaction Strategy to Achieve P2P Efficiency”” and “A Management Primer for Balancing Risk and Control in P2P”. By designing a “P2P manufacturing” factory with transactional flow-lines that are fit-for-purpose, efficiency and effectiveness will invariably improve.

Thanks, Pierre!

Are Your Best Practices Really Best Practices?

Best practices are important because, as per Wikipedia, they can deliver desired outcomes with fewer problems and without unforeseen complications and do so more productively and at lower costs. Many organizations claim to employ them, and chances are that your organization falls into this group. But do you really employ best practices?

Calling a procedure a best practice does not make it a best practice. And even if it was a best practice five years ago, that doesn’t mean that it’s a best practice today … even if it’s the best practice you know of. As Carlos Alvarenga points out in “When Is a Best Practice Not a Best Practice?”, “best practices” is often a misleading term used by some consultants and software vendors, a term misappropriated to refer to what are in fact just “rules” of daily operation.

As Carlos notes, by the time a “best practice” gets incorporated into a piece of software or a PowerPoint presentation at a big consultancy, it is usually no longer “best” but simply “good”. Most companies that devise truly innovative practices try very hard to keep them trade secrets for as long as possible. Chances are, by the time they are proclaiming the greatness of their best practices to the rest of the world, they’ve already moved on to a new suite of best practices, or improved the effectiveness well beyond the pasturized pablum they are milking for all the attention they can get from the media.

Furthermore, a best practice is not a best practice if your organization cannot, or will not, adopt it and implement it to its full extent. (For example, monitoring a supply chain visibility daily for unexpected demand fluctuations and actively taking action on that information, which would be a demand-driven best practice, are two completely different things.) A best practice is the best possible solution that your organization will implement, follow methodically, and try to improve on a regular basis.

Constant evaluation, and improvement, is key. New technologies, methodologies, and organizational structures crop up all the time … and you never know when one or more of these new innovations might provide the foundation for a two times productivity improvement, and a four times ROI, in one of your best practices. If you haven’t reviewed a best-practice methodology in a year or two, it’s time to review it now … with an open mind. You never know what opportunities you might find.