Friday, March 30, 2012

Service Level Agreements

When you purchase services, the scope of those services needs to be either identified in a specification that describes all the services and measurements and service metrics that are required or they can be specified in a separate document called a Service Level Agreement or SLA that is made part of the overall agreement. For internal functions where groups “purchase” service from another function, the groups may also enter into a form of service level agreement that establishes what must be provided and the scope of that so its clear to both parties what is required.

While SLA’s are most frequently used in purchasing IT services, the concept can be applied to any service that you purchase. What you purchase impacts the tasks to be performed, scope of those services and the metrics that would be used to measure performance. SLA’s frequently include service level credits for failing to meet the agreed metrics. They may also include service level performance incentives when performance exceeds the agreed metric and the customer benefits from that higher-level performance. Failing to consistently meet SLA performance requirements may also be defined as a material breach of the agreement that would give rise to termination rights and claims for damages. Another reason for having SLA’s is when a service isn’t being performed, or is not being performed in a satisfactory manner there is usually a productivity and/or cost impact to the customer. There may also be an impact to their customer’s satisfaction.
For example, if you purchased a service that included help desk services you could be measuring things like waiting times, response times, percentage of issues closed versus requiring higher level escalation as all of those are indicators of the quality of the service. If you were purchasing the use of an on-line service or tool, you would measure things like up-time, number of simultaneous users supported, and agreed performance benchmarks such as response times. For things such as on-site support a SLA could describe hours of service, required response times, measurements of closed calls versus calls needing addition service, parts, and calls requiring escalation.

The key in creating service level agreements is to first list all the tasks that need to be performed considering the 4W;s and an H. Who is responsible? What is their responsibility? Where must they provide the task? When must they provide the task? How are they to provide the task? For each task that must be performed you then determine whether performance may be objectively measured and how it would be measured. If it can and would be objectively measured you establish what the metric would be that would be acceptable performance. You may also establish goals that the service provider will try to meet.

The service level agreement would then consist of:
1.List all tasks the supplier is responsible to perform
2.It would define their responsibility.
3.It would indicate where the service must be provided.
4.It would identify when and include objective metrics for measuring when.
5.It would specify how the service is to be performed and include objective measurements of that performance.
6.For each objective measurement it would include a remedy the buyer has for failed performance.
7.For any buyer task it would list those and limit the buyer’s liability for failing to perform them on time.

Should subjective measurements be used in a SLA? My feeling is there will always be significant concerns about a buyer providing their own subjective measurement in a SLA. The concern is whether they may be trusted to be totally subjective when it comes to money. I do feel that subjective assessments by third parties, such as customer satisfaction surveys for services accessed by buyer’s customers, should be considered as part of measuring performance.

Thursday, March 29, 2012

Work for a midsize business? Are you considering Cloud?

IBM is conduction a free virtual event featuring nationally recognized cloud computing expert Judith Hurwitz, co-author of the best-selling Cloud Computing for Dummies. To attend log on to

Managing Your Procurement Career

While career advice is not my specialty, I had someone ask about changing industries and thought I would address that as part of an overall post on managing your career.

In current times the thought of having a job for life with one company no longer exists, so how do you best manage your career. In some of the social networks people ask about how to change industries. The simple fact is you need to prepare before you get laid off, not after. People who find themselves out of work and not able to find a job in their area of expertise because the jobs simply aren’t there and who are not successful in changing industries are usually the ones that became complacent in their job and made no effort in managing their careers. While I’m not expert in this I thought I would share advice that I have given to young people entering into the field.

When companies have management development programs they will routinely rotate people through different operations to learn them. So one of the first things I recommend is when you are in a company take different types of positions to similarly broaden your experience. For example, if you have a production focus, take a position with a service or indirect procurement focus. The reason for that is if you need to change industries, while your production experience may not relate to the new industry, those other areas usually are similar and you can apply for those types of positions to get you “foot in the door” and once hired can later move into other areas that interest you.

Unless there is high market demand for individuals with specific commodity experience, one you have learned all about a commodity, move on to another. The more commodities that you have experience with the greater the probability you will have experience in what another company needs. Avoid getting locked into managing a single commodity. It reduces your flexibility and limits your ability to get management positions that require a broader knowledge.

