Category Archives: contract management

Plugging the Leaks in Your Contracts that Erode Your Savings

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A recent article in the CPO Agenda on how to “keep the value attached to your contracts” started of by noting that purchasers and suppliers are often disappointed by the results of strategic sourcing, as over half of the negotiated savings never materialize the vast majority of the time.

Over the past year, the CPO agenda has been conducting a global study across more than 600 companies (and 800 respondents from buy-side and sell-side executives and professionals). Based on the results of this research, they have devised a number of recommendations that they believe will help procurement leaders weather the challenges of today, position themselves for success and, most importantly, plug the leaks in their contracts. And some of their recommendations are pretty good.

In a nutshell, they recommend the following:

  • focus on developing sophisticated negotiation and supply chain management strategies and capabilities
    spend consolidation and e-auctions alone don’t cut it
  • take a more collaborative approach
    over 80% found their negotiations adversarial; furthermore, those who believe they were taken advantage of operated defensively, refused to share information, focussed on compliance rather than execution, and actively looked for ways to “make up losses”
  • balance the use of competitive sourcing and bidding with negotiation strategies that are more collaborative, fair and sustainable
    63% of the top performing buy-side study participants described their negotiations as collaborative
  • effective preparation is key
    leverage in negotiations is largely a matter of perception and structural factors have far less impacts on leverage than effective preparation
  • systematically assess leverage from multiple angles
    it’s just as important to understand your trading partner’s business model and strategy as it is to understand your own
  • take a structured approach to negotiations
    67% of top performers characterize their negotiations as structured and predictable while 69% of bottom performers characterize their negotiations as unstructured and unpredictable
  • adopt a formal supplier relationship management program
    organizations with these programs were found to realize 17% more value from their strategic sourcing efforts
  • align your internal stakeholders
    lack of internal stakeholder alignment was consistently touted as a top barrier to success
  • involve business and technical stakeholders
    a lack of involvement leads to internal stakeholders, and suppliers, trying to work around procurement processes and policies

Good advice. For more, see the article.

Protecting Against New Supply Chain Threats with your Contracts

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CIO Magazine recently ran a great article on “8 contract tactics that protect against new threats in offshore outsourcing” that is definitely worth a read. Given, to name a few,

  • the current economic conditions,
  • rising geographic instability, and
  • increased vendor instability,

now, more than ever, you need to review existing contracting approaches and adopt new strategies for these emerging threats. To this end, CIO outlined eight tips to help you negotiate your next contract or re-negotiate your renewal that every buyer and contract specialist should take to heart.

  1. Extend force majeure to encompass new threats.
    Insure that such clauses do not forgive a lack of responsible precaution as well as excluding natural disasters beyond either party’s control.
  2. Extend criteria for eligibility for termination for cause.
    Include termination provisions that provide an early rapid response to changing supplier conditions that present potential disruptions, linked to visible triggers such as a significant reduction in a supplier’s credit rating, admission of fraud, or misleading financial statements.
  3. Extend change of ownership provisions to include break-ups.
    If a key division is broken off and sold, that could be more damaging to your service level than a change in ownership.
  4. Establish clear ownership of assets and documentation.
    Don’t overlook the soft intellectual property assets such as software, documentation, and proprietary processes.
  5. Add clauses and terms to address emergent concerns.
    Transition-out requirements, audit provisions, and termination costs are often overlooked but becoming increasingly important.
  6. Take advantage of lessons learned.
    Don’t overlook necessary audit provisions.
  7. Seek concessions in re-negotiations.
    It’s a weak economy. Don’t forget that.
  8. Secure adequate legal advice.
    Many of the new scenarios and contingencies in contracting bring additional legal risk and complexity and will likely require consultation with a legal advisor.

Is it Time to Get Hip with Hiperos?

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Hiperos is a relatively new entrant in the space focussed on what they call “Extended Enterprise Management”, which is their term for what you get when you amalgamate (what I call) Enterprise Contract Management, Compliance, Performance, and Sustainability into a single 360° solution platform.

