You just conducted a sourcing event, finalized negotiations
and have selected a supplier. You have started contracting but you find yourself
stuck in what seems to be endless redlines and negotiations. You are beginning
to believe that you are never going to be able to finalize. There are
significant savings on the table but you can’t seem to clear the final hurdle.
Is your legal process flawed? Are you being too nit-picky on various business
terms? Are you trying to enforce terms that don’t make sense for the supplier?
Is your internal legal department inflexible? I’ve found that all of this needs
to be reviewed from a cost benefit perspective. In most cases you will find the
things that have become sticking points aren’t really worth it in the long run.
In other cases your organization has created a legal review process that is
cumbersome, time consuming and overall unnecessary.
Let’s review a few cases I’ve seen through various clients
and projects that have proved to unnecessarily elongate the contracting
process. It’s important to note that in most of these cases the client
conducted business with the supplier prior to the contract negotiations with no
contract or an unfavorable contract in place.
The client’s legal department developed a “one size fits
all” Master Services Agreement (MSA) in order to streamline and standardize
terms and conditions. The legal department attempted to utilize the same MSA
language for Master Purchasing Agreements (MPA). The problem among suppliers
was universal, the indemnification language was designed for contractors not
for distributors and no distributor was willing to accept it. The client’s legal
department insisted the template document could not be changed and the
suppliers had no choice other than rejecting the contract. In turn, forcing
purchasing to resort back to ordering against blanket purchase orders,
drastically limiting their protection from a pricing and services standpoint.
The lesson learned is that sourcing and legal need to work together proactively
and collaboratively, ensuring legal understands the importance of securing the
agreements to the organization. This will help to alleviate inflexibility and
create an effective and efficient process.
Another more extreme case I’ve worked through was a dispute
over business terms specifically payment terms and price increases. The
sourcing department expressed an unwillingness to accept price increases of any
kind within their contracts and were unwilling to accept any payment terms
below 2% Net 45 days. We had just finished finalizing pricing negotiations
within a commodity based category and had essentially reached the market low.
Within commodity based product groups it is typical for the supplier to add
price increase clauses tied to market indices in order to protect themselves if
the price of raw materials is to rise. This is especially common given
competitive pricing due to the fact that there is the potential the supplier
could end up selling at a loss if they are to hold pricing. During contract
negotiations we had worked to tie the products to the appropriate indexes and
cap the year over year increases to a max of 3%. However, the client’s sourcing department was
unwavering and willing to lose the ~$1.5M in savings due to the potential for
minimal price increases which would have an almost negligible effect on savings
over the life of the contract.
Again this stresses the overall need for flexibility when
contracting. Negotiations are give and
take. It is important to realize when you are requesting something reasonable
and attainable or when you are operating outside the realm of how a supplier
can conduct business. Don’t blow a deal that’s favorable to your organization
over something that has largely a minimal effect on how you operate.
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