If you want to change companies or industries find out how they do business, what the unique issues or challenges are and seek out how you can learn about them so you can speak in their language. Network to find hiring managers so you can apply directly to them.

Expand you network. Join organizations that have cross industry participation to both make contracts and to learn from. Maintain your personal network of friends, past workers, even supplier salespeople. You never know who may have already changed to that company or that industry that can help you. If you must go the resume route, focus on skills and accomplishments not positions held. A position or job title that isn’t recognized in that industry can be an instant disqualifier.

Don’t get comfortable, after you have worked at a company for however long it takes to be vested in whatever retirement options they provide, look to change jobs. That is the best way to improve your salary. Once you are in a company you are locked into their compensation program and most compensation programs aren’t there to reward you, they are there to manage the cost. Things like vacation time can be negotiated.

Once you are over 45 to 50, don’t changes jobs unless you know the company you move to will be around for a while as the older you get and the higher you are paid the more difficult it becomes to find a job or change industries.

Learn other skills that are portable such as contract negotiation or contract management. The more value you can offer a new company, they more they will be willing to develop what you don’t have which is industry knowledge. It also puts you ahead of individual that don’t have those skills.

Always seek out a mentor or an expert you can follow. You’ll learn faster that way. No question is too dumb to ask. They didn’t always know the answer themselves.

Consider positions with medium sized or growth companies. You will be asked to do more and you will learn more as a result.

Did I follow all of these in my career? No, but wish someone had told me how when I started.

Wednesday, March 28, 2012

Closing the agreement fast.

Sudhir is a frequent reader of my blog and provides suggestions for posts to add to the blog. Recently he asked "When you are pressed for time, how do you do close the agreement fast?"

Closing agreements quickly requires a combination of negotiation, program management and people skills on the part of the negotiator or contract manager.Here are some suggestions on how to do that

1.Make sure that management of both companies are committed to closing it fast so they support the intense effort that will be required over the short time frame. When management agrees the troops have to follow.

2.Use all of the electronic tools available to you to help speed and facilitate the process.

3.Use electronic tools such as instant messaging to get needed information and support quickly if not real time during the process from your team.

4.Manage the content of the contract documents to only what you need. Including things you don’t need so you can later make concessions only wastes valuable time.

5.Get all the documents to the other party immediately.

6.Get the supplier to commit to review the documents in no more than one day so the negotiation can commence the next day.

7.If economically feasible and if all individuals can free up their time, schedule face-to-face negotiations.

8.If #7 cannot be done, get both parties to commit to have all individuals required to participate or agree to be available for calls or have them give authority to agree to those who will participate.

9.Make sure all participants understand the urgency and schedule and ask them to clear their schedules for negotiations and review meetings. Pull rank if needed to re-prioritize their schedules.

10.After the initial negotiation, schedule follow up negotiations/review meetings at the same time daily, including weekends until it’s closed.

11.If you are dealing with another geography where there is a time zone difference, have your people available to meet when it works best for the other party or at a mutually agreeable time.

12.Be prepared to spend long hours until you close.Each day will require time for negotiations and reviews, internal reviews, documenting status, updating the agreement and expediting open internal actions
13.Have the supplier identify their key issues or concerns and focus on those first.

14.Probe to understand their concerns, as they may exist only because of a misunderstanding. If needed use your own words to describe the intent, what you need and why you need it.

15.Manage the discussions so they are short, clear and accurate. Avoid valuable time being wasted on things that don’t add value.

16.Have side discussions be taken “off-line” to discussed by the interested parties rather than tie up all participants with the discussion.

17.Provide daily progress updates to leaders on both sides to keep pressure on delivering.

18.At the end of each meeting state and get confirmation on what has been agreed and what remains open identifying who is responsible to close the issue and when it must be closed by. Add that to your action item list.

19.Update the drafts to reflect agreed changes and highlight open areas to narrow down what gets reviewed or discussed. Only allow going back to previously agreed issues when the current point being discussed has an impact on what was agreed.

20.Focus your negotiation on key issues. Eliminate wasting time on small points. Demand the same from the other party.

21.Make sure your agreement has a counterparts provision that allows the document to be signed in counterparts so you aren’t managing signatures serially once you have agreement. (see post on counterparts).

