Contract and Supplier Management
Buying Services – Supplier Contracts
This section sets out the key considerations when you are procuring or contracting services. Taking a systematic approach will increase speed to contract, minimise risk and help drive more value from the supplier.
Services you might want to buy include: technology (hardware, software, cloud), outsourcing, facilities and professional advice.
In each case you are buying an intangible, and there is a heavy dependency on the buyer.
There are typically four stages to procurement and they all affect contract negotiation:
What end-to-end objective are you trying to achieve?
How do the proposed services support that need?
This will influence budget, supplier selection and key requirements during the pre-contract stages.
Tender / Pre-contract
What are your key operational, financial, commercial and legal requirements?
Get clear on these in advance. It will help you negotiate a quick and favourable deal, while you still have leverage with the supplier. It will also assist the supplier to quote a more accurate price, with less room for costly ambiguity.
Typically you would conduct an RFI stage with 5-10 suppliers, then focus down to a shortlist at the RFP stage.
Even if you decide against a competitive process, clarity on your requirements will still benefit significantly leveraging the negotiation power you have before signing.
Typically you would only enter detailed contractual negotiations with one supplier – otherwise this becomes arduous. A check list of the most important aspects of the contact is outlined below.
Managing the supplier ‘in-life’ so that the business needs are met. Typically, requirements will change in-life. Hence, you should ensure your contract is flexible enough to accommodate this without time-consuming change control.
Were there lessons learned post-contract that you should consider during renegotiation with a successor supplier?
How do you work together (e.g. management meetings)? How do you implement continuous improvement?
Take into consideration any exit requirements you may have. What help do you need from the supplier to bring the service in-house or bring in a new supplier?
What would be the ‘cost of change’ against the opportunity cost?
Contract Negotiation – Supplier Contracts
Negotiating a complex service agreement requires a cross-functional approach (rather than leaving it to your lawyers). This section outlines key considerations.
What are you buying? What is the service? What are the key service levels? Which service levels are so important that they will attract service credits (or other remedies if the Supplier does not deliver)? What are the legitimate dependencies that the Supplier will have on your organisation, in order to deliver their service? Who, at your supplier, will ensure that these dependencies are met?
Typically, this will be led by the operations team. As a rule, it is better to be less prescriptive, unless it is important for the Supplier to follow specific processes.
How much are you paying? What are the charging principles?
Are these subject to any assumptions (as a rule, the fewer and more specific the better).
How is payment structured? Normally: Fixed Service Charge or Time and Materials (volumes etc.). With Fixed Charge, the supplier takes the financial risk if the resource cost exceeds what they quoted. If pricing is on Time and Materials – the customer takes the risk. Hence, if you opt for Time and Materials, you should define the parameters around this.
Typically, the finance / procurement and service / operations team will contribute to these discussions, with support from legal.
Generic Contractual Considerations
Below is a range of other contractual considerations, independent of the payment structure:
Risk Allocation Provisions (Liability and Indemnities)
What is a fair allocation of risk? If the Supplier fails to deliver, what types of loss and how much loss are you likely to incur?
Most suppliers will try to carve out: loss of profits, loss of revenue and business continuity. If you accept their position, you would not be able to claim, in the event of these types of losses.
These apply both for cause and convenience. In practice, it is very difficult to exit for ‘cause’, even when the service is particularly poor. So you may want to define, specifically in the contract, a right to terminate for cause, by reference to breached service levels.
When you cannot demonstrate cause, you will typically pay a ‘termination for convenience fee’ to terminate early.
Conflicts over intellectual property can be costly and time consuming. It is important that you have a ‘right to use’ all intellectual property used to deliver services, but typically less important that you own the intellectual property.
Confidential information should only be disclosed to those on a ‘need to know basis’ and only for the specific purposes of the project.
Suppliers may want to mention that you are one of their clients in their sales brochures, and/or making an announcement. On the latter, are you comfortable?
You will want the right to audit the supplier to ensure that they are compliant with the terms of the agreement – particularly that you have been invoiced correctly. There are other key audit rights that the contract might cover, e.g. security.
Is the supplier processing any personal information at your behest? If so, what types of personal data and how much? There are certain mandatory provisions that may be required in your supplier contract (see below).
Does the supplier have access to key systems, commercially sensitive information, or personal information (other than contact information)? If so, you should conduct thorough pre-contract security due diligence on your supplier, and ensure that you have appropriate security obligations.
Contract Negotiations – Go-To Market/Sales Contracts
Having a sound, balanced suite of sales contracts, with clear fall-back positions for push back from your customers, will greatly increase your speed to market.
Considerations will be the same as above – but there are a few specific call-outs:
Scope, Service Levels
A well drafted, adaptable suite of service schedules and service levels, and influence on the customer during the sales process on its requirements, can get to contract faster and improve assumptions around the cost of delivery.
What key assumptions that might affect price, would you want to verify?
Will you be generating any intellectual property that will be useful for other customers?
Information Security and GDPR
If your solution requires access to customers’ key systems, commercially sensitive information or personal data – you should demonstrate, through the tender process, how you are compliant. More information is provided in the section on Data Breach Policy and Procedures.