Editor’s Note: I was recently reminded of a conversation I had at AribaLive in Las Vegas earlier this year with a former colleague who also happens to be a lawyer. We were chatting over beverages about how interesting contract management is (no, really, we were), and how procurement practitioners can use contract management processes and systems to manage enterprise risks. Coming from a lawyer whose job (in a corporate setting, at least) is to mitigate risk, this was a refreshing take on an old process and it got me thinking about all the ways in which contracts and contract management mitigate procurement, supplier, and supply risk. Five ways immediately come to mind, and I list and explain them, below.
- “Putting it in writing.” Contracts are the lifeblood of an organization as they codify the relationships that enterprises have with suppliers and customers. Pricing, service-level agreements (“SLAs”), and terms and conditions (“T&Cs”) should all be carried over from the sourcing phase and written into the contract so that all parties are aware of their responsibilities and can faithfully and dutifully execute them. If something is not “put in writing,” it makes it harder to enforce it and even harder to litigate it one way or another.
- Assigning risk. Contracts are also where enterprises assign risks to each other — where each side determines the level of risk that they are comfortable carrying based on a number of factors, including precedent, probability, impact, mitigation resources, necessity, and so on. Procurement teams need to collaborate with their legal counterparts to ensure that, when they are drafting contractual agreements between the enterprise and a supplier, they accept risks that are fair and manageable for the enterprise, and are not left holding the proverbial bag.
- Audits and Compliance. Regularly conducting contract audits can help to drive both internal and external contract compliance, which can help to reduce costs and increase savings. Enterprises realize the most savings (and avoid the most savings leakage) when on-contract spend is high and off-contract (“maverick”) spend is low. Auditing contract usage to determine who in the enterprise (either individuals or departments) is or is not leveraging existing contracts, and then reinforcing the primacy of contract compliance are routine but effective ways that procurement can mitigate the risk of savings leakage.
- Holding Suppliers Accountable. Contract auditing can also help to hold suppliers accountable and drive increased contract compliance. Audits (and, for the record, spend analysis and supplier performance management, too) can help to shed light on supplier adherence to contract T&Cs, SLAs, and generally how well they performed in accordance with the contract. Supplier attempts to renegotiate T&Cs and SLAs — to upsell, resell, or renegotiate prices for items already included in the contract — should be noted with the supplier and internal stakeholders to drive contract compliance and supplier performance post-execution to ultimately reduce financial risk.
- Force Majeure. Returning to the point about assigning risk between two commercial parties, force majeure (Defined by Wikipedia as “unforeseeable circumstances that prevent someone from fulfilling a contract,” also known as “Mother Nature,” “Acts of God,” and so on) can wreak havoc on enterprises and cost them significantly. Inserting a force majeure clause into a contract that is sensitive to the needs of the enterprise and the realities of the world markets in which it operates can save the enterprise from economic ruin. Failing to do so can expose the enterprise to unforeseen liabilities and supply disruptions that it may have to absorb.
Although the contract management process is typically regarded as a routine and unglamorous part of B2B relationships, a closer look reveals that it can play a very significant part in preventing and managing enterprise risks. As the saying goes, “the Devil is in the details,” and he (or she) can strike when it is least expected. Fortunately, common contract management processes and language are available to procurement and legal/general counsel teams to keep the Devil at bay.