22.When successful, make sure you acknowledge and thank everyone of your team that helped copying their managers. When someone goes over and above make sure management knows it. The individual will be more willing to help you the next time if they are recognized and praised.

23.When successful, make sure you thank everyone on the supplier’s team and their management for helping close the agreement quickly. That starts to build a positive relationship after what may have been an intense negotiation period.

If you have other things you would suggest, please add them as comments. If there is a topic that you haven't found address and would like it addressed please let me know.

Making terms mutual

Beware of anyone using Latin phrases in a contract. I was involved with a negotiation and received a mark up to a number of sections in the agreement where the supplier’s outside counsel had added a statement that the clause would apply to them “Mutatis mutandis”. This wasn’t a term I was familiar with after many years of negotiations so I needed to do research. What I found was it meant “by changing those things which need to be changed" or "the necessary changes having been made". What they were proposing was that those terms be mutual without coming out and saying that. Armed with that knowledge I reviewed the changes a second time to determine if it made sense for the supplier to have those same contract protections.

I work off a general rule that since the relationships under a contract are different the commitments should be different.

For example, under law the parties to a contract are treated different. A buyer who hires a supplier is considered a principal, the supplier is consider an agreement of the buyer. This means a buyer can potentially be liable for the actions of a supplier under the concept of agency. As agents aren’t liable for the acts of the principal, the supplier cannot be liable for the actions of the buyer. The only exception to that would be where the buyer specifically directs what the supplier must provide (such as making something to a buyer provided designs) or directing how they must implement their design. That latter situation is usually already addressed in most contracts where the supplier is excused from in indemnifying the buyer for those acts. Since the legal relationship and risks aren’t the same, why should the commitments be the same?

The second thing to consider is the obligations of the parties under the contract. In the vast majority of purchase contracts, the buyer’s primary obligation is to make payment for the goods or services they purchase. The supplier has far more obligations. For example the buyer may ask for a number of warranties regarding the product or service the supplier will be providing. What warranties does the buyer really need to provide when their primary obligation is to make payment? The terms don’t apply equally to both parties simply because the obligations of the parties aren’t equal, and the risks aren’t equal.

When it comes to the supplier’s product or services, the supplier is the one that has the ability to manage and control the risks associated with that product in terms of how they design it, how they manage production of it. They can be protected by specifying how the item may be used, the environment, the tolerances. When it comes to intellectual property infringement, how does a buyer protect against the supplier’s product infringing a third party’s intellectual property. They have assumed that risk by agreeing to sell their product or service and can manage against that risk by the way they design their product. When a contractor has control over a site and is responsible for managing safety on the site, how does a buyer manage against the risk of damages or injuries? The contractor can manage against those risks by hiring skilled personnel and implementing safety programs and not taking risks during the performance of the work.

I didn’t agree to any of the sections where they proposed mutatis mutandis. If my company caused the problem such as providing instructions that would be infringing what would be the best thing for the supplier to have. They were looking for the indemnification to be mutual. An indemnification only provides value if they were actually sued for the infringement. In most cases since the buyer was the one selling the infringing product that the supplier produced, it would be the buyer that would be sued.

If I was sitting on their side of the table, rather than pursue a mutual indemnification I would have sought a warranty from the buyer that any buyer specified designs or instructions do not infringe upon the intellectual property rights of a third party. With that warranty if there was an infringement claim made they could claim breach of the warranty, terminate the contract and claim damages.

Very few things in contracts need to be mutual.

Tuesday, March 27, 2012

Letters of Credit versus Bank Guarantees

Letter of Credit Definitions:
The “issuing bank” is the financial institution that issues the letter of credit or bank guarantee. They are usually located in the same geography as the party they are issuing the letter of credit or bank guarantee on behalf of.
The “advising bank” is financial institution is the bank, usually in another geography that the issuing bank will transfer money to per the letter of credit or bank guarantee

Letters of Credit
Letters of credit are used when there are concerns over potential payment especially when dealing with international transactions. They can be an alternative to requirements for requests for advance payments by suppliers. In a letter of credit a buyer would contact an issuing bank to create the letter of credit on behalf of the buyer. The bank would reserve money in the buyer’s accounts to pay for the letter of credit. The supplier who will be the beneficiary of the letter of credit will select the advising bank in their location where they want the funds transferred.

