When you are the customer, you are often provided with the suppliers’ agreements to review and sign. When your organisation is large and you procure numerous products and services, what strategies can you put in place to minimise time and cost involved in contract review and negotiation? There are a number of ways organisations determine when a contract needs or need not be reviewed by legal advisers. Monetary thresholds, type of contract, length of contract are commonly used as the relevant criteria. There is no right or wrong method.
We believe the best approach is a risk based approach. However in order to adopt this approach effectively, managers must understand what risk means for their organisation. Risk for one organisation is not the same for another. A few logical steps we suggest are as follows:
- Categorise the types of supplier agreements entered into by your organisation on a regular basis.
- Consider risk profile for each category of supplier agreement. This can be done by reference to a few indicators such as operational impact on business (e.g. does it impact on internal operations or client service delivery), likely quantum of loss, existence of risk mitigating factors such as insurance and so forth.
- For each category of supplier agreement, identify the top 5 risks and consider the ideal contractual position and the extent to which you are prepared to negotiate. Of course, you will need to consider if identifying only the top 5 risks does not leave your organisation unnecessarily exposed.
- For less risker category of supplier agreements, consider if there are ways to mitigate the top 5 risks by incorporating operational or external means of mitigating those risks to a point where you only need to set exceptions where agreements must be reviewed by legal advisers.
- Prepare policy or guidelines to guide those who are responsible for reviewing each category of supplier agreement and run training sessions for consistency in approach by all who are involved in negotiating agreements.
Aspect Tip: Review this annually and seek feedback at the end of each contract negotiation with a significant supplier to continually improve the contracting process and hence relationship with your suppliers!