Your supply contracts are important. They govern your commercial relationships. However, after they have been negotiated and filed, they are often forgotten about. Years may pass by and business contexts may have changed. Contracts that were once fit for purpose may no longer be suitable or protect the organisation adequately. It is, therefore, necessary to periodically review your supply contracts. It will help identify risks and missed opportunities.
Your organisation may have lots of contracts in place with suppliers, but just looking at the top 5 initially will save time. If there are fundamental issues with the most important ones, others probably have similar issues too. Look out for the following, which can add costs to and/or disrupt your operations:
- Payment terms. Could they be extended to improve your cash flow?
- Lock-ins. Can you get out of the deal by giving reasonable notice? You want as much flexibility in your contracts as possible.
- Performance measures built into the agreement. Do they incentivise the right behaviours?
- Service Level Agreements. If they exist, are you holding the supplier to account?
- Statements of Work. Are deliverables and specifications adequate defined?
- Supplier obligations. Is the supplier doing everything they have agreed to? Often contracts with a number of deliverables have been negotiated with the vendor. But because nobody is actively managing the contract after it’s signed, the buying organisation often does not get everything it has paid for.
- Corporate Social Responsibility (CSR) clauses. CSR is becoming more and more important for all organisations. All stakeholders, including customers and investors, are now demanding that companies don’t just take responsibility for their own CSR, but also take adequate steps to ensure a certain level of CSR throughout the supply chain. It’s not only the “right thing to do”, it’s also very good for business, as illustrated in my article, Considering Corporate Social Responsibility through Every Step of the Supply Chain. As a very minimum, suppliers should be able to give some assurance in the contract.
- Risk. You should also consider risk assessing your supplier base to determine if anything beyond contractual assurances is needed. For your strategic suppliers, CSR should be on the agenda at every business review meeting.
- Data. Clauses that provide reassurance regarding data protection. Suppliers that process any personal data on behalf of your organisation in any way should contractually assure compliance with the General Data Protection Regulation (GDPR), agreed upon by the European Parliament and Council in April 2016. It replaced the Data Protection Directive 95/46/ec in May 2018.
- Compliance. How much “leakage” is associated with key contracts? It’s not about plumbing. It’s about the amazing supplier agreements you have spent time putting in place being ignored. People still do their own thing and buy whatever they want wherever they want. So much for those savings benefits! Reasons for “leakage” are typically multi-faceted. But if one reason is that the deal is simply not good enough, now would be a good time to renegotiate. Sub-optimal processes, visibility and policy enforcement may be other causes of “leakage”.
Also, establish approximately how much of total spend is covered by formal contracts. If key spend is not covered by negotiated contracts, you are very unlikely to get the most favourable deal and best quality. A simple way of creating value would then be to negotiate some great deals. Our article How to Negotiate Great Supplier Contracts gives you some tips on how to do that.
Your analysis may show that there have indeed been missed opportunities, that you are not always getting what you contracted for, or that performance measures are not properly managed. Any of these are symptoms of absent or inadequate contract management. Managing a contract properly takes time and dedication, but the benefits are enormous. To learn more about how your business can optimise its supplier contracts to stay competitive, contact our Managing Director, Armand Brevig, today.
