Category Archives: contract management

Supply Management Contract Writing, A Review Part II

When I reviewed Next Level Purchasing’s (NLP) (now the Certitrek NLPA) course offerings to date: Mastering Purchasing Fundamentals (Parts I and II), Savings Strategy Development (Parts I and II), and 14 Purchasing Best Practices (Parts I and II), I did so in two parts. In the first part, as I did in Part I, I presented an overview of the course, the key topics contained within, and a general discussion on why it is worth your time and money. In the second part, I dived into a few select topics, with kind permission, that serve to illustrate the quality and usefulness of the course to a procurement / purchasing professional. This post will continue the pattern.

In the first lesson, you are introduced to the six major purposes of a contract. These are:

Formalization of obligations and rights.
Written contracts formalize the parties rights and obligations in such a way that misunderstandings are minimized and legal remedies can be sought if required.
Control and allocation of risk.
A well-written contract will specify which party is responsible for all possible consequences and make sure that one party does not unfairly bear too much of the burden.
“Locking in” benefits.
A good contract will guarantee one or more benefits, such as performance, price, and/or warranty, for a long period of time.
Elimination of the need for further negotiation.
Negotiation takes time away from strategic activities that can reduce cost and increase performance – a contract locks in an agreement and minimizes the need for future negotiation.
Formalization of an agreement on exception handling.
Things inevitably go wrong. You can thank Murphy. However, documenting who is responsible and what corrective actions will be taken up front minimizes risk and loss as it allows for expedient and focussed resolutions.
To solidify an advantage.
Whenever you can identify a specific advantage that would not be realized in the conduction of business in the absence of a contract, you should formalize a contract.

In the third lesson, the course dives into three monetary remedies and three non-monetary remedies you can choose from in the construction of your performance clauses. Financially speaking, you could negotiate the right to withhold payment, cover damages, and liquidated damages. Alternatively, you could go a non-financial route and negotiate termination, specific performance, and injunctions.

Let’s dive into four of these briefly. Specific performance is a remedy that allows you to force a supplier to do exactly as the supplier promised to do. Injunction is a remedy that allows you to prevent the supplier from doing something. Chances are they would not appear in the same contract and serve complementary purchases. You’d use specific performance if you were buying a one-of-a-kind item, such as an original Van Gogh for your conference room (since you wouldn’t want a forgery) and you’d use injunction if a manufacturer was making a custom part to stop that supplier from making that part for anyone else (should that supplier stop doing business with you for any reason).

On the other hand, as you might have picked up from one of the other courses I reviewed, cover damages and liquidated damages are not the same thing. Cover damages refer to a calculated amount the seller has to pay for failure to deliver and occur when a buyer has to acquire the goods from another seller. They are generally calculated as the difference between what the buyer had to pay versus what the buyer would have paid if the supplier delivered. Liquidated damages refer to a fixed amount the seller has to pay for failure to honor an obligation, such as a fixed late fee for each day the seller is late. Whereas the premise behind cover damages is that the buyer loses money when the buyer has to obtain goods from a different seller, the premise behind liquidated damages is that the buyer suffers financial harm when the seller fails to deliver.

Finally, in lesson five on key commercial provisions, there is a very good discussion of the shipping clause, what needs to be addressed, and what questions you need to ask when writing this clause. If you are buying goods, this is one of the most critical clauses, since it determines when the risk transfers from the seller to you, the buyer, and who pays the various expected and unexpected shipping costs that can arise.

Shipping terms should address the method by which purchased goods are shipped, the carrier who will deliver (or at least which party has the right to choose the carrier), the party who bears the shipment costs, and the party who bears the risk of loss in transit.

That’s it for my review of “Supply Management Contract Writing”. So, assuming I have convinced you its worth your time, after acknowledging that neither Next Level Purchasing nor Sourcing Innovation practice law, that Next Level Purchasing and Sourcing Innovation are not rendering professional legal services with regards to this (online) class, that neither Next Level Purchasing nor Sourcing Innovation will be responsible for any contract, either in whole or in part, based on any material presented in the (online) class, whether used in whole or in part, go on over to Next Level Purchasing and find out more.

