Category Archives: contract management

Is it Time to Get Hip with Hiperos?

Share This on Linked In

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.

Do Your Contracts Enhance Trust or Destroy Trust?

A recent article in the Harvard Business Review notes that good contracts are designed to reinforce trust and reduce risk but that there can be a fine line between a good contract and a bad contract which destroys trust and, ultimately, increases risk. A contract that is too detailed or rigid, or one that sends mixed signals, can exacerbate the problems it was intended to preclude as it can restrict creativity and even prevent the display of good intentions.

For example, if the contract specifies a rigid resolution process that requires that all issue reports need to be reviewed by a team before being classified as either errors or enhancement requests, at which point they will be placed a queue for resolution, and the bug is actually preventing the client from getting work done, instead of insuring that the client’s requests are addressed in a fair and equitable manner, the contract is preventing development from making what might be a quick fix. Instead of engendering goodwill by attempting to insure every request from a client is considered, you’ve created ire by preventing a developer from getting a client running again quickly.

The reality is that most negotiators want to overestimate the level of certainty and underestimate the likelihood of future divergences from the situation they perceive during negotiations. As a result, fewer contingencies are included and terms are finalized sooner than they should be. A good contract defines a good dispute resolution process and leaves room for renegotiation later if circumstances change. Something to think about before being too hasty to dot every i and cross every t in your next negotiation.

Tired of Yo-Yo Contracts? Fix the Price with an Indexed-Based Model

When markets yo-yo, so do buyers and sellers … and they waste time, and money, doing so. When prices fall, buyers scramble to cut new contracts to obtain better prices and mythical “savings”*. When prices rise, suppliers scramble to exit contracts to get better prices from other buyers. And when prices yo-yo, it’s a never-ending renegotiation dance that does nothing but waste time, and money, especially when there’s an easy way to lock in a contract for the long term that allows both parties to win. It’s called the Price Index(ed) Contract, and in this post I’ll explain how you can lock in a contract that will protect both parties and allow you to avoid the renegotiation dance … which will allow you to focus on more categories and new, and better, cost savings opportunities.

The first thing to do is to build a should-cost model that captures all of the major price components (> 5%, if not > 10%) using current prices, drawn from an index. We’ll use a (hypothetical but representative) cost breakdown for a 30kVA power transformer, since we all need power, as the foundation for our example.

 

Cost Amount Percentage
Steel 1055 34%
Labor&Overhead 620 20%
Misc 560 18%
Copper 530 17%
Oil 215 7%
Transportation 125 4%
3105 100%

 

This tells us that our primary cost components are steel, labor, and copper and that oil would have to to fluctuate 5% to have the same impact as a 2% fluctuation in copper and 10% to have the same impact as a 2% fluctuation in steel. This also says that if our threshold for negotiating a contract is a minimum cost reduction of 5%, that oil would have to fluctuate 70% for us to even consider a renegotiation. Given that rampant runs, like the one which we just experienced where oil tripled and fell back to the baseline in less than two years, historically only happen every few decades, and that labor costs tend to increase rather predictably with inflation, it also tells us that we should only be concerned with steel and copper costs.

There are market based indices for both steel and copper, the CRU is one example of the former and the New York Futures Market is one example of the latter. At least one of them will, on average, correlate to the prices that your supplier consistently plays for steel just like at least one of them will, on average, correlate to the prices that your supplier consistently pays for copper (which depend on their contracts, leverage, and the market(s) they buy from). You just have to agree on one.

Then, you can tie your contracts to the index and word them to automatically adjust prices on a monthly (or quarterly) basis using the impact of market price fluctuations on the should cost model. Since steel accounts for roughly 34% of the cost, if you agree to cost a increase of 1% for every 3% increase in steel cost, you won’t have to worry about your supplier having to choose between reneging on your contract or financial ruin in a bull market and if your supplier agrees to a cost decrease of 1% for every 3% reduction in steel cost, he won’t have to worry about you having to choose between finding cheaper sources of supply or risking financial ruin due to your inability to compete with (unrealistically) high costs. Similarly, if you agree to a cost increase of 1% for every 6% increase in copper price and your supplier agrees to a cost decrease of 1% for every 6% decrease, neither party loses — and more importantly, both parties win. In bull markets, your supplier gets to pass on the raw material cost increase — and only the raw material cost increase (as you both know the cost, no ridiculous mark-ups), and in down markets, you reap the savings without having to go through a long, time-consuming, wasteful renegotiation.

This works for any category you can think of, allowing you to lock in 1, 2, 3, and even 5 year contracts (on non-strategic categories) without having to worry about lost opportunities or overpayments. The only thing you have to do is check the indexes once a month (or quarter) on the date you both agree to “reset” the prices for the next month (or quarter) to make sure your supplier is holding up their end of the bargain. And you can even use this model to take into account financial costs, such as foreign exchange rate assumptions (if raw materials or components are being bought in a foreign currency) or finance assumptions (if part of the product or transportation cost needs to be financed). So build a should cost model and get that yo-yo off your finger.

* There’s no such thing as “savings”. “Savings” is just money you shouldn’t have spent in the first place. (And that is why “cost avoidance” is more important than “cost reduction”, despite the refusal of many old-school diehards to recognize that fact.