A Letter of credit “LOC” requires pre-conditions be met before payment is made (such as proof of delivery). The supplier needs to provide the required documentation to the advising bank. If the advising bank agrees the conditions have been met, they will notify the issuing bank. The issuing bank withdraws the funds that were reserved and transfers payment to the advising bank who then credits the account of the supplier that had the LOC issued to them.

In a LOC situation if the condition has not been met, there is no payment. If the condition has been met and there is a problem with what was delivered, the customer would need to go against the supplier to resolve the problem. The only exception to that would be if there was fraud by the advising bank. In that case the issuing bank could go against the advising bank. The buyer could not go directly against the advising bank as there is no agreement between them so they have no privity of contract between them. LOC’s are most frequently issued on behalf of buyers to supplier although reverse letters of credit could be used in situations where the supplier may have payment obligations to the customer.

One key requirement in a letter of credit used with procurement is that it must be irrevocable. That way the supplier knows that the funds will be available when they ship. Buyers place specific requirements that must be met for the payment to be made. These may include the date(s) by which the shipments must be made, a requirement for a commercial invoice that complies with the requirements of the agreement, as that will be needed for import purposes. The bill of lading that describes what was included in the shipment and proves that it was shipped. It will also include other documents that prove the supplier complied with the contract requirements. Those can include proof of insurance if insurance was required to protect the items during transit or proof of export licenses if the supplier was responsible to obtain the export license. Letters of credit may be written to be either payment on sight or on specific dates or terms after delivery. Sight means that there will be an immediate payment upon presentation of all the documents that are required by the Letter of Credit. Date or term payments are similar to net terms where payment is made on a specific date or terms after meeting the Letter of Credit obligations. If the supplier fails to meet one of the obligations they do not get paid. If the obligation was for a specific delivery date and the supplier was unable to meet it, the letter of credit would need to be amended for payment to occur.

Bank Guarantees

A Bank Guarantee is similar to a performance bond. It is a third party guaranteeing that monies are available to complete the work if the party the party they guaranteed fails to complete the work. Bank Guarantees are usually established by a line of credit that is secured. That way their supplier’s funds are not reserved and are not tied up for the duration of the contract. The issuing Bank is protected by the Line of Credit agreement and the securities or assets that were pledged to secure that credit. The guarantee could go directly to the customer or it could go to a receiving bank that has agreements with the receiving bank if the bank guarantee was international. With Bank Guarantees any claims would first go against the issuing bank. If there was both an issuing and receiving bank you would need to provide proof of the failure and claim to the receiving bank who would then claim against the issuing bank. Bank guarantees are usually issued on behalf of suppliers or contractors although there could be situations where a customer might be required to provide a bank guarantee as an assurance of payment over a longer duration contract where individual letters of credit would be cumbersome.

If there were uncovered losses after collecting upon the letter or credit or bank guarantee, the customer could still go against the supplier or the supplier could god against the customer for any difference under a claim for breach of the contract. They could seek any uncovered damages sustained as a result of breach.

There are a number of different variations of both LOC and Bank Guarantee terms. When you are dealing internationally what you don’t want to do is have to litigate in another country to be able to recover against them whether it’s the supplier, buyer or the issuing bank. A major bank can provide the advantage of having operations in both the issuing location and the receiving location where they can manage any problems that arise with the issuing bank

There are alternative to letters of credit and bank guarantees. For the most part they are not balanced. Approaches that are good for the seller have higher risk for the buyer and vice versa. The best way to always protect yourself is do your homework in advance and only deal with business partners that you trust.

There was a post in Linkedin about a company being abused by a Supplier where they had made an advance payment to the Supplier, only had received 20% of the order and the Supplier was demanding a new larger order as a condition of shipping the balance. The question was what would you do and I thought you might enjoy my response that directly ties to this post.

“I would never pay anyone in advance for goods. If the supplier has a concern about your paying them I would provide them with a letter of credit. Letters of credit protect the Buyer because to collect the supplier has to meet the requirements of the letter of credit. They are required to provide proof of shipment of all the materials, not part. If they ship less they don't get paid. If they claim they have shipped all but haven't it’s then a criminal act of fraud.

