In any business relationship there will be contractual requirements and guidelines outlining either the statement of work or agreement between two or more parties. It is how business is done to ultimately protect a company’s key resources.
Contracts are crucial for any business to successfully operate and without them companies would be operating on a high-risk basis. However, despite their importance and role in protecting companies/individuals, business contracts do not come without complications. Especially when neither party can agree on terms of business or engagement.
Of course, it is in the best interest of the business or individual to protect themselves from possible risks, but a contract needs to be created to suit both parties’ requirements. So, how to you solve this?This is a challenge that can arise for numerous business reasons, for example, working as an Executive Head-hunter I know that from a hiring perspective it can often be challenging for candidates and clients to agree on a final employee contract. It is also an issue that several of my candidates face once they are in role and need to establish contract with external clients.
To find a solution to a challenge many business leaders are continuously facing, we spoke to Interim Procurement Professional – Michael Hallinan to gain his expert opinion. In this Q&A, Michael outlines the processes procurement experts should follow when dealing with contracts, the challenges you may face along the way, and how to avoid them.
Michael- how would you define a good business contract?
In simple terms a contract is an enforceable set of agreements/promises between two or more parties with each agreeing to do something in return for something else. It can be oral but most often it is in the written word.
Which key factors define a valuable commercial contract?
To avoid confusion, it is always best practice to have an agreed reference point- which is of course usually enforceable by law.
At the very least this is what a contract represents but there are many ways to build commercial value into the contract that will be beneficial to both parties. This usually relates to potential changes in the commercial relationship over time and brings in the idea of agreed variables such as: volume, quality, delivery time, specification, balance of risk and price. Note that the variables must be agreed between the parties and therefore must be identified up front and given commercial consideration. This is not always an easy task, after all, who can see into the future?
How can complications or challenges be eliminated from the contractual process?
A skilled procurement professional with enough experience should certainly make this task easier and working with a lawyer can bring in contractual clauses that give negotiating room for any commercial movement.
However, this brings us onto the next challenge of managing compliance to the contracted terms and working with the supplier over the course of the contract to address required changes and improvements. This is called ‘Contract Management’ and is defined by ‘The Chartered Institute of Procurement and Supply’ (CIPS) as “a continuous procurement process that ensures suppliers adhere to their agreed contractual obligations along with negotiating any future changes that need to take place”.
How do you measure the performance of a contract?
To measure the performance of a contract, tools such as Key Performance Indicators (KPI’s) and Service Levels (SL’s) will need to be employed and tracked so that progress and compliance can be reported. Failure to meet these performance targets would normally result in a review meeting to understand and try and correct the issues but can also result in a penalty (financial or otherwise) for the supplier if that was agreed. Further actions would normally be agreed to take the service to the agreed levels over a specified time scale, but if this is not likely to happen or the supplier fundamentally cannot meet the agreed performance it may result in the termination of the contract under agreed notice terms. This of course would not be a desirable outcome and can expose the client to even more risk (supply chain, reputational, litigation etc) which is why significant thought, care and attention should be given to the drafting of performance metrics in the first place.
What are the benefits of implementing a contracts management process?
Contract management can be hugely beneficial in terms of service, supply chain efficiency, cost and managing supplier relationships which we will talk about in a moment. It’s not appropriate in its entirety for all supplier contracts as it would be an inefficient use of resources, and as such a strategic review of the supply base should be carried out to identify suitable supplier contracts before such work is started. In most instances this work is done as part of a full departmental review with a view to formulating policy, process, toolkits and training etc.
Could you say that efficient contract management is good for maintaining relationships with external clients/stakeholders/employees?
The relationship management aspect of contract management is worthy of its own separate focus and is often segmented away and managed as an individual work stream. Supplier Relationship Management (SRM), as it’s known, can be a key part of building a much-improved future state with both suppliers and the industry. It is a strategic tool and must form part of an ethos rather than a plug and play approach, but again it is not appropriate in all relationships.
It is likely that under such circumstances far more information will be shared from both parties about their business, their plans and future goals. Collaboration and innovation are the key buzzwords here and it should be a symbiotic relationship more akin to employer and employee when successfully executed. We don’t have time to discuss all the tools of SRM right now, but they are usually based on a pillar approach which may include but are not limited to any of the following; quality, service, value, innovation, process, systems, people, governance and CSR.
The benefits sought should include improved quality and service, reduced cost, reduced risks that may open new opportunities, better understanding of life-cycle costs, innovation wherever it can be found, deep supplier relationships that can offer true competitive advantage, an improved perception of procurement in your business and better internal stakeholder relationships.
Are there any risks to be aware of with Supplier Relationship Management (SRM)?
That’s a good question and a note of cation if I may; Rome was not built in a day and neither is an SRM platform. The foundations of good practise must be outlined, adopted and be fully utilised before rushing into an area such as SRM. After all, if managed badly this can create serious issues. A clear procurement policy, sound strategic sourcing and risk management methodology and successful contract management strategy will pave the way to develop the enhanced levels of trust required to utilise an effective SRM approach.
What do you think? What do you think are the core rules for creating a contract that suits both parties? We would be keen to hear your thoughts, so be sure to leave your comments below.
In the meantime, if you are interested in connecting with Michael directly, you can connect with him on LinkedIn here.
More about Michael: A high calibre procurement, supply chain and supply management professional with significant national & global experience in blue-chip environments. A track record of successful delivery in complex procurement operations in both the private and public sectors.