Category Archives: contract management

Does Your Software Come With A Bill of Rights?

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Ray Wang of Forrester recently released Version 2 of their “Enterprise Software License Bill of Rights” and Vinnie Mirchandani did an excellent revision over on Deal Architect that not only outlines what your rights should be but identifies some key issues you need to be aware of if your vendor does not provide you with a bill of rights as part of their textbook thick contract.

In particular, watch out for:

  • 40%+ SG&A
    that money should be going to R&D to give you a better product for the 22% to 30%+ maintenance you’ll be paying
  • no support/defect stats
    your provider should be measuring them, actively working on improving them, and be willing to provide them on request
  • certified service partners
    if they don’t have any, or won’t certify any, that’s a problem
  • an inability to flex-up / flex-down at each quarter
    you don’t want to be paying for shelf-ware
  • confusing SLAs
    you want clear, concise, and to the point

And be sure to check out Vinnie’s Version. If you going to invest seven, eight, and even nine figures (over the long term), you better make sure up front that you can get what you pay for.

Blogging on International Contracting?

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Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

After I made a brief comment on international contracting, the doctor suggested that “maybe I could write an expert piece about international contract construction?“.Well, that piece would be way too long for a blog format. I take about an hour on this topic in face-to-face seminars and that’s after a session on cultural differences.

What I can do in this format is give my philosophy and a tactic or two.

Why do people write purchasing contracts? (And not everyone does.) I see two reasons. First is to get a written document that describes what each party is going to do. Second is to enable bringing in a powerful third party (a court) to get a company to do what they might not do otherwise, such as pay liquidated damages.

When you cross borders, cultures and language barriers, the first reason becomes more important than it is domestically. The second reason becomes less practical. Adjudication and enforcement can be awfully difficult and expensive.

That means first of all, it’s much more important to get a good supplier than to get a good contract. Second, it means that the contract should be written to help with communication between the parties, not hinder it. It should be clear and easy to read (no size eight gray type please.)

Here’s the tactic for the day.

Run a grammar check on your contract using Microsoft Word with “check readability statistics” turned on. Look for a “reading ease” score of 40 or higher and a grade level requirement of 11th grade or less. Remember, the document probably won’t be in the supplier’s language. Once you achieve that, then print the document in an attractive format. Pay attention to typography and white space. Make it easy to read.

If your lawyer struggles with this, get him or her a copy of the SEC’s “A Plain English Handbook”.  It has lots of guidelines and tips. Another good source is “Plain English for Lawyers,” which you can find on Amazon.

As a final note, I just happen to be doing my one and only public Global Supply Management seminar for 2009 in the Chicago area on August 11-12.

Dick Locke, Global Procurement Group and Global Supply Training.

Why Are You Negotiating The Wrong Terms?

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At the beginning of every year, the IACCM does a survey of the top negotiated terms of the previous year. And for the last three years, the top negotiated terms haven’t changed much. This is not a good thing, because the top terms are not what you should be focussed on. As of today, the top negotiated terms are the following:

  1. Limitation of Liability
  2. Indemnification
  3. Price / Charge / Price Changes
  4. Intellectual Property
  5. Confidential Information / Data Protection
  6. Service Levels and Warranties
  7. Delivery / Acceptance
  8. Payment
  9. Liquidated Damages
  10. Applicable Law / Jurisdiction

This is nuts. The most important things are:

  • what products / services do you need,
  • what quality and service levels are required,
  • what quantities do you need,
  • when and how do you need the products / services delivered, and
  • how much can you / are you willing to pay?

And if you look at the top ten list, only three of these five key points make the top ten. Furthermore, if you examine the top thirty list of the negotiated terms, we see that

  • scope and goals is 14,
  • freight / shipping is 23, and
  • information access and management is 29.

This is absurd. If you can’t verbally agree up front in the first five minutes that

  • you’re liable for your actions (and your supplier is only liable for theirs),
  • your IP is your IP (and your supplier’s is your supplier’s),
  • you’ll take the utmost care to protect your supplier’s confidential information (in exchange for your supplier taking the utmost care to protect yours),
  • each party will respect the laws in each country where they do business and the jurisdiction will be that of the buyer (or destination), and
  • you’ll each respect all of the applicable import and export regulations,

trust each other on these points, and just go with standard clauses in the final agreement, then should you be negotiating in the first place? Because if you can’t get right down to what’s important, I’d argue that maybe you don’t trust each other enough to be doing business in the first place. It’s not about how many billable hours your lawyers can wrangle out of you on administrivia, it’s about getting down to business and making sure you can each profit on the transaction. I’m not saying these clauses aren’t important … I myself insure they are included in every contract I draft and / or sign … just that they’ve been written thousands of times, there are standards that capture reciprocal protections, and it’s not worth sacrificing your goals to try and wrangle out provisions that may be unfair to one party and inevitably destroy the trust that is needed for a successful relationship.

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.