Category Archives: contract management

Are You Ready for the 4th Quarter Crunch?

Even though businesses can choose their own fiscal years, many choose to coordinate with the calendar year. As a result, the 4th quarter is now upon them, and, in any company that is not best in class, a lot of people are getting anxious about meeting their numbers. It happens every year, and even if I’m not oot and aboot (NSFW*), I see it indirectly every year in the 4th quarter slump (when blog stats take a temporary dive).

And this year, many supply management professionals have good reason to be worried. While the economy has started on the road to recovery, the road is full of potholes and, with the impending U.S. election, we don’t know what’s going to happen and whether or not the U.S. Congress that is elected on November 6 is going to vote to raise the debt ceiling or take the U.S. over the fiscal cliff. Given the lack of sound economic and global trade policy since Clinton left office, it’s hard to say what’s going to happen.

The issues is that many of these professionals did’t plan for the rapid increase in some commodity cost categories, talked about risk but never took mitigating actions, and didn’t take the time to upgrade their skills so that they could continue to do more with less (as we all know that even though many companies are spewing the talent talk, they aren’t engaging in the talent walk [and will be surprised when the market eventually rebounds and their top talent walks out the door, but that will be another post]).

But the year’s not over yet, and there’s still things they can do to not only mitigate the “damage” that is expected as year-over-year spend increases, but contain costs and demonstrate their ability to add more value to the organization before the year is up.

Three things in particular that they can do right away are:

  • Have Finance Agree to Better Cost Savings and Avoidance Metrics
    As discussed in yesterday’s post, savings on categories negotiated this year should factor in (index & formula based) commodity rate increases and exchange rate fluctuations and cost increases on spot-buys should be calculated using similar year-over-year comparisons. This way, even if the Sourcing team couldn’t get to as many categories as they’d like, and savings were less than anticipated, a better, more realistic, picture is painted.
  • Start Monitoring Contracts and Supplier Performance more Actively
    Has the supplier been billing at contract rates, honouring discount levels, and shipping on time with an acceptable defect rate? If the supplier is over-billing, if discounts are missed, and if shipments have to be constantly expedited at higher costs, the savings that were negotiated evaporate rapidly. Increasing the rate of savings capture across all high-spend categories will go a long way to meeting targets.
  • Take some online / distance training that can be done after hours
    Increase your skills, increase your efficiency, increase your supply management opportunity astuteness, and do better at every task you do. There are a number of options, and some, like Next Level Purchasing, offer certifications recognized to various degrees around the globe.

And then they can start planning for next year by pushing for the acquisition and implementation of better technology and the transition to new and better processes.

* But hilarious!

Managing Indirect Spend: An In-Depth Review, Part I.2

In Part I.1 we began our review of Managing Indirect Spend, a new book by Joe Payne and William (Bill) Dorn of Source One that is the culmination of everything they have learned while doing nothing but Strategic Sourcing, primarily on Indirect Spend, since 1992 — before it was cool. And as SI noted in its last post, clocking in at 422 pages, this book is an incredible handbook for anyone who wants to get a handle on indirect spend, which has increased in organizations across the board since outsourcing and right-sizing rose to fame in the 1990s. (And if you think otherwise, download SI’s free eBook white-paper on Spend Visibility: An Implementation Guide, dive into your spend, and see just how much of it is indirect.)

Today we’re going to continue our review of Part One — The Process, and dive into the last three parts of Bill and Joe’s excellent adventure into the strategic sourcing process and discuss:

  • Scorecarding
  • Negotiations
  • Contracting

A Balanced Scorecard is a strategic performance management tool that tracks supplier performance against a set of metrics in order to provide a well-rounded picture of the supplier that can be used to monitor and control performance. While most organizations introduce balanced scorecards after a supplier has been selected, scorecards should also be used when determining which suppliers to invite to the table, and everything — pricing, capabilities, past performance, market intelligence, supplier responsiveness, and employee perception — should be built into the scorecard to help insure the most appropriate supplier is selected.

