Category Archives: contract management

To “Term” or Not to “Term” … That is the Question


Today’s guest post is from Torey Guingrich, a Project Manager at Source One Management Services, who focuses on helping global companies drive greater value from their expenditures.

I sometimes hear clients say, “We are leaning towards Vendor ABC because they don’t make us sign a contract“. In most cases, Vendor ABC does have a contract (or something acting as an agreement such as a letter of authorization, etc.); it is just based on a month-to-month term with no termination penalties/liability. Some companies have a knee-jerk reaction to avoid contracts, but while there appears to be less risk in a “no-term” contract, there are risks and rewards for both “term” and “no-term” agreements. Part of the strategic sourcing process is educating stakeholders on the different consequences of contract components such as term. When evaluating what type of contract or what term to leverage for your next agreement, consider these different aspects before negotiating a shorter (or longer) term contract.

Availability of Supply and Criticality to the Business:

Consider the supply management strategy of the category you are working with and where the product/service lands on the axes of availability of supply and criticality to the business. Based on the classification of purchasing strategy for the product or service to be sourced, you can determine if that strategy is best supported by a long-term partnership or a shorter-term, more flexible agreement structure. For example, if you are working within a category that is scarce in the market and critical to your operation, a long term contract is necessary to guarantee supply. On the other hand, if the products you are sourcing are widely available and can easily be replaced, it may be in your best interest to forego a term agreement.

Pricing/Price Changes:

One of the reasons why many companies opt for longer term contracts is to gain deeper discounts and ensure negotiated pricing is held for a period of time. When entering a contract, pay attention to the language around pricing and the supplier’s ability to change that pricing. Month-to-month contracts typically give the supplier the opportunity to raise prices; if you are purchasing in a market with downward pricing pressure, ensure that language also allows price reductions based on the market. Having a short-term contract in a market under pricing pressure may prompt suppliers to reduce pricing to prevent you from moving to a competitor. Likewise, when a market is trending up in cost (whether it be from decreased competition, increased maintenance costs, etc.) it may be prudent to lock in pricing with a long term contract. Depending on the industry, suppliers may offer signing bonuses, rebates, or other incentives when you sign a long term contract; these should be in addition to more competitive pricing in the contract.

Changeover:

Month-to-month contracts can be very appealing because in theory they allow you to simply change to another vendor if you are unhappy with your incumbent. There are certainly plenty of goods or services where companies are able to be vendor agnostic, but there are other categories where the cost to change is substantial. Likely, changing suppliers will (and should) involve a sourcing activity, e.g. RFP or RFQ, and thorough review of other suppliers in the market. After a new supplier is chosen, the transition process can be a relatively simple for some products or services, e.g. ordering IT accessories from another reseller, but can get more complex for others, e.g. migrating network services to a new carrier. If you are unhappy with the current supplier and chose to change, you will still need to rely on them to some degree during the changeover period. Be sure to consider the ease of change before jumping into a short or no term agreement under the assumption that you can quickly switch suppliers if needed.

Flexibility:

The name of the game in short-term or no term contracts in flexibility. Companies may elect to pay slightly higher pricing to have the flexibility to terminate services or purchasing whenever they see fit. This tends to surface when companies are considering technology changes; they have plans to migrate their services to a different technology or platform and the flexibility of a month-to-month contract allows them to change over as necessary without penalty. This is all well and good, but before entering a higher priced agreement or one that allows for pricing increases, consider your company’s track record on executing migration/change and truly exam the pricing risks that can come with flexibility. If the migration will be based on small, incremental change over time, it is likely you can still use a longer term agreement to your benefit. Also examine the reasons behind the company’s need for flexibility: if the concern is around certain SLAs or KPIs, you can try to add termination rights related to these performance levels and still operate under a term agreement.

As you contract for new and existing categories, don’t get stuck using a one-size-fits-all contracting pattern. Where changes occur in the market, category management strategy, or category roadmap, ensure that the contracts you put in place support those changes and allow your Procurement group to perform optimally.

Thanks, Torey.

Contract Lifecycle Management 2015 (Consolidated Links)

Contract Lifecycle Management — Do You Have Your Platform and Process in Place?

By now you should, especially since 8 parts of the doctor‘s and the maverick‘s series on Contract Lifecycle Management (CLM) have been up for your reading pleasure over on Spend Matters Plus (registration required) since October, but if you don’t yet have it in place, now’s a good time to review the current series end-to-end and get a grip on what your platform should contain.

