When you enter into business critical supplier relations, there is an all too often neglected area within the contract and that’s the plan to disengage.
Since the relationship between suppliers and clients are best when they’re mutually beneficial, the exit strategy needs to meet the same requirement.
That being said, the best time to discuss this is not during negotiations. It’s after the supplier has been partnered with you for a period; a working relationship established, rapport built and comfort grown for both parties to come back to the table and enter into further discussions about exiting.
The only thing that should be discussed during the negotiation process is the timescale for both parties to meet, after say six months after the supplier’s contract commences to discuss a strategy for disengaging.
It’s best to have this in place to ensure that the continuity of service provision remains the same, even if an existing contract is being terminated or transferred.
What a supplier won’t be comfortable with is too short a notice for your contract ending. They will want to know more about the “what if” scenario of losing a contract – and you your supplier.
Most will require more than thirty days for business critical supplies.
For longer term contracts of say over five years, a good rule to go by is one month per year. Using that as a general rule of thumb… if you’re on a three-year contract, a three-month notice period to terminate would be sufficient. That would give your supplier plenty of time to source new contracts and replace lost revenue, whilst retaining their continuity of service to your business within the final stages of the contract. At the very least, it’s risk management for both suppliers and clients.
Why would you end a contract with suppliers?
1) It’s run its course.
2) To re-enter into the tendering process, for which existing suppliers can also be a part of to keep your offers competitive.
3) If either company feels the partnership is no longer beneficial, they can begin. negotiations to exit out the contractual obligations. If this is the case, you’ll be glad to have discussed the exit strategy beforehand as both companies will know the process to follow and the actions each party is responsible for.
4) Lack of performance by either supplier or client or both.
5) Better deals elsewhere.
That’s just five reasons that are pretty standard for contracts terminating. Nothing lasts forever.
When there are assets involved, it’s even more imperative that this forms part of your procurement process. People’s jobs could depend on it.
Then there’s the issue of who owns what as there are many business supplies for which you are loaned equipment from a service provider for them to take care of supplies and maintenance. If that’s the case, there will be ownership issues and equipment to be transferred back… not to mention any costs involved in contract cancellation without a good reason for doing so before the contractual period is met. These are your early termination fees and they are fairly typical for large supplies that are critical to business functions.
How to raise the issue of disengagement during negotiations
As you’ll understand, losing contracts is not something any supplier wants to discuss because it implies you’re leaving or not really keen on the idea of working together.
It’s not necessarily meaning you are parting though. It’s only a process you want to put in place to ensure you continue getting value. And that your potential suppliers aren’t too eager or blind sighted by the revenue projections that they fail to consider the risk.
Instead of calling it a disengagement process to address an exit strategy, you can call it a re-engagement process.
All you do here is assign a named contact from your company to deal with the re-negotiation process. It can involve opening up your horizons to others in the field and inviting your supplier’s competitors to enter the tendering process, whilst your current supplier is actively engaged in the process. That will help them feel more comfortable with continuing with your processes, and with your support.
Even if they don’t have that, it’ll force them to be competitive in the tendering process. Their advantage is they will have the data to know how much it’s costing to supply your company, for which they may be able to provide an even better proposal. Either way, existing suppliers are in a good position for re-entering the tendering process to renew contracts. Just because you have existing suppliers in place should never mean that you stick by them through loyalty, unless there’s a significant advantage to your company for doing so.
Why?
Because…
It’s stability for both businesses
Both suppliers and clients need stability and that’s what the exit strategy meeting is designed for. To ensure business continuity, even during a re-tendering process.
No service disruption is one stipulation to ensure is covered within your contract. The other is that any employees involved in the transitions are aware of what’s happening and kept in-the-know. This is particularly of interest to the recruitment sector when staff may be on two year contracts through a temporary staffing agency. Even if your supplier needs to have staff on premises to ensure service delivery with minimum fuss, ensure the people they have in place, know what’s happening with their jobs.
Always ensure everyone involved with the contract knows where they stand, are involved in the process, and aware of what happens, when things happen, and also that the “what ifs” are addressed. Any questions, have them answered and sooner rather than later.
The more that both companies (and employees) know about the contractual obligations and the disengagement process, the more comfortable the relationship will be as there won’t be any fear of the unknown involved.
Keep things simple and discuss exit plans during the negotiation stages of contracting out.
Image courtesy of psow.edu.
The financial viability of your business could be jeopardised by any of your suppliers. For that reason, it’s important to consider the long term impact of any contracts you’re considering entering into.
While suppliers will generally look at long term contracts for business critical supplies, you shouldn’t assume they will be operational for the duration of the contract terms you agree to.
