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We recently stirred up some interesting debate over risks and legal contracts, specifically regarding balancing risk and whether or not companies are actually protecting against the right kind of risk (or introducing risk and losing opportunities in the process). But we truly touched a nerve with a post quoting a presentation where a procurement leader at a large corporation suggested starting with a supplier’s paper rather than their own for some types of purchases. Given the emotions and indeed risks around the topic of legal contracts, I found an anecdote by Tim Cummins during a roundtable at the Ariba LIVE event in London a few weeks ago to be very thought provoking.
Tim, the President and CEO of the International Association for Contract & Commercial Management (IACCM), told the story of an IACCM member company that decided to do an experiment with their buy and sell side contracts. They had their in-house legal teams do a blind review (the company name was concealed) of their own contracts to look for misplaced priorities and potential exposure. Their sell side legal team looked at their own company’s buy side contracts and vice-versa for the buy side team, who reviewed the sell side team’s paper. To quote Tim on the findings:
Both sides were apoplectic!
Apparently, they found that their own contracts and legal priorities were often insulating against the wrong types of risks and extremely burdensome, which at best extends negotiation cycle times and wastes expensive legal resources, and at worst actually costs business or introduces new risks.
Now, hopefully in these finals days of the fiscal quarter, your legal team is extremely busy pushing 11th hour contracts through (the economy needs it!). But perhaps as the smoke clears in the coming weeks, an exercise like this “blind” taste contract test is a worthwhile endeavor. No one knows your company’s business better than your own legal team. So if they can uncover efficiencies or deficiencies in your contracts, strategies or risk management process, your organization will be better off. At the very least, this experiment will open up a good dialog between procurement and legal on the topic of risk…and given procurement’s ever increasingly role in risk management, enlisting legal’s help is a big step in the right direction.
Justin Fogarty is Managing Editor of Supply Excellence. For any questions or feedback on the blog or its contributors, Justin can be reached at jfogarty[at]ariba.com.
3 responses so far ↓
1 Jeff G. // Jun 29, 2009 at 9:02 am
Justin:
This seems awfully similar to an older conversation (I don’t remember if it was here on SE or not). Maybe the issues are just so common that everyone’s discussing them.
Regardless, I do think that you make a good point. Risks are temporal and situational - the depend on the actual set of circumstances in play at the time of the deal. Templates, on the other hand, are static and (generally) inflexible - designed as a one-size-fits-all solution to a multi-sized head.
This is exactly the reason why I don’t sell my template documents on my site - and why I don’t ever plan on doing so. The language in a template agreement is a STARTING point - meant for skilled people to massage based on the uniquities of a given transaction. It’s not the one-size-fits-all (OSFA) solution that everyone wants it to be.
And frankly, software vendors (especially the smaller ones) tend to want to find that OSFA because they don’t have the time or the money to work every deal individually. They sometimes also get frustrated when changes are made because they might not even understand the language of their own template.
But all of this can be solved by engaging properly trained people on both sides of the fence for every procurement transaction.
For sales, this means: the sales exec, the lawyer/contract negotiator, the sales engineer, and whomever has the power to change the agreement’s terms.
For buyers, this means: the business owner, the lawyer/contract negotiator, and whomever has the power to change the agreement’s terms.
If you’re missing any of those folks, you don’t have the proper team in place to understand the inherent risks in the deal or the language in the agreement meant to memorialize the transaction.
Oh, and I also agree that your templates need to be reviewed by EVERYONE at least once per year for relevancy. I once knew a vendor who had a particular set of clauses (more than 3 pages of contract language) designed specifically to handle one particular type of product. They didn’t question it until I did when buying something totally different. Their counsel discovered that it was for this one product, which had been discontinued several YEARS prior. Needless to say, the language was removed.
2 Jamie Silk // Jul 5, 2009 at 5:16 am
Just to expand on the previous comments, another internal challenge I have found helpful is for supply chain/ procurement specialists to periodicially review how product and sales specialists in the firm respond to RFIs/ RFPs received, especially where standard template reponses are used.
This allows 1. procurement to add further value to the organisation by enabling better responses and a higher win rate and 2. the procurement expert can also see opportunities to better align the way the organisation secures goods and services to better deliver product to the end customer, or manages contractual risk to the way the organisation delivers goods and services - cutting risk or realising more efficiencies across the value chain.
3 Take a Look at your Contracts // Jul 29, 2009 at 4:41 am
[...] a quick minute and read “Are your contracts focused on the right risks?”. Since we’re in the middle of the 3rd quarter now may be the best time of year to practice [...]
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