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.