If you do, you’re putting your business at major risk.
5 Questions to Answer to Assess the Risk Potential Suppliers Pose
1. What impact does the contract have for business continuity?
The more serious the suppliers are for your business continuity, the more effort, resources, planning and collaboration will be needed to ensure potential partners are suitable to be supplying your business.
They need to be able to accommodate you for the duration of the contract, but you need to be sure you know the risk you’re entering into the instant you sign a contract.
Identify the risk first. A scorecard system will be the easiest with three scoring high risk, and one indicating low risk.
In practice, a managed print service for a local optician would score low because it’s not high on their list of priorities for supplies. A print shop though couldn’t survive without the printers therefore that would score a three on the risk score and signify a high risk, needing a thorough process in place to identify the most stable business partner for the long-term.
2. How easy can you get an alternative supplier in place?
The ease of switching is another noteworthy consideration for assessing risk. If your partner falls apart on you and can’t deliver on the goods or services they’re contractually obliged to deliver, can you get an alternative in place rapidly?
If not, it may be a better idea to diversify your supplies between suppliers so that your business isn’t entirely reliant on one supplier. There’s a backup in place should one fall through.
For the initial contract agreement, you’ll know the time frame it has taken to get things rolling. Three months isn’t unusual for a tendering process to take, and they can run longer. The longer it will take you to get a new supplier in place for business continuity, the higher the risk will be.
3. How competitive is the sector you are contracting out to?
When you’re dealing with smaller sized firms, you need to consider whether they’re going to last. It’s not something you’ll feel comfortable about discussing with potential partners during negotiations, but you can’t avoid it. In competitive industries, where the competition is fierce, such as the security sector where price undercutting is typical – you need to assess whether your partner will be around for the duration of your contract, or if they’re planning to exit and sell their business on.
Some sectors are highly competitive, others not so much. This should form part of your research process when evaluating potential suppliers so you know when you go into discussions, the level of competition they are up against for survival. And don’t be afraid to ask them about survival plans if there are some really competitive bids coming at you during the tendering process.
4. Will your contract leave your supplier too reliant on Your TCV?
TCV = Total Contract Value. Diversification is a necessity in business therefore, if you discover your contract is going to be the one keeping your partner operational then the relationship may not be mutually beneficial.
Mutually Beneficial Supplier Relationship is only one of the eight principles of a quality management system in respect of
ISO 9001.
Early stage start-up businesses are often overly keen to get out of negotiations and get the contract agreed that they neglect to take time out for considering long-term risks that will be associated with your contract fulfilment.
Ensure your partners are not going to be dependent on your contract for services or goods for them to remain operational.
As a rule, the higher your TCV is, the larger a supplier you will need. The reason being, the larger your contract value, the more cost there will be for service or product delivery. Should any of your suppliers be too reliant on your contract, investors (like the bank) will be reluctant to provide financial support (if they ever need it) due to the lack of revenue diversification.
5. Intellectual Property Protection – Who owns what and who’s managing it?
IP protection is an important part of on-boarding new suppliers. In certain situations, they may be getting more information from your company that could prove dangerous later if your IP isn’t managed effectively.
Take contract manufacturing,
as this report highlights. If you don’t own, as in really own your intellectual property, come the end of your contract, your supplier could be in a position to enter your market and become your competitor using the technology or information your company owns. There is a risk you breed your own competitor and those are the worst threat you can have because they’ll be a direct copy of your product or service.
Always protect your intellectual property.
For early stage start-ups that have neglected this part and need to know more, or if you’re late on learning about IP protection, see the Government overview of what it is and your protection options
here.
Image courtesy of nfib.com.
5 Things To Know About Effective Contract Management
The first thing to understand about contract management is that it doesn’t just entail awarding and managing contracts.
Contracts form part of every business and the more you have, the less risk you’re exposed to. That’s why you need to have good management processes in place to manage every contract in your business.
1. Where are your contracts?
You should have contracts for the following (at minimum):
·With your partners and suppliers
·If required, customer contracts
·Employee contracts
The majority of B2B suppliers will insist on contracts being agreed. To avoid your business being on the losing end of contractual obligations, the process needs managed. You must know and fully understand the terms you’re agreeing to when you enter a legally binding contract.
2. Never sign without negotiation
That’s a rule to live by in business.
There’s always some wiggle room and it’s the entire reason for part of the duties procurement officers do day in, day out. Assess, identify and negotiate.
They need to review all the terms, understand them and find the areas within the contracts that need revised to improve those terms. Moreover, better terms are most often ripe for the picking. You don’t get if you don’t ask.
