Our third in a series about Procurement Policy addresses vendor contracts. The culmination of most sourcing or procurement activities is documenting the agreement.
It's best to start at the beginning and ask, "What is a contract." It's not only a documentation of agreed upon terms but a continuation of the negotiation process. Negotiation starts with the first contact with a vendor, but form used, items included or not, terms agreed upon can continue to provide leverage as the deal is finalized. These items should be considered from the initial screening of potential vendors and not as an add on at the end, after a business unit "finalizes a deal" and then hands it to procurement to put it on paper.
A contract can take many forms. A purchase order is a contract, so is an engagement letter, so is a 40-page outsourcing agreement. It's important to understand your intent to select the best format and content.
Below are a series of questions that can help guide you in the contracting process:
-
When do you need one? For each procurement type, assess the overall level of spend, complexity, and
risk of the purchase. For straightforward purchases (e.g. catalog) of items, a purchase order that documents price and delivery with your standard terms attached is most likely sufficient. Anything that is custom or built to spec, is better documented in a contract where these requirements are clearly understood. Match the need to the level of effort required in executing the selected form. Have guidelines to be consistent across purchasing groups or individuals within your company.
- What should be included? I am not a lawyer, so I am sure one would give you a different answer. From a more practical perspective, the following list identifies the key items I believe should be addressed in vendor contracts. Each organization will need to evaluate its risk tolerance to determine what is included in their standard Terms and Conditions. There can be a tendency to just "throw it all in". Resist the urge to cover every potential outcome and work to craft targeted and relevant agreements.
- Term and termination - Know how long the agreement is for and more importantly how and when you can terminate it. While termination for cause (a specific action a vendor did or did not do) should always be an option, negotiate in termination for convenience. It's your get out of jail free card to end the relationship for any reason.
- Deliverables and Change process - Clearly define what you are buying. Use this to set expectations, clarify understanding, and define acceptance procedures at the end of the engagement. This is valuable to both sides of the deal. Consider what may require a change and when does that change move out of scope of the original agreement. Consulting agreements are good examples of where this is important.
- Subcontractors - Particularly if you are paying for a marquee name, ensure they are not subcontracting to less expensive resources without your knowing. Have all subcontractor arrangements disclosed and have your vendor agree to be responsible for the subcontractor complying with all terms of your agreement.
- Data Ownership and Usage - Define that you retain all ownership of data generated as part of your agreement. There should be provisions to request for it to be provided to you in usable electronic format during the relationship and returned to you and purged from their systems at contract end.
-
Risk Management - This is a broad topic and is specific to each organization. But other items to consider are vendor insurance requirements, confidentiality indemnity, limits of liability, non-compete, and non-solicitation. Work in conjunction with your legal and compliance groups to determine what is needed.
Now that we've talked about what a contract is, I think it's worth noting what it IS NOT. While you want to define expectations and set the basic terms under which the relationship will be conducted, it is not a detailed account of activities to be used as a stick to manage the vendor. Supplier
Contracting is an integral part of the procurement process. Using it as a relevant, value added tool in your procurement toolbox will help you to Spend Smarter and Grow Smarter.