The chapter also makes some great points that are often overlooked:

  • Scorecarding can be a teambuilding activity
    The entire cross-functional team can contribute to the process.
  • Scorecarding fosters buy-in to the awarded supplier.
    As everyone knows that the supplier was selected only after all data and all viewpoints were carefully considered and organizational needs fully balanced.
  • Scorecarding can deliver market insights not otherwise obtainable.
    Especially when supplier references are checked as part of the process.
  • Insights only come when a full history of the relationship is obtained
    Suppliers only give you references they believe will be glowing and cast them in the best light. Thus, it is vital to ask the references what supplier interactions were like from day one, what issues were encountered, and how (effectively) they were resolved. How long before the customer reached its current level of satisfaction?
  • A lot of questions will need to be asked!
    The authors provide a starting list of sixteen on page ninety-seven, and depending on the category and its nature, this might just be the ice-breakers.

Eventually, every process results in negotiations, which are covered extensively in Chapter 6. The authors also make some great points in this chapter that cannot be forgotten:

  • Suppliers have the advantage — ALWAYS!
    Whereas a sourcing team spends 5% of its time, or less, sourcing a specific product or service, especially in an indirect spend category, the [lead] supplier negotiator is 100% focussed on selling that category of products or services every single day. They know everything about it, and the market waters around it, while the sourcing team is struggling just to tread water in the unfamiliar territory.
  • A proper negotiation strategy minimizes the chance a supplier will add extra margin in a first round bid.
    If the negotiation strategy pervades the entire process, and presents a business case to the supplier that your business is something they can’t afford to lose because they will profit immensely by gaining it, the supplier will be much more aggressive with its bidding up-front.
  • It’s Not Getting to Yes, It’s Getting to No!
    If the supplier never says no, then the sourcing team never came close to getting the supplier’s best offer.

The chapter also had some great techniques a buying team can use to improve pricing, as well as some very important things that a sourcing team should never do, which include:

  • no negotiating after a reverse auction
  • no negotiating in contracting
  • no setting artificial targets

and if it’s not clear why, then you should definitely read this chapter.

The last, and final part, of the basic process is contracting — getting it in writing. A contract should balance the need for legal protection with common sense. It should be concise and only address the relevant risks and identified resolutions. It should not be a generic — one size fits all — boilerplate MSA that is 100 pages in length where only 10 pages are really relevant. All that does is add time (for unnecessary review), cost (of the overpriced lawyers), and loss (while savings opportunities go unclaimed) to the process. With the exception of a few basic definitions, the only clauses that should be there besides negotiated terms and resolutions are a balanced force majeure clause, a right to audit clause, and, possibly, a right to first refusal clause. While the supplier should have the right to be late without penalty if an act of nature prevents it from business as usual, the buyer should have the right to seek alternate sources of supplier or terminate the contract if the supplier cannot recover in a certain amount of time and, especially in the case of software (maintenance) contracts, should NOT be required to make payments when the supplier is unable to perform. The right to audit should be for the life of the contract, the audit should be allowed to go all the way back to the start of the contract (even if four and a half years into a five year contract), and the buyer should have the right to recover all monies owed from overcharges, even if they were made four years ago.

The chapter also did a great job of explaining why:

  • legal should be brought in even before the RFP/Q to prevent issues from arising later on,
  • most favoured nations clauses, which symbolize much of what is wrong with government agencies, do nothing but bite you, and everyone else, in the @ss, and
  • continuous innovation clauses all but guarantee that there will be no innovation for the lifetime of the contract.

There’s some great advice in these pages — and more to come in Part I.3 which will discuss how to truly achieve continuous innovation, how to get stakeholder buy-in, and what not to do if the goal is success. Continue to stay tuned!

Boilerplate Blasphemy

A recent article over on the eSide that explained why you need to “Focus on the Fine Print”, while a little simplistic, did a great job of pointing out the most important thing you need to remember when you are in contract negotiations:

The advantage always goes to the drafting party.

