Setting up for success when developing
supplier agreements – best practice
A presentation for the Chartered Institute of Purchasing and Supply
Michael Park, Partner
Norton Rose Fulbright
25 September 2014
A smart approach to sourcing
• Global survey of sourcing vendors and customers
• Customer spend totalling US$13 billion per year
• Vendors interviewed comprised a mix of on and off-shore
providers
• Across all industry sectors
• Our findings highlighted the need to
– place procurement at the core of corporate strategy
– strengthen vendor-customer relationships
– adopt a more sophisticated approach to risk
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The contract
• 13% of customers had no procedures in place to ensure final contract
reflected business requirements
• 44% had only ad hoc procedures
• Inadequate time allowed for a full contact review before execution
• If contracts are not aligned with business requirements this could lead to
operational problems for customers and vendors
• Customers need to invest more resources to ensure their contracts are fit
for purpose
Customer interviewees:
customer procedures for
ensuring contracts are
aligned with business cases
Best practice: drafting the contract
• One size cannot fit all – contract should reflect business requirements
• Project team should be involved in contract preparation, not just Legal
• Extensive initial planning, with early input from Legal, is critical
• Allow enough time to assess whether contract meets business
requirements and is satisfactory from a risk perspective
• Consider whether a joint steering committee would be beneficial
• Ensure empowered decision makers are at the negotiation coalface –
otherwise retracted concessions and delay
Procurement risks
• Mismatch between vendors and customers as to how they rate and
evaluate procurement risks
• Suggests that vendors do not fully understand their customers’ business
and motivations
Vendor views on customer procurement/
project risks
Customer views on customer procurement/
project risks
Best practice: evaluating risk
• Evaluate risk at the outset before issuing the request for tender
• Consider allocating a risk manager to the project team
• Maintain a written risk register
– rank risks as high/medium/low
– consider their likelihood of occurrence
• Mark the register with details of operational and contractual steps
taken to mitigate risk
– consider sharing all or part of the risk register with vendors
The allocation of risk
• Industry sectors demonstrated different approaches to allocation of risk
• Customers should adopt a realistic approach
– there are some risks that cannot simply be “outsourced” to vendors
• But, across all industry sectors, customers had a greater appetite for
management of risks than vendors gave customers credit for
Best practice: allocating risk
• Consider which party can best manage risk
– take a realistic view
• Focus on risk which is real and important
– what are the showstoppers?
• View risk holistically
– do not focus on a deal breaking position if the overall risk profile of the
arrangement is low
• Remember risk will be priced
Risk management strategies
• Having an effective contract was the most popular risk mitigation tool for
both customers and vendors
• Interestingly, customers showed a greater degree of confidence in the
effectiveness of risk mitigation tools than vendors
Risk mitigation strategy:
consolidated customer view
Best practice: managing risk
• Consider how risk can be managed and the most appropriate tools
• Typically the contract is the key tool for managing risk
Key contractual clauses
• Liability and indemnities – escalate early if required, steering committee?
(see Liability Schemes in Sourcing Contracts)
• Change of law – who is responsible and at what cost?
• Step in rights – right for competitor to step in
• Termination rights – limiting right of service provider to terminate
• Data security and privacy – appropriate standards, cross-border privacy
• Transition in and out – agree plans and costs up front
• Change management – agree an objective procedure up front, two tier?
• Dispute resolution – venue for disputes, governing law
• Above-country vs in-country arrangements
Capturing innovation
• 54% of customers expected to own the intellectual property rights in
bespoke technology – that is, developed specifically for the customer
• But 66% of customers had no systems in place to identify such IP rights
– therefore they were not in a position to exploit their assets fully
– no able to maximise revenue generating possibilities
• Customers should put in place systems to identify and protect IP rights
– otherwise they are potentially wasting money acquiring rights
Best practice: capturing innovation
• Identify the type of rights that are likely to be developed
• Assess the importance of these rights to the business
– decide whether they should be owned or licensed
• Note there is often a significant difference in price between ownership
and licensing
– is ownership really necessary?