For other types of purchases after doing the due diligence they should have done. if I still had any concern before giving them the agreement I would consider requiring a performance bond in the amount to the value of the work. That gives you another party you can go after to complete the performance if they don’t.

I would absolutely never give them any more business or orders as all that they are doing is a form of extortion. I would use the information of their actions to terminate the agreement for cause. I would send them a cure notice. When they fail to deliver, I would then send them a termination notice. Then the decision comes down to whether its economically viable to go against them in court to not just recover the part of the payment that they didn't earn but also to collect any damages you have sustained for the excess cost of re-procurement (cover). If it isn't chalk it up to an expensive lesson on how to not to conduct business. You could possible assign your rights to a third party that could go after them, That's similar to companies selling their receivables. They would pay you pennies on the dollar but that may be better than nothing.

Lastly, before posting any information about your experience with the company on any websites, I would also talk with your attorneys to coach you on how to do that without being subject to libel or slander claims.” Any company that would try to extort you into giving them more business is the same type of company that would come after you claiming libel or slander of their “good” name."

Monday, March 26, 2012

Using the functionality of Microsoft Word™ in Negotiating Contracts.

Word™ has certain functionality that everyone that negotiates contracts should know about and be able to use.

First, under the Tools pull down menu you do two things
1. Select protect document. Click on changes and then password protect it.
2. click on “track changes” to establish how you want changes shown. You have three options on how the changes will be shown. One uses the Balloons that appear in the margins showing the change. A second provides a red line version of the changes with items inserted highlighted and items deleted showing strikethroughs. The third option is to use the Balloons only for comments and formatting, where all other changes are shown as red-line. This is my preference.

Once you receive a document with changes the easiest way to work with that depends upon the Version of Word that you have. For Word 2010 you should have individual pages called "Home" "Layout" "Document Elements", "Tables", "Charts", "Smart Art" and "Reviewing" Click on the reviewing page and you will see the buttons. For prior versions of Word you do that by adding the “Reviewing” pain to your Word™ Buttons. To add the Reviewing Button you click on the Toolbar Options Button that is dark and has a downward facing triangle on the bottom. Select “Customize” and click on the Button “reviewing”. When you turn on the reviewing functionality it will add a number of buttons to the toolbar that help you navigate through the changes.

To use the functionality you highlight the word, words or section you want to accept or reject. You can do that several ways:
•By clicking on your mouse and holding it down and dragging it over the change.
•Double clicking on an individual word will highlight the word

The Button that looks like a sheet of paper with a Pen with a left facing arrow when clicked will move you back to the last change.

The Button that looks like a sheet of paper with a Pen with a right facing arrow when clicked will move you forward to the next change in the document.

The Button that looks like a sheet of paper with a Pen with a check mark on it when clicked will accept that change.

The downward arrow to the right of the Accept Change Button provides additional functionality in accepting changes. For example, if you highlighted a paragraph with multiple changes in the paragraph you can click on accept all changes shown.
If you want to accept all changes to the document, it allows you to do that such as when the document with all the changes represents the final agreement of the parties and you want to produce a clean document for signature.

The Button that looks like a sheet of paper with a Pen with a RED X on it is the Reject Changes Button and when clicked will reject that change.

The downward arrow to the right of the Reject Changes Button allows additional reviewing functionality.

The Yellow button that looks like a file folder with a star on it is the Comments Button and allows you to insert a comment in the document such as why the change is not acceptable.

The Button in the Reviewing Pane that includes an upward arrow is the reviewing pane. If you click on that it will provide a split screen of the document that highlights the change and who made the change and when it was made.

There are additional things that you do need to be aware of in using Word™. For example, if you sent out the contract internally for review all the changes made will still be retained by Word™ even though you have used the reviewing tool to accept or reject them. To prevent the Supplier from seeing those internal changes, simply do a save as on the document to another file name and that will eliminate the history.

Word™ has several other tools that you can use as part of the negotiation process.
On the tool bar there is a “display for review” Button that allows you to view the original, the original showing markup, the final and the final showing mark-up. If you want to see all the changes that have been made, click on original showing mark-up.

In the Print functionality you can also decide which version of the document you want to print. For example sometimes there could be a dispute over who made a certain change. If you click on Print and in the area that says “Print What” if you select “List of Mark-up” what will be printed is all the changes that were made, when they were made and who made them.