The goals of the platform are to provide you with:

  • Supplier Information Central
    • collect all supplier information in one application
    • allow it to be entered and reviewed by suppliers, third parties, and internal staff, according to roles and permissions
    • allow for the creation of quick and easy monitoring reports that can be displayed in a dashboard
  • Cross-Enterprise Supply Chain Risk Assessment
    • allow risk to be evaluated against any supplier or service provider
    • allow risk to be evaluated by category / product line
    • allow risk management programs to be created based on whatever supplier / risk segmentation criteria you select
  • Supplier Performance Management
    • allow for the easy definition of surveys and scorecards
    • allow suppliers to be evaluated based on the type of product being delivered or service being performed
    • allow for internal and external feedback, subject to approvals
  • Regulatory Compliance Management
    • support any and all compliance regulations your organization is subject to (RoHS, HIPAA, ITAR, etc.)
    • allow requirements to be easily communicated to suppliers
    • monitor responses and flag non-compliance for exception based monitoring and resolution
  • Sustainability Initiative Support
    • allow sustainability guidelines to be captured
    • allow them to be communicated across the supply chain
    • monitor adherence to implemented programs

For those of you in a rush, I’ll tell you right now that the application (which is now on R3) does precisely what Hiperos says it can do, that it’s relatively easy to configure and use (and a couple of clients have self configured it without any help at all), and that it can be configured to report on precisely what you want it to report on, and display this information in real time on every login. Furthermore, if you use it’s capabilities to augment data collected internally with data in your other entprise systems and external data sources and integrate 3rd party risk and financial data, such as what you would get from Equifax, Lexis Nexis, or D&B (using their new “D&B Inside” offering), you can truly get a 360° view. Furthermore, if you define your risk assessment and monitoring metrics accordingly (and / or select the right templates for your vertical and organizational risk management needs), my assessment is that you can be just as confident in the risk assessments as you would be if you outsourced it to a specialist consulting firm (especially if you bring one of them in to help you define your risk assessment program and insure you set up the feeds, applications, and reports appropriately).

The application allows you to define what fields you want to track, what metrics you want to use, the calculations that define those metrics, and the reports the metrics appear in. It also allows you to define as many roles as you need (buyer, manager, approver, CPO, third party auditor, supplier, etc.) and define access permissions and capabilities based on those roles. In addition to the standard supplier, contact, contract, and (enterprise) program entities, it also allows you to define “relationships” and define the data you want to capture, track, and measure against those relationships. For example, a relationship will be with a supplier, managed by a local account manager and supplier account manager, against a program type and have it’s own status and risk measurements. Collectively, these measurements and statii can be rolled up to give an overall status and risk picture, which, of course, can be drilled into at any time. You can also define as many levels of details as you need in your surveys and scorecards, which, of course, frees you from the limited capabilities of a 3-dimensional spreadsheet workbook. And it comes with template libraries for standard compliance (HIPAA, RoHS, REACH), risk management, and sustainability (carbon tracking) initiatives that can be used to jumpstart configuration for your enterprise.

The one weakness is that while the application has been configured to be extensible and accept an unlimited number of external data sources, at this point in time, only RSS Feeds and a couple of 3rd party financial feeds are configured out-of-the-box. This means that you will have to do some integration with appropriate 3rd party data sources to get a 360° view, which is vital because, if you don’t have someone on the ground, or a good relationship with a 3rd party auditor you can trust, you can’t trust self-submitted supplier surveys alone. (And, these days, some of the best leading indicators are those you get from financial risk data consolidators like D&B — who acquired Open Ratings — and Equifax — who acquired Austin Tetra — and from import/export visibility companies like Zepol, Import Genius, and Panjiva.)

The application is one that is definitely worth looking at, because the only other providers offering integrated solutions of the same breadth are Aravo, CVM Solutions, and, if you’re in the health-care industry, Vendormate.

An Enterprise Software Buying Guide, Part VIII: Contract Definition & Management

In this, our final post in this intial series on the successful acquisition of enterprise software, including e-Sourcing, e-Procurement, and other Supply Chain Software Solutions, we discuss the contract review and performance management steps.

7. Comb the Contract

The legal minds behind traditional software vendor contracts excel at including all kinds of seemingly benign terms and conditions that can turn out to be big cost gotchas if you’re not careful. My personal favorite is the mandatory maintenance clause that states if you stop paying maintenance, you lose the right to run the software. Sure you still own the perpetual license you paid big bucks for up front, but you’re not allowed to use it unless you pay maintenance, which usually has you paying the entire cost of the software every 4 to 5 years.

