It is fair to say that as a procurement professional you need to know that contractual problems are more likely to occur than not; and the severity of the consequences of those problems will clearly depend on the type of contract you are letting and how well prepared you are to deal with them.
Advance knowledge of the likelihood of an occurrence and of the potential severity of the consequences of that occurrence will allow you to identify the likely post-contract administration problems you will face – ‘forewarned is forearmed’!
Once you start to think about likely problems, you can consider and identify the causal risks such as complex specifications, tight timelines, tight budgets, complex acceptance and so on. This will equip you to go on and develop a considered approach and realistic management strategies. There is no such thing as ‘best practice’. There is good practice and bad practice; it is only the foolish and/or ignorant person who thinks that once the contract is let, everything will unfold without a hitch – neither life nor business is like that.
As a professional in procurement you can use the procurement process to help you – specifications, contract pricing structures, inspections, monitoring and payments processes all provide leverage and control. These ‘controls’ should be used carefully to deploy methods to help you avoid, shift, minimise or accept risk. The procurement process can be used as a ‘smart’ system and as such it provides you with an effective risk management tool.
If you are aware of these attendant risk factors from the beginning, you will be able to proactively develop a procurement plan based on your determination of which problems are likely to occur; the severity of those occurrences and, ultimately, develop the intelligence to determine an overall level of risk for potential contractual problems.
Detailed below are ten tips on how to develop contract management intelligence to help you avoid, shift, minimise or accept risk:
1.Know who you are buying from: Are you sure you are dealing directly with the supplier? It could be an agent. Dealing direct means you can check out the supplier and avoid commissions. Talk to a person in authority; deals founder because the supplier’s own people aren’t aware of the deal themselves. Visit the supplier and check they have the capability to supply; at the very least get a reference regarding the supplier from someone you trust.
2.Keep it short and keep it simple: Language, culture and time zones create enough barriers, without adding complex deals and contract terms and conditions. A lengthy contract might put off a supplier, so instead focus on the key issues and contract conditions which are enforceable. Perhaps consider starting the relationship with a short-term arrangement rather than a complex, long-term, substantial agreement.
3.Think about payment and currency: The supplier may want a letter of credit. These are common, but come at a cost and introduce even more complexity. Push for ‘open account’ trading and consider alternative forms of trade finance. Think about exchange rate variation whether it brings contingent risk and if so how you will manage it?
4.International delivery is complex and risky: When does risk pass to you – on physical delivery or earlier, such as on delivery to the port of export? Who will deal with and pay for export/import duties? Who insures? Who organises the carrier?
5.Look ahead and work through warranty support: What will you do if there is a product defect? Does the supplier provide local support? If not and they are in China, what are the practical implications for your business?
6.Keep an eye on product liability and safety: Make sure the supplier complies with your local safety requirements. Remember if you are the first importer into the EU, you will take the European product liability risk.
7.Do not lose control of your intellectual property (IP): Are the goods made to your specification or displaying your branding? If so, you need to take steps to ensure your designs are not stolen or your brand copied.
8.Focus on tax issues: The tax impact of global payments can be complex. Make sure you also understand VAT impact – a 20 per cent miscalculation will make a big difference!
9.Always try to contract in accordance with your national law: If there is a dispute it is important to know which law applies and which court or arbitrator will determine the dispute. Otherwise you will have a dispute about a dispute – a huge waste of money where only the lawyers will win.
10.Never be complacent: The process carries risk; in a global economy there are great opportunities, but they will come with a risk. Make sure you understand and manage it.
Preparing in advance by considering the issues and performing a risk analysis will help you to pre-empt problems instead of wasting valuable time and resources reacting to them.
The procurement process, especially in the pre-award phase, should be viewed as a critical component of your post-contract management plan. By effectively using your existing procurement processes and thinking about potential problems, you can make sound decisions at each stage of the process to achieve your overall goal.
The post-award phase is equally if not more important than the pre-award phase because this is where the contract is realised.
…never stuff the contract in the drawer and wait for a problem!
Use the document to manage the process.
This level of management ‘professionalism’ is procurement’s strength; the capability to deliver intelligent and value-adding contract management as well as strategic value to the organisation. This is what the contemporary CEO expects from procurement.