The last tool you can use to make sure that you are seeing all the changes that have been made can also be found on Tools pull down menu. If you click on the Compare and Merge Documents it allows you to electronically compare the documents for changes.

Here’s how to do it.
In the current document that is under negotiation click on accept all changes and do a save as to a new file name. This keeps your original document untouched.
Open the new document; make sure track changes button is off. Then click on Compare and Merge documents and Select the Original document that was sent to the Supplier before any changes were made. Word™ will show the differences between the two and will show any changes that may have been made to the document with the track changes functionality turned off. Print out that document and use that to compare to your current document in negotiation to ensure that it represents a correct picture of what has been agreed to be changed.

Always save the original and each version of the changed document as a history until the agreement is executed. If there is a dispute about what was agreed you can then use that to show what was change, when and by whom.

Market Intelligence

On linkedIN someone suggested that market intelligence could aide in negotiations. That is true and market intelligence works on both sides.

For a supplier there are a number of different forms of market intelligence they may perform.

1.There is market intelligence that occurs in the product or service development stages where companies seek to identify a unique feature or service the can develop that they will use to differentiate their product or service from their competition,

2. There is market intelligence to understand what your potential competitors have or don't have at the present time. This type of intelligence can include not just the products or service they offer and their pricing or terms. It can also include keeping track of things that can affect their competitors being able to meet the customer’s needs such as available capacity and lead-time.

3. Another form of market intelligence goes on in the selling process where the sales person is seeking to understand what the customer’s problems are, what they need or prefer. This gives a supplier an edge in understanding how they stand against their competition and how they will need to price them item or what they may need to agree to for terms to be competitive.

4. Another form of supplier market intelligence is being able to read the bid or proposal documents to clearly understand what the customer is telling you about what they want and what is important. For example if they find that schedule is very important and they have done market intelligence and know a key competitor will not be able to meet that schedule, they will know they don’t have to compete with that supplier to win and may be able to charge a premium as they can meet those needs.

Purchase decisions are frequently made based upon the features a product or service has and the perceived benefits to the customer. If the Supplier can accurately read the situation that may be able to charge a price premium and still get the business when compared against competitors that don’t offer those same features and benefits. If a supplier determines they don’t have those advantages or the customer doesn’t need or want to pay the premium for what you offer, it that unique feature provides you no advantage. In that situation if the supplier wants to win they need to compete on price or show other value they can deliver that the customer will see as benefitting them and be willing to pay for.

For buyers they can also perform a variety of market intelligence that can both aide in the negotiation but also in determining the right contracting strategy to use. Let’s look as some of the procurement market intelligence approaches:

1.Pre-qualification of suppliers and their potential competitors is a form of market intelligence.
2.Tracking product or industry trends is a form of market intelligence.
3.Understanding where a product is within the life cycle of the product is a form of intelligence to help determine the length of the contract or the fixed period for pricing.
4.Benchmarking is a form of market intelligence to help determine what is both standard and best- in-class.
5.Requests for information or requests for quotations is a form of market intelligence.
6.Interviews of suppliers, their references and subcontractors or material suppliers is a form of market intelligence that you may use in determining who to select or what may be needed in a contract.

On the buying side its important to manage and control the amount of market intelligence a supplier can perform within your own company as you simply do not want to be providing them with information that can be used against you or be providing them with information they will use to attempt to charge you a higher price.

Insolvency - should it be an event that allows termination for cause?

Insolvency is described as the condition of having more debts or liabilities than total assets available if the assets were liquidated. Many agreements provide for the right to terminate for cause if the other party becomes insolvent,files for bankruptcy protection or has bankruptcy claims filed against it a petition in bankruptcy. As there are specific laws regarding bankruptcy you may only be able to terminate to the extent permitted by law. The question is why would you do it? There are a number of reasons:

1. You simply don’t want to accrue additional obligations to a company that is not be able to perform. For example a supplier doesn’t want to be obligated to sell more to a company that already isn’t paying them.

2. If the company goes into bankruptcy, the trustee in bankruptcy does not have to honor the agreement.

3. It excuses you of existing contract obligations other than paying for what you had already received and accepted. That frees you up to source product or sell your good or services elsewhere. For example, firm purchase commitments or requirements type provisions would not need to be honored. This allows you to manage you own future destiny.

