When it comes to contracting, it is not a surprise to realize that most of the contracts that I see in my day to day life, lack the basic elements required for cost-saving and performance
A recent study concluded that while certain industries can have up to 90% of their revenues covered by contracts with suppliers, the same companies only allocate typically less than 1% to their procurement operating expenses. By under-investing in such a way, they are overlooking a source of value, which combined with other elements, can erode contract value up to 9% of their annual revenues.
Just for fun, I applied this principle to the recent purchase by the Belgian state of 34 new fighter jets from Lockheed Martin’s for a total of 3,6 billion euros: the above 9% would equate to 324 million euros of tax payers money… you can do the math at a country level: the amounts at stake are just abysmal!
But how can you avoid such erosion in your contracts?
You could look into it in a myriad of ways, but let’s concentrate on 3 simple areas which are often overlooked:
- General T&C’s: ensure that KPI’s and reporting linked to the engagement TCO. This requires expertize from the category buyer who should define ways to measure vendor performance. Clauses defining rules on how subcontracting works are to not be overlooked, especially if the nature of the agreement concerns services, as third-party personnel gaining direct access to customer sites inherently increases associated risk.
- Commercial conditions: They should contain, good benchmarking clauses, ensuring that pricing remains in line with the market for the duration of the engagement. However these clauses need to be written by specialists, otherwise, they are often too limitative when exercised for real. Another example of an often omitted clause is one that limits pricing adjustment due to inflation…
- Partnerships and Governance clauses: since partnership and governance enable stronger collaboration, don’t forget to add these ones either. Those clauses need to have a good process definition for continuous improvement of the supplier. Of course, one should remember that partnerships require a well-defined supporting governance and escalation path to manage inherent issues arising during contract life cycle.
This is not the end…
Despite the above, contracting for performance won’t be effective because of only applying these recommendations to your services contracts.
There are multitudes of ways where you can have a card to play, and it starts very early in the process:
Already as soon as pre-contracting activities start, failure to engage legal/contract teams early enough, and/or if the correct stake holders are not engaged in the procedure, chances are high of ending using the wrong form of contract, extending lead times to sign, and misaligned interests; not to mention future opposition from involved teams.
As I see in many cases, the lack of clarity on scope and goals at inception, will inevitably put the relationship in the road to claims and disputes during the life cycle of the contract.
Finally, during the active life of the contract, process gaps, if not addressed properly, will lead to missed opportunities. Controling and enforcing regularly the terms contained in your contract is key to success.
Organisations disregarding this basic hygiene in contracting usually end up with inflexible contracts where performance management of vendors becomes difficult, and instead of addressing root causes, the parties end-up blaming each other.
The above recommendations are only a sub-set of the practices that we put in place with our Customers but they could already significantly improve your position when willing to implement contracts for performance. At the same time it allows you access value that would be otherwise locked in your service relationships.
Good practices in contract and vendor management are the north star at Unego.
Every day we advise our customers on how to avoid the typical pitfalls encountered in complex service contracts. We preach about good contract, performance, financial, risk and vendor relationship management and have developed processes and methods that have proven to be efficient in maximizing your contractual expectations while minimize the risks associated with your key suppliers. We do this using a clever combination of technology, automation, artificial intelligence coupled with pragmatic human expertise.
If you would like to discuss how we can help you or your company, please don’t hesitate to contact us: www.u-nego.com/contacts