Supply Management Contract Writing, A Review Part I

Those of you following along will remember that I have reviewed three of Next Level Purchasing’s (NLP) (now the Certitrek NLPA) course offerings to date: Mastering Purchasing Fundamentals (Parts I and II), Savings Strategy Development (Parts I and II), and 14 Purchasing Best Practices (Parts I and II). This course, like the last three, is also worth the time and investment for any purchasing professional looking to advance her knowledge and career with a training program that can lead to a recognized industry certification (the “Senior Professional in Supply Management”).

According to NLP’s website, this course is designed to give you the skills necessary to minimize your procurement risks. Going way beyond the typical, dry explanations of contract law, through plain English examples and interactive exercises, this course is designed to teach you how to negotiate and write effective contracts and iron-clad terms and conditions.

The course promises that you will learn how to protect your organization from the disastrous effects of suppliers’ failure to perform, plus

  • How to decide if you need the protection of a contract
  • How to choose the most appropriate form of agreement
  • How to structure contracts
  • How to select, use, and develop language for methods of dispute resolution
  • How to write a contract’s key legal provisions such as indemnities and limits of liability
  • How to write a contract’s key commercial provisions such as pricing and delivery
  • How to write a contract’s key technical provisions such as specifications and warranties
  • How to make use of effective styles of contract writing
  • How to effectively proofread and organize contract revisions

… but it delivers much, much more! It also includes:

  • The primary purposes of a contract. (There are more than one!)
  • The differences between the ten most common forms of agreement.
  • Six different remedies that you can consider when writing a contract that covers what will happen if your supplier fails to perform.
  • A discussion of four different dispute resolution methods.
  • Common legal terms such as “force majeure”, “most favored nations”, and “choice of law” which have a distinct legal meaning despite the fact that they are typically not translated into English.
  • Stylistic guidelines that not only make your contracts easier to read, but reduce the number of objections your legal counsel will invariably have.

And even if you don’t write your purchasing organization’s contracts, the course is still worth much more than it costs – after all, if you don’t fully understand the language that lawyers love to use, how can you be sure that they are accurately capturing your agreements and intent?

So, after acknowledging that neither Next Level Purchasing nor Sourcing Innovation practice law, that Next Level Purchasing and Sourcing Innovation are not rendering professional legal services with regards to this (online) class, that neither Next Level Purchasing nor Sourcing Innovation will be responsible for any contract, either in whole or in part, based on any material presented in the (online) class, whether used in whole or in part, go on over to Next Level Purchasing and find out more.

Contract Management II

Looking back, it would appear that this is one topic that I have not really tackled yet. Back in week one, I made an initial post on Contract Management, but although I have mentioned the importance of good contract management in a number of posts here and over in my summer series on e-Sourcing Forum. I haven’t really dived into contract management and contract lifecycle management systems in detail.

Back in my first posting, I noted that today’s (E)C(L)M (Enterprise Contract Lifecycle Management) systems are quite powerful and offer a number of advanced features above and beyond just contract tracking. These features will generally include a searchable centralized contract repository, collaborative capabilities, workflow capabilities, monitors, alerts, reporting, and even template and clause-based contract creation capabilities.

In addition, I noted that I believe that one of the areas of future improvement will be in the area of business intelligence, specially in the area of automatic recognition of contracting patterns. These systems will not only point out What types of contracts and clauses are usually used for a certain type of supplier and / or commodity, but what types of contracts and clauses should be considered given the financial status of the supplier, historical performance, and commodity specifics. They will automatically draft starting contracts for you and indicate when you are missing important clauses like IP protection or delivery terms and when recommended updates are inconsistent with your usual practices.

Since then, I’ve put some considerable thought into what’s missing in today’s C(L)M systems, and how they can be used to provide you with benefits above and beyond simple document management and drafting. I’ve come up with a few more ideas, but two in particular stand out.