Other good examples of “gotchas” that you need to watch out for include:

  • The mandatory upgrade on the vendor’s schedule
    The vendor will usually try to insert a clause along the lines of “you must upgrade within 90-365 days or lose support” if you’re not careful, regardless of how long they say they will support an older version.
  • The free lunch
    There’s no free lunch. Someone always pays … and in enterprise software, that someone is YOU! Either the “free” training, support, or modules are included in the price or being offered as an incentive to lock you in for a long term that will ultimately increase the vendor’s margin and salesperson’s commission.
  • The toothless SLA
    The majority of SLAs are designed for one purpose — and one purpose only — to give you a false sense of security that causes you to overlook the fact that the wording was carefully designed by the vendor’s legal counsel to insure that the vendor gets to keep your money for the length of the contract, no matter what.
  • The Escrow
    You get the code if the vendor goes belly-up. Whoopee. Unless you have a large team of expert software developers in house that can quickly familiarize themselves with an application that contains (tens of) millions of lines of code and get you up and running again quickly, escrow is pointless. What matters is that you have guaranteed complete data access 24x7x365 and that the vendor is required to give you 30 days warning and a complete data export in a standard, product neutral, format before a material change in operations or ownership, so that you can shunt your data into another system and keep on truckin’ if, for some reason, the system stops working for you.

8. Manage Performance

You can do everything right up to the time you sign the contract and still have everything go to hell in a handbasket (and your costs go through the roof) if you don’t carefully manage vendor delivery and support throughout the contract lifetime.

It’s critical to create a project management team who will mange the implementation, monitor uptake, collect feedback, quickly identify issues, and work with the vendor to get those issues resolved in a timely manner. Otherwise, you might not get the uptake, utilization, productivity improvements, and savings you expected to get.

That’s it for this initial series on how to successfully buy enterprise software. I hope you found it useful. And remember, if you’re planning on acquiring RFX & e-Auction,
Spend Analysis,
Optimization,
Contract Management,
e-Procurement,
Supplier Networks & Catalogue Management,
GPOs & Marketplaces,
Market Intelligence,
Strategic Sourcing Services,
Trade Data Management,
Supply Chain Optimization, or
e-Payment platforms, a good starting list (that you can customize to your needs based on the outputs of Step 2) can be found in the X-emplification series. Have fun!

Competitive Advantages of Contract Management Solutions

A recent article in Material Handling Management provided a good overview of why “contract management is a critical competitive advantage” for today’s supply chain centric organizations. When you consider that a typical fortune 1000 company cannot locate over 10% of its 20,000 to 40,000 active contracts at any given time, the importance of a good contract management application should be immediately clear. But just in case it’s not, here are seven more reasons a contract management solution is important, as covered in detail in the article:

  • Standard Contract Templates
    This can help to insure consistent contract creation across departments using standard templates with standard terms and conditions sanctioned by the organization’s legal department.
  • Organization-Wide Visibility
    This allows all departments easy access to contracts created by other departments. Sourcing can immediately query existing logistics contracts, R&D can review existing sourcing agreements, etc.
  • Status & Metric Tracking
    Certain conditions, such as automatic renewal dates, spend tolerances, limit quantities, and pricing need to be tracked and monitored for compliance. In addition, certificates of insurance, price adjustments, and escalator clauses need to be monitored.
  • Maverick Spend Control
    With a contract management system that maintains a centralized contract repository, it’s easy to determine if a contract exists for a given good or service, who the suppliers are, what the prices are, and what any associated conditions are. There’s no excuse for off-contract buying.
  • Compliance
    All your contracts in one place make it much easier to comply with operational policies, regulatory requirements, and corporate performance requirements.
  • Internal Controls (SOX)
    SOX requires that signing officers are personally responsible for establishing and maintaining internal controls designed to ensure material financial information is known to those officers. Contract Management helps a company meet that requirement.
  • Competitive Advantage
    For each dollar earned, as much as eighty percent is lost to procurement costs. As most of these costs are external expenditures, the strategic importance of good contract creation, execution, and monitoring cannot be underestimated. A good contract management system will reduce costs, improve compliance, and rope in maverick spend … giving you an edge over your competition.