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Missed Opportunities

June 24, 2014

Average savings that exceed 25% of contract price are impressive, especially when they are achieved through cost reduction, not through slashing supplier margin.

Too good to be true? Not according to two organizations I met with last week, each of which has unearthed a wealth of opportunity buried in their contracts. Quite simply, they are buying the wrong thing in the wrong way, driving up costs and ensuring buyer / supplier contention.

In reviews of more than 40 contracts, these organizations discovered a pattern of poor requirement definition and badly defined scope. Often, there were endless instructions on how to perform tasks, rather than clear descriptions of what needed to be done, or the desired outcome. These practices were frequently resulting in avoidable complexity, contention and focus on a raft of largely irrelevant performance measures. In one instance, the supplier was being challenged for using too few staff to perform the defined tasks, rather than being applauded for increased efficiency. In others, the scope definitions were so poor that work was re-tendered – and price reductions averaging 34% were achieved.

These stories illustrate the problem with contracting process and practices in many organizations. Both buyers and suppliers suffer from poorly defined roles and responsibilities, limited cooperation and failure to adopt good practices. The result is incremental expense for both parties. IACCM’s studies of the most negotiated and the most important terms and conditions have illustrated this divide for many years. While contract negotiators have focused on issues of compliance and risk allocation, value has been undermined through poorly defined scope, responsibilities and performance measures. In many cases, the answer to poor performance has not been to tackle its source, but to increase the resources dedicated to its oversight.

It seems that even top consultancies such as McKinsey are now converts to the need for improved contract management. This means that it is increasingly on the agenda for top management as an area to be fixed. This realization should not be a surprise to anyone who has followed the work and research undertaken for the last 10 years by IACCM and its members. What is unfortunate is the extent to which incumbent contract management and procurement groups are missing the opportunity to drive improvement. For many, the chance to be seen as leaders is now out of their hands and management is turning to others to re-engineer the contracting process.

IACCM provides a wealth of guidance, research and support materials to organizations that wish to improve their contracting and commercial capabilities. The research points to potential for major improvements to bottom-line performance and competitive advantage.

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3 Comments
  1. Eugene P. Grace permalink

    Good contract structure and checklists can alleviate many of the referenced problems. A good service/product description is critical as are installation, warranty and maintenance provisions. For various arrangements, I require a detailed workflow chart. This is a remarkably powerful visual tool that forces business and technical personnel on both sides to focus on “day-in-a-life” issues. I also require a number of sign-offs at the completion of each step of the project. The goal is no surprises. Good contract structure avoids the intermingling of legal and business terms although these two elements need to be consistent with each other to avoid discussion regarding language nuances down the road.

  2. LaDona Herrer permalink

    Mr. Grace:

    Do you have a checklist that you could share?

    • Eugene P. Grace permalink

      LaDona,

      As a matter of policy, we do not release that type of information. In my negotiation webinar, I do describe the key elements of the checklist. They are:

      1. product/service description: often times this is not adequately described in the contract when presented for legal review. This might include a workflow and/or PERT charts;
      2. potential for third party liability: I have done a lot of technology contracting. The business people focus on price; I focus on third party liability which I call the “O-Ring” consideration. The O-Ring was an inexpensive part of the Space Shuttle but caused its crash. With technology matters, small pieces of equipment could crash or slow down the entire network.
      3. term of the contract: can the user get out of the contract quickly; how much does it cost to buy yourself out of the contract;
      4. resource or result: what does the company think it is buying, resource or result. A result focus means that the vendor will provide everything necessary to achieve a certain result; resource means that you are buying a certain capability and your people are doing the rest. This will impact different considerations such as warranty and maintenance.
      5. liability/indemnification: verify that there is sufficient liability coverage and limitations to incent proper contractual behavior; not trying to be punitive but make sure that the proper incentives exist to perform the contract;
      6. compatibility with existing network
      7. acceptance testing: unit, intermediate and acceptance testing as a whole;
      8. my personal favorite: what is missing from the contract, which I call the most difficult thing to negotiate. If you don’t know that it should be there, you have no reason to raise the issue in a negotiation.
      9. new or prior relationship
      10. information previously provided between the parties; what is the negotiating ecosystem for this acquisition; what was previously communicated that needs to be moved forward into agreement
      11. anticipated start date
      12. Good install; good warranty; good maintenance
      13. Financial strength of vendor

      Hope that helps. This is not an all-inclusive list, but is indicative of various general subject matters to be considered for the creation of a checklist that fits your particular circumstances.

      Best regards,
      EP Grace

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