The first major breakthrough in next generation contract management systems, which has already crept into some current best-of-breed C(L)M systems, such as pure-play Nextance (acquired by Versata Enterprises) offering (another company that I spent some time chatting with recently), is contract optimization. What is contract optimization, you ask? It’s the ability to globally analyze all of your contracts and determine where you spend is going, where your products are going, and what IP you collectively possess. For example, as Ralf Vonsosen states in his recent article in Contract Management, ECM plays a role in solving the new complexities of IP management and optimization. On the front end of the IP life cycle, ECM solutions can improve revenue by creating and negotiating attractive IP portfolios. On the back end, these solutions can optimize royalties, by carefully and effectively managing the resulting IP licensing agreements. These recent advances in ECM technology are no longer just for procurement or contract professionals – they now ensure companies that they are creating, managing, implementing, and tracking their IP licensing agreements to optimize revenue, mitigate risk, and improve compliance. In addition, a complete CLM system defines what you should be spending. Contrast this with what you are actually spending, as determined by your leading spend analysis solution, and you have identified the areas you need to work on to improve your compliance and realize your negotiated and planned savings. Finally, it helps you understand whom your biggest and best customers are, and where you should focus your marketing and sales efforts.

The second major breakthrough in next generation contract management systems will be in the area of supply chain visibility. If you think about it carefully, since today’s business runs off of contracts, the contracts in your repository collectively provide the best picture you can get of your immediate supply chain. Data on all of your suppliers and all of your customers in one place. Furthermore, by tagging your strategic suppliers and customers, as well as the suppliers you heavily buy from and the customers you heavily sell too, you can immediately identify the key branches of your supply chain that need to be mapped out. Any single sources of supply, or restricted transportation routes, that are subsequently identified are your starting points in your risk mitigation planning efforts.

Regardless of what happens, I’m sure you’ll hear a lot more about (E)C(L)M systems in the coming years, and that some of the advances they will include will surprise you.

Contract Management

Monday we defined a basic strategic sourcing process, indicated there were five critical process driven phases that can be greatly enhanced by software solutions, and indicated that we would spend one day discussing each of these technologies this week.  Monday we discussed spend management and spend analysis, Tuesday we discussed RFX, Wednesday we discussed auctions, and Thursday we discussed decision optimization, a personal passion (and expertise).  Today we are going to discuss the last critical technology in the basic strategic sourcing cycle – Contract (Lifecycle) Management – C(L)M.

Whereas yesterday’s topic of Decision Optimization is my personal favorite, I have to confess that contract management is probably my least favorite.  After all, all the fun takes place leading up to the award.  Once the award is made, all that’s left to do is execute it, track it, enforce compliance, and ensure performance – the boring tactical elements come into play big time.

However, this is the very reason that contract management should not be overlooked!  I’ve read numerous studies, including some from Aberdeen, that state that, on-average, 60% or more of negotiated savings are never captured in practice?  Why?  There are a number of reasons, but most of the costly ones come from incorrect orders and lost discounts and rebates, due to poor contract management and compliance tracking. 

Without a good contract management system in place that tells a buyer who she should be ordering from, when, and for what location, she is likely to simply reorder from the last supplier used when supply gets low.  If it turns out that this is the supplier that was only supposed to be used as an overflow supplier, then chances are the costs are much higher then the primary supplier with whom discounts were negotiated.  Furthermore, many suppliers offer their volume discounts in the form of rebates, which buyers have to apply for.  If you don’t have a good compliance-based contract management system in place to track your purchases, you will probably not realize when you qualify for rebates and these applications will probably not be collected in the long run.

Furthermore, today’s C(L)M systems are quite powerful and offer a number of advanced features above and beyond just contract tracking.  These features will generally include a searchable centralized contract repository, collaborative capabilities, workflow capabilities, monitors, alerts, reporting, and even template and clause-based contract creation capabilities.

Of course, as with every other technology we’ve discussed this week, I think there is still some room for improvement.  I think one of the areas of improvement will be in the area of business intelligence, specially in the area of automatic recognition of contracting patterns.  These systems will not only point out What types of contracts and clauses are usually used for a certain type of supplier and / or commodity, but what types of contracts and clauses should be considered given the financial status of the supplier, historical performance, and commodity specifics.  They will automatically draft starting contracts for you and indicate when you are missing important clauses like IP protection or delivery terms and when recommended updates are inconsistent with your usual practices.

This concludes sourcing week and our introduction to the basic strategic sourcing processes where technology has a large role to play. I’m sure many of you are already familiar with these steps, but I wanted a solid foundation on which to kick off the blog and lay the seeds of future innovation.  Next week we’ll kick it up a notch and discuss some innovative practices of leading procurement centers and additional innovative practices that the future may hold.