While contract management is not new, and many first generation platforms have been including contract management modules since the late noughts, many features of next generation contract management platforms are reasonably new, and some are much more valuable than others. That’s why the focus of this series was on must-haves, should-haves, and nice-to-haves for contract management platforms since it’s almost impossible to implement a good process without a good platform, and selecting one is becoming harder and harder as more and more e-Sourcing and C(L)M providers, including those who started in the Sales / Legal space, hit the market, and not all are created equal (or anything close to equal).

For example, while a clause library is only a should-have capability and multi-tier contract management and drafting a nice to have capability, especially for a Procurement Organization that does fairly standard direct materials and indirect services contracts, some CLM providers will push them as essential (which they may be for Legal organizations that handle commercial [building] development contracts with a lot of work being outsourced to specialist providers) for every organization, this is not the case and for some organizations these features will not be used at all. Similarly, some CLM providers without native MDM integration (which is a should-have) and, gasp, expiry and renewal management (a must-have) will try to down-sell their importance, which is critical in an organization with a lot of auto-renew evergreen contracts (which can cost the result in the organization overspending by 10% or more on multi-million category) and price data in third party systems.

Plus, with so many e-Sourcing technologies, and a plethora of acronyms which mean similar, but not the same, things (for instance, do you know the difference between S2S, S2P, and P2P — don’t fib!), it’s hard to tell where CLM even fits, why you need it, and the extent of capabilities your organization is missing out on with an outdated system. (This is critical as good CLM can result in significant year-over-year cost savings. While the percentages aren’t as high as supplier relationship management, spend analysis, or strategic sourcing decision optimization (which can tops out at an average year-over-year cost savings of 12% in the last case), annual savings from an effective end-to-end CLM process, backed up by the right platform, have been known to generate 4% to 6% savings that go straight to the bottom line (and get Procurement credibility with Legal and Sales, who can all be on the same system), and that’s nothing to scoff at!

CLM is critical as good contract management, coupled with good supplier management, is what ensures that the sourcing plan is realized, and this is key to capturing the savings that Supply Management works so hard to negotiate. It’s pointless to negotiate a 10% savings if only 6% of it gets captured due to bad contract management practices (which result in poor supplier management, maverick spend, inferior order management, expedited shipment, lost credits, etc.). And this is the case in many organizations without good contract management practices. (And has been for many years, as chronicled in AMR’s (now Gartner’s) classic series on “Reaching Sourcing Excellence”.)

In other words, if you haven’t, you really should read the Series to Date on Spend Matters (membership required):

  • Part    I: An Introduction
  • Part   II: The CLM Platform Model
  • Part  III: The Upstream and Downstream Phases
  • Part   IV: The Traditional Solutions
  • Part    V: The Core CLM Solution
  • Part   VI: The Standard CLM Platform
  • Part  VII: The Extended CLM Platform
  • Part VIII: The Importance of Being Earnest Integrated

Contract Lifecycle Management VIII: Are You Ready for the Journey?

In this series, we have defined and discussed contract lifecycle management (CLM) and the requirements for an extended contract management solution. In the first few posts we laid the foundations for the series by discussing the various processes and supporting solution elements that surround CLM as a way of bounding the CLM solution space. We subsequently detailed the requirements for a CLM system from a data and process perspective, as defined by our CLM wheel model.

However, in our series to date, we’ve largely ignored the commercial performance management aspects that CLM also needs to support. This goes beyond the strategic aspects, and the performance and obligation management aspects, to the competency requirements and the integration requirements necessary for an organization to not only use, but maximize the value from, such a system.

In particular, at a minimum an organization needs to consider, and obtain support for:

  • Procure to Pay
    because CLM encompasses everything that happens between a contract being signed, which is where traditional strategic sourcing ends, and the supplier being paid for goods delivered and accepted
  • Compliance beyond Invoice Matching
    because while this is critical to prevent overspending (and the need for expensive cost-recovery), there are also insurance requirements, regulatory requirements, and other requirements that, if not met, could be much more costly
  • Risk Management
    as one unexpected, and then unmanaged, event can result in a 20% overspend instead of a 10% savings

And this is just the beginning. Depending on the organization, the following could also be critical:

  • IP Management
    if it has a lot of intellectual assets
  • License Management
    if it uses a lot of software products (and instances) or licenses a number of works for publication and distribution
  • Inventory Management / System Integration
    if the organization requires a lot of assets to be purchases, leased, and managed during the contract term to fulfill its obligations

And, of course, other commercial aspects could be important as well for organizations in a specific vertical. To find out more about some of these areas, and why you can’t forget the commercial perspective when evaluating contract management systems and prioritizing the must haves, should-haves, and nice-to-haves, check out Part VIII of the doctor, the prophet, and the maverick‘s series on Contract Lifecycle Management over on Spend Matters Plus (membership required).