– consider scope of any licence required (egg extend to related bodies corporate)
• Put in place systems for identifying and protecting these rights
Managing performance
• Both customers and vendors said the most effective tools for managing
vendor performance were
– Project management
– Key Performance Indicators
– Service Level Agreements
• Service credits, audit rights and technology did not score highly among
either vendors or customers
• 87% of customers sought to resolve problems at a relationship level
• If disputes are resolved in arbitration or litigation, the project has failed
– better to resolve disputes at the working level well before this point
Performance management tools
Consolidated vendor view
Consolidated customer view
Best practice: managing performance
• Maintain a good, open relationship with your vendor
• Decide which performance management tools are best suited to the
project
– do not over-engineer as this will affect price
• Consider a joint governance model, ie a true partnering approach
• Regular scheduled meetings of operational teams will ensure problems
are quickly identified and escalated internally up the management chain
• Binding expert determination may be suitable to resolve deadlocks
– especially for disputes over technical subject matter
• Set realistic service levels and service credits that drive positive
behaviour
– carrot and stick approach
– balancing service levels and pricing
Summary: Project failure and the keys to avoiding it
• Rethink the approach to vendor/customer relationships and risk
management
• There are two broad causes of project failure
– inadequate planning and stakeholder review of risks
– inadequate negotiation strategy
• Always look to achieve extensive initial planning, goal setting,
risk analysis and stakeholder buy-in to reduce the risk of failure
• Regular review and refresh of this planning phase is critical in
keeping the project on time and on budget
• Be realistic in setting goals – they should drive positive behaviour
for both parties
Managing difficult relationships –
dispute resolution
A presentation for the Chartered Institute of Purchasing and Supply
Nigel Jones, Partner
Norton Rose Fulbright
25 September 2014
Tips to avoid disputes and deal with them effectively
• Relationship management and troubleshooting
• The Contract
• Evidence and Paper-Trails
• Dispute Resolution Mechanisms
Relationship Management and Troubleshooting
• Early resolution – nipping in the bud early.
• Maintain open lines of communication – respectful and
constructive – firm but fair.
• Flexibility in resolution options (where necessary) – maintain open
mind – look for win/win outcomes and sometimes creativity.
• Spot tell-tale signs of trouble early:
• Failure to meet KPIs, service levels, benchmarks etc.
• Non-responsiveness.
• And deal with proactively – to avoid escalation.
19 Global best practice in sourcing: how to get the most from your sourcing arrangements
The Contract
•
•
•
•
•
•
•
Fundamental to avoiding disputes.
Clear and enforceable terms.
Able to be located.
Executed.
Not expired.
Appropriate dispute resolution mechanisms.
Document management is critical.
20 Global best practice in sourcing: how to get the most from your sourcing arrangements
Evidence – The Importance of Paper-Trails
• Documents win cases – and resolve disputes.
• The contract – as per previous slide.
• Clear contemporaneous records of:
• KPIs, service levels, benchmarks etc; and
• Key dealings – verbal (notes – and confirmed) and in writing.
• Properly collated and easily retrievable.
• Gives rise to ease of:
• Monitoring performance and correcting non-compliance.
• Rebuttal of incorrect allegations.
• Briefing lawyers for advice and use in dispute resolution.
21 Global best practice in sourcing: how to get the most from your sourcing arrangements
Types of Dispute Resolution Mechanisms
• Early engagement (face to face meetings) with clear outcomes
communicated, agreed and confirmed in writing – process for
escalation to senior management if necessary.
• Formal settlement conference – with or without lawyers – Mexican
stand-off.
• Mediation:
• The process - Highly effective.
• Preparation: understand facts, strengths, weaknesses and possible
outcomes.
• Quality mediator.
• Flexibility to resolution – be prepared to compromise.
• Reaching agreement on the day?
• Getting a result that you can live with.
• Court determination:
• Use litigation to achieve strategic objective.
• Evidence preparation – paper-trail – mediation as part of process.
22 Global best practice in sourcing: how to get the most from your sourcing arrangements
Types of Dispute Resolution Mechanisms (Cont)
• Binding determination (non-Court):
• Arbitration or expert determination – intent is quicker, cheaper, technical
expertise.
• Build dispute resolution mechanisms into the Contract.
23 Global best practice in sourcing: how to get the most from your sourcing arrangements
Additional resources
Outsourcing in a Brave New World:
An international survey of current outsourcing practice and trends
http://www.nortonrosefulbright.com/files/outsourcing-in-a-brave-new-world-57727.pdf
Liability Schemes in Sourcing Contracts:
A global perspective
http://www.nortonrosefulbright.com/files/liability-schemes-in-sourcing-contracts-118907.pdf
Cloud Computing:
A practical guide to legal risks and issues
http://www.nortonrosefulbright.com/files/cloud-computing-brochure-103886.pdf
Data Centres Unboxed:
A guide to legal issues, trends and risks
http://www.nortonrosefulbright.com/files/data-centres-unboxed-70745.pdf
Global Data Privacy Directory
http://www.nortonrosefulbright.com/files/global-data-privacy-directory-52687.pdf
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Contacts
Michael Park
Partner & Asia Pacific Technology Business Group Leader
Norton Rose Fulbright
Direct:
+61 3 8686 6499
Mobile: +61 419 049 811
Email:
michael.park@nortonrosefulbright.com
Nigel Jones
Partner
Norton Rose Fulbright
Direct:
+61 3 8686 6931
Mobile: +61 408 035 723
Email:
nigel.jones@nortonrosefulbright.com
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