Always. Why? Because the drafting party always takes home-court advantage. While it is theoretically possible to prepare a contract to the advantage of the other party, I’ve never seen it happen. Even the fairest contract I’ve ever seen gave home-court advantage to the drafting party in the section on Governing Law.

Thus, if you are given a choice as to whether you should start with your paper or their paper, start with yours. And then remember that:

The fairer the contract is, the faster the negotiations will go.

You should only take the advantage where you absolutely need it. If you try to take it in every clause, the other party will likely be insulted at your lack of willingness to at least offer a few concessions and negotiations will not go well.

Remember that the point of a good contract is to build a framework for a problem-free working relationship. Keep that in mind, and drafting will go easier.

For Good Outsourcing Contracts, Keep Litigation in Mind

A recent article in the Sourcing Interests Group newsletter that described “a litigation perspective on outsourcing relationships” is right when it states that a litigation perspective will improve your results with outsourcing agreements. Given that outsourcing agreements are typically long in duration, it is important to craft the best agreement possible. A litigation perspective will help. Why?

Without a litigation perspective, a typical outsourcing agreement is:

  • general
    Since it is impossible to predict every circumstance that may arise, most drafters of outsourcing agreements stick to general terms, broad service descriptions, and generic service level improvement requirements. This is bad because generality results in uncertainty, uncertainty breeds disagreement, and disagreements threaten the stability of outsourcing relationships.
  • full of vague terms
    Such as material breach; gross negligence; willful misconduct; direct, indirect, consequential damages; best efforts; generally accepted standards; and commercially reasonable efforts which sound very legal but which are typically unclear in case law.
  • sparse (or devoid) of communication protocol
    While most outsourcing agreements will contain clauses for dispute resolution, they will be sparse, or devoid, of clauses describing proper communication protocols for communicating, addressing, and responding to issues as they arise. Disputes only arise when issues are not adequately addressed as they arise.

However, with a litigation perspective, a typical outsourcing agreement is:

  • specific
    While the agreement will still contain general clauses for modifying procedures to deal with unexpected situations, it will contain provisions for dealing with situations that can be anticipated in advance, such as a spike in data processing, the inability for the service provider to handle increased order processing, or a change in regulations that restrict a service provider from performing one or more functions. For example, in the first case, if data processing requirements increase beyond a certain threshold in a given month, the organization will pay overtime rates to get it done. If the service provider can’t handle a rapid spike in customer orders, the organization will have the right to bring on a second service provider to assist. And if an unforeseen change in regulations preclude part, or all, of the functions from being performed by the service provider, the organization may cancel the affected parts, or all, of the agreements, without notice and penalty.
  • built on clearly defined terminology
    Instead of just saying that the service provider is liable for “direct damages”, the agreement will say that the service provider is liable for “direct damages, which include but are not limited to the additional cost of securing an alternative service provider” or instead of just saying the service provider is responsible for damages that result “willful misconduct”, which may or may not include a deliberate breach of contract, the agreement will say the service provider is responsible for damages that result from “willful misconduct, which include but are not limited to intentional tortious acts”.
  • clear on communication protocols
    The agreement will contain a communication protocol where the organization can officially notify the service provider of issues that arise, and response protocols for the service provider to officially respond to the issues.

Communication protocols are important as they provide official communication trails and a way to “shape the record”. If an official dispute arises, and goes to arbitration or court, and the organization does not have a clear record of events, that includes correspondence officially notifying the service provider of a(n impending) breach, then its chances of winning its case (and receiving damages) are not good.

Moreover, if the organization maintains a good “real-time” written record of events, that includes official communications that follow the protocol, it has a better chance of resolving the disputes quickly, cost-effectively, and with minimal disruption as a provider is not going to want to risk an official dispute when the client organization has a strong case.

Considering that termination of the relationship likely will cause both parties serious economic disruption, its important to draft the best agreement possible. The best way to do this is to keep litigation in mind and consider how you would prove the elements of a claim if a dispute were to arise as this will lead to the creation of clear and unambiguous clauses.