A few weeks ago, I wrote about one of the “Most Stupidest Contract Clauses” I have come across, the Most Favored Nations Clause. Today I am going to add to the list of clauses that probably don’t belong in a contract, with the “total cost of ownership” or “Continuous Improvement Clause”.

The Continuous Improvement Clause (CI Clause for short) comes in many forms, but the basic idea is that a supplier will agree to assist in providing cost reduction and/or enhanced services to the customer over the life of the agreement. Examples of this include reducing inventories, reducing energy costs, cost avoidance, and administrative cost savings such as speeding up the ordering/payment process.

In many cases, the supplier will commit to both soft and hard dollar savings targets in these areas, and include the mechanisms to calculate cost savings in the contract. Cost savings percentages are based on estimated annual transactions and spend, and in every case, include a term to the effective of “results are predicated on customer’s participation in cost reduction proposals. If customer does not implement the cost reduction proposals suggested by supplier, the targets offered here shall be considered null and void.”

Essentially, the customer has to implement for the cost savings to work, but the supplier gets credit regardless. Here in lies the problem.

One time as I started a project with a new customer, the buyer insisted on the importance of these clauses. In their contract, the clause included details about how the supplier and customer would have quarterly meetings to discuss and implement cost savings opportunities. “We need a commitment to CI in every one of our contracts!”

I asked the buyer what specifically happens during the quarterly meetings, are they effective, etc. The buyer informed me that so far, they haven’t had any quarterly meetings.

“Our schedules have been too full.”

“Oh”, I said. “How long have you been under contract with the supplier?”

“Three Years”, the buyer replied.

The buyer, in his commitment to helping the company reduce costs, was adamant that contract language had to be put into every contract regarding Continuous Improvement. After that, the buyer saw no responsibility to follow up, and since the supplier had an out, they didn’t feel the need to push the issue.

Lets call the CI clause by what it really is, a CYA (cover your ass) clause. CYA does belong in contracts to some extent, in most agreements you want to include terms that make sure you are covered when things go wrong. But to spend the time and resources negotiating CI terms into an agreement, when a supplier partner will typically agree to these programs informally, is a waste of time and money. Weeks or months of hard dollar savings are lost while the contract sits in legal or meetings are held to develop cost savings estimates or clarify what was being agreed to.

In the end, the supplier always has a way out, and the buyer always has an excuse why they were too busy to move ahead with the arrangement. But at least it’s in writing.
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Joe Payne

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