3. The ball remains in the buyer’s court so play responsibly
When you’re negotiating contracts, you cannot be in the mindset of scrounging for every saving you can. Savings are all well and good but never at the expense of a positive working relationship.
One of the worst things for contract management is to have one party feel unjust due to extravagant terms. What can start out as a standard RFP (Request for Proposal) can have numerous bids, the most attractive ones will be analysed, scrutinised and all too often sabotaged.
When suppliers are keen to jump aboard and partner with you, in particular the smaller sized firms, often the owners are looking for security of finance, rather than good terms.
The result is that they don’t have the capacity to understand the entire scope of works being agreed to until it’s too late. They find themselves bending over backwards for too little remuneration in comparison to the efforts put forth. Next thing you know, the quality of service declines, and it’s affecting your customers.
That’s the price of cheap sourcing.
Don’t look for best pricing. Focus on best value.
4. Build the relationship before the contract
You won’t get a great discussion going into negotiating terms of agreements between two parties without the relationship first. When RFPs are first put out, the focus should be on building relationships with suppliers first because often is the case, that’s a representation of how your working relationship will be, possibly for years to come.
If that rapport isn’t there, the working relationship will be poor. That’s just to start with because the contracts will come up for renewal. When you get to that stage, it’s best to be on good terms with a supplier who gets your business, understands it, and works closely with you to enhance your customer’s experience.
Changing suppliers doesn’t help customer service in the short-term but sometimes, things don’t go to plan, negotiations break down and you find yourself beginning the tendering process over.
The management of contracts is never done. As long as they’re in place, they need managed and so do the people and companies involved.
5. Analysis must be thorough
For contract management purposes, there are four ways to assess risk to business finance, and the legal responsibilities or ramifications of commercial contracts.
The four main types of analysis include:
PEST analysis
· Political
· Economical
· Social
· Technological
SWOT
· Strengths
· Weaknesses
· Opportunities
· Threats
STEEP
· Social
· Technological
· Economical
· Environmental
· Political
STEEPLE
Same as STEEP with the addition of…
· Legal
· Ethical
Most businesses will be familiar with the SWOT analysis to assess threats and use that for their internal and external risk assessments. However, when there are changes to the economy, the political landscape cannot be ignored.
Take for example the UK’s exit from the EU. That’s politics affecting businesses of all sizes. That brings legal compliance issues into the risk assessments, and by adding in the issue of ethics for CSR policies, the STEEPLE analysis is the more in-depth option for a comprehensive risk assessment.
Manage your contracts and you’ll be better placed to manage risk within your business, thus preventing complications further down the line.
Without contract management, risk management would be impossible.
The first thing to understand about contract management is that it doesn’t just entail awarding and managing contracts.
Contracts form part of every business and the more you have, the less risk you’re exposed to. That’s why you need to have good management processes in place to manage every contract in your business.
1. Where are your contracts?
You should have contracts for the following (at minimum):
· With your partners and suppliers
· If required, customer contracts
· Employee contracts
The majority of B2B suppliers will insist on contracts being agreed. To avoid your business being on the losing end of contractual obligations, the process needs managed. You must know and fully understand the terms you’re agreeing to when you enter a legally binding contract.
2. Never sign without negotiation
That’s a rule to live by in business.
There’s always some wiggle room and it’s the entire reason for part of the duties procurement officers do day in, day out. Assess, identify and negotiate.
They need to review all the terms, understand them and find the areas within the contracts that need revised to improve those terms. Moreover, better terms are most often ripe for the picking. You don’t get if you don’t ask.
3. The ball remains in the buyer’scourt so play responsibly
When you’re negotiating contracts, you cannot be in the mindset of scrounging for every saving you can. Savings are all well and good but never at the expense of a positive working relationship.
One of the worst things for contract management is to have one party feel unjust due to extravagant terms. What can start out as a standard RFP (Request for Proposal)can have numerous bids, the most attractive ones will be analysed, scrutinised and all too often sabotaged.
When suppliers are keen to jump aboard and partner with you, in particular the smaller sized firms,often the owners are looking for security of finance, rather than good terms.
The result is that they don’t have the capacity to understand the entire scope of works being agreed to until it’s too late. They find themselves bending over backwards for too little remuneration in comparison to the efforts put forth. Next thing you know, the quality of service declines, and it’s affecting your customers.
That’s the price of cheap sourcing.
Don’t look for best pricing. Focus on best value.
4. Build the relationship before the contract
You won’t get a great discussion going into negotiating terms of agreements between two parties without the relationship first. When RFPs are first put out, the focus should be on building relationships with suppliers first because often is the case, that’s a representation of how your working relationship will be, possibly for years to come.