4. If you terminate you can sue for damages you sustained, While a court judgment would not make you a secured creditor, it would place your claim for payment above the company’s shareholders in any liquidation of the assets.

5. You avoid having to deal with the bankrupt firm and the bankruptcy trustee whose primary focus is the interest of the creditors.

Friday, March 23, 2012

Contracting strategies

Yesterday I posted Tax Management Contracting Strategies. Today I want to add other contracting strategies.

The term “Contracting Strategy” can have a number of different meanings.

It can be used to identify which purchases you have under contracts versus simply P.O.'s.
It can mean decisions on how you source (single suppliers versus multiple suppliers).
It can be a method by which you hedge certain procurement risks.
If can describe what risks you are willing to accept and what you want to transfer to the other party.
If can describe how you plan on writing agreements (fixed term, self extending, evergreen).
It can address how you manage things like end of life or end of support.
It can refer to a strategy used to manage when contract negotiations will occur.
It can be driven by perceived leverage changes that may occur between the parties.
The establishment of standard contract templates, alternative clauses and what individuals may change or need to get approved on to changes is part of an overall contracting strategy.
The contract strategy may also vary depending upon the life cycle of a product or service you are buying.

Contracting strategies are driven by the need to manage risk. They may be driven by the desire to take advantage of opportunities both now and in the future. They may also be driven by resource availability that’s needed to manage the activity. There is no one single best strategy and within a company you can easily have different strategies employed in different commodities. Let’s take a look at these and more,

1.Strategy on which purchases you have under contracts versus simply using Purchase Orders. There are three major factors that decide this. One is the potential to leverage repetitive purchases or the same items or from the same suppliers to simply get a better deal. The second factor is the inherent risk with the purchase. The third factor is the risk or impact of a failed performance. Small dollar value items may high risk and high dollar value purchases may be low risk. Low risk, not repetitive purchases should be done by purchase orders. Low risk repetitive purchases should be put under contract when better pricing or terms can be achieved. Higher risk non-repetitive purchases should as a minimum have a written or electronic acceptance so it is a binding agreement. Higher risk repetitive purchases should be under a contract. All high risk purchases should be under a contract

2.Contract strategies on how you source. If you have a single source supplier that you are dependent upon where the cost or time to switch suppliers is prohibitive, you should always have a contract and the contract needs to protect you. For single source contracts the term should be for as long as you potentially need the supply or services. You should have price and other competitive protections built into the contract. For example if you committed to purchase all of your requirements of a particular item from one supplier, to maintain that commitment you would need them to meet all performance requirements set forth in your contract. You would want them to commit to provide you with all of your demand. You would also want to require that supplier be competitive from a price and technology perspective with other companies and have the ability to benchmark other companies to force the supplier to remain competitive. If you have multiple suppliers that are under contract and are qualified to perform you would want a contract strategy where contract expire on alternative years. That way if you are not able to successful renew the agreement with one, you have the other and also have a year to bring on an alternative. I might also include a transition period, where if there is no agreement on the contract, the supplier agrees to sell you products or services for a limited term at the same price and terms that existed to smooth the transition.

3.It can be a method by which you hedge certain procurement risks. For example in true commodity markets your contract strategy could be a mix of contracts and spot purchasing. The contracted purchases provide stability in pricing and the spot purchases provide the ability to take advantage of spot rates when they are favorable and not be too hurt when they are unfavorable as the contract purchases mitigate the impact.

4.It can identify which risks you are willing to assume, the type of contract you want to enter and what risks you need to transfer. There are a number of approaches to contracts starting with time and materials and ending with a fixed fee. The variables between approaches are time versus risk. A contract strategy should help determine what the best approach is for an individual situation

5.If can describe how you plan on writing agreements (fixed term, self extending, evergreen). In determining the length of the agreement there are several things to consider. The first is how long do you expect the relationship to last. Second is how much do you think the contract terms will change. If you expect that it will be a long term relationship and the primary things that will change will be the addition or removal of products or service and changes to the prices or lead-times, you can do a long term or self-extending agreement in which you periodically have the right to negotiate those changes. That eliminates the need for managing amendments to extend the contract term. When you select a fixed term you always need to be concerned with having to manage extensions or have sufficient advance notice that you may need to source an alternative. For example, if I had a two-year term and I know that it would take 6 months to qualify and be in the queue to get materials, I would want the negotiation of any extension with the existing supplier to occur before the eighteen months had passed so I could plan accordingly.