If that rapport isn’t there, the working relationship will be poor. That’s just to start with because the contracts will come up for renewal. When you get to that stage, it’s best to be on good terms with a supplier who gets your business, understands it, and works closely with you to enhance your customer’s experience.
Changing suppliers doesn’t help customer service in the short-term but sometimes, things don’t go to plan, negotiations break down and you find yourself beginning the tendering process over.
The management of contracts is never done. As long as they’re in place, they need managed and so do the people and companies involved.
5. Analysis must be thorough
For contract management purposes, there are four ways to assess risk to business finance, and the legal responsibilities or ramifications of commercial contracts.
The four main types of analysis include:
PEST analysis
· Political
· Economical
· Social
· Technological
SWOT
· Strengths
· Weaknesses
· Opportunities
· Threats
STEEP
· Social
· Technological
· Economical
· Environmental
· Political
STEEPLE
Same as STEEP with the addition of…
· Legal
· Ethical
Most businesses will be familiar with the SWOT analysis to assess threats and use that for their internal and external risk assessments. However, when there are changes to the economy, the political landscape cannot be ignored.
Take for example the UK’s exit from the EU. That’s politics affecting businesses of all sizes. That brings legal compliance issues into the risk assessments, and by adding in the issue of ethics for CSR policies, the STEEPLE analysis is the more in-depth option for a comprehensive risk assessment.
Manage your contracts and you’ll be better placed to manage risk within your business, thus preventing complications further down the line.
Without contract management, risk management would be impossible.
Image courtesy of stature.com.sg.
Do You Need To Transform Your Procurement Process?
How your business partners and gains buy-in from suppliers will influence not just your overheads, but your CSR policy, Procurement policy and quite possibly even extend to your HR policy too.
There’s a magnitude of variables involved in procurement that to the average business owner, without a professional procurement team (or even just a manager) in place to manage suppliers, things won’t go as smooth as they could do.
What Professional Procurement Entails
This goes beyond assigning a monetary value to lock in savings commitments through procurement. Value differs by company and it’s the business owner who ultimately determines what he or she defines as value.
Your company may value supporting SMBs for goods and services supplied, while another may place more importance on the value of green sourcing.
Whatever values your company supports and works hard at upholding as part of your CSR policy, can be supported and further championed by working with suppliers with the same core values.
Values go beyond figures.
- Professionalism throughout procurement
One of the best approaches to ensure professionalism in procurement is to ensure your buyers, whether in-house or outsourced, are invested in continual professional development.
In the UK, you can simply check with The Chartered Institute of Purchasing & Supply (CIPS).
By investing in people who invest in keeping their expertise current, you can be certain that your company will meet or even exceed compliance requirements.
In addition, further areas that will not be neglected is market research, which is essential prior to issuing RFPs (Request for Proposals) to begin the tendering process. Moreover, ethical standards will be included in the analysis of potential suppliers as well as having sound organisational knowledge.
When CPD is part of your HR policy, complimenting your procurement policies, you will find it to be beneficial for improving your entire procurement process.
The fundamentals
Combine…
- The Principles of fairness
- Integrity
- Transparency through competitors
By using the above fundamentals, you will achieve better operational efficiencies, reduce corruption, increase effectiveness throughout your supply chain… all of which brings us right back to the starting point of value – your business will reap the benefits of value for money, and your policy will enhance customer trust, and enable your business to gain a competitive edge.
Plus, you get the data to make further improvements to your procurement process
Data analysis is critical for business development. The longer you’re operational, the more data you will collect and store both in paper format and in digital format.
The majority of the data gathered by procurement professionals must be understood in order to enhance your business processes.
Data analysis can be done whenever you feel the need to, quarterly, bi-quarterly, annually or ad-hoc.
With the magnitude of data at your fingertips,
- Benchmarking can be done
- Supplies and suppliers monitored
- Contracts evaluated
Introducing a transformation process
Chances are, there’s something above that your business hasn’t covered already with your systems and business processes. To implement any of it would involve transforming how you currently manage your suppliers, contracts, tendering process and quite possibly, your entire procurement policy.
The good news is that it’s not too late to make changes, because frankly, to experience efficiencies through procurement, it takes an ongoing approach.
There are plays you can make for the short-term, others will be long-term.
Whatever your ambitions are to better your supplier management, there are three steps you can take that will transform how your business buys-in.
- Assess your current procurement situation
- Plan changes strategically (seek advice if you lack the market research or organisational knowledge)
- Implement the changes you deem necessary
- This 3-step approach will need to be done periodically. The more your business matures, the more frequently your procurement team will need to repeat the above three steps to ensure any gaps are identified, addressed and changes implemented for faster improvements.