6.It can address how you manage things like end of life or end of support. Every product has a point in time where it is no longer manufactured, having been replaced with a newer or better one. No product is committed to be supported forever. There will always be a time when the supplier declares that they will no longer supplier that product or that version. The contracting strategy needs to take both of those into account and establish what’s required to deal with those situations. It can be things like requiring guaranteed availability for a certain period. It can include things like advance notice to identify other alternatives and last time buy options to provide a smooth transition.

7.It can refer to a strategy used to manage when contract negotiations will occur. In many companies price negotiations need to occur at the same time every year to establish standard prices for planning purposes for the next year. Where groups get into problems is when they also try to do contract negotiations at the same time. The two do not have to be managed together and when you use term contracts that need to be re-negotiated its best to establish a contract strategy to have contract term expiration dates be spread over the course of the year, with the option to adjust pricing when that is negotiated. For example, if you had a contract had the price negotiated in December where the price was good for a year and the contract expired in June you would extend the contract in June with the pricing previously agreed with the agreement that new pricing would be negotiated in December of that year.

8.It can be driven by perceived leverage changes that may occur between the parties. For example, if you agree to a single source situation with a supplier, at the end of the initial contract term your leverage may be limited if it is difficult or costly to change suppliers. If you find yourself in that situation you need to have a strategy that implements either a longer term agreement or you need a contract where you have an option to extend the agreement and only limited parameters are subject to negotiation and those are also bound by other parameters. For example, they only thing subject to negotiation is the price and the future price cannot be more than X percent over the current price.

9.The establishment of standard contract templates, alternative clauses and what individuals may change or need to get approved on to changes is part of an overall contracting strategy. This is clearly part of managing risks to ensure that the right level of skill has to be involved in changes that could significantly impact the cost or risk of the purchase.

10.The contract strategy may also vary depending upon the life cycle of a product or service you are buying. For example during the initial phase of a product’s life the price is usually the highest it will be and will go down as competition enters into the market. So in this initial phase you would want long-term contracts that lock you into a price that will be falling. At the end of the life cycle of a product as companies exit the market with demand still remaining, prices tend to go up so if you renewed a contract when the market was at its low point you would want a longer term contract to protect you against that price upswing that normally occurs.

11.Contract strategy should take into account and manage when contracts expire to avoid expiration during key periods. When I worked for a bank management wanted to replace their debit card processor with a new supplier. The problem was their current contract expired in December, which was their most critical period of the year. The risk in changing suppliers at that time was simply too high to risk it. So I approach the supplier in the end of September and negotiated a three-month extension to the end of March. That was to allow for negotiations with them and others. They didn’t keep the business and we were able to switch over to a new supplier performing the conversion to the new supplier at a far less critical time. Contracts don’t need to have terms written only in annual increments. You should have a strategy that allows you to set a contract term’s length so that it will expire when it is best for you to have it expire.

12.Contracting strategy can also look at how customers decide to use prime contractors or interact with subcontractors, especially subcontractors that are critical to them where they may need long term relationships.

Thursday, March 22, 2012

Tax Management Contracting Strategies

A lot of people think that the loss of American jobs and jobs in other locations is the result of lower labor rates. While that may be part of the cause, aggressive tax management programs that are allowable under tax laws has driven a larger share of it in countries that have large corporate tax rates. For example the U.S. Corporate tax rate is Thirty-Five percent any company that makes over eighteen million dollars. The tax rate forced them to do to that to remain competitive. An article in the New York Times last year said that 55% of the U.S, Corporations paid nothing in one or more years over a seven-year span. How did they do that? How did companies like Cisco get forty billion dollars in off-shore accounts? How did Apple get sixty-four billion in off-shore accounts?

Here are several examples:

1.Companies have products produced in locations where the labor is lower cost, but they will also have those products be purchased by a foreign subsidiary in a tax haven or lower tax country. That company adds significant overhead and profit to the product and then sell that product at what’s called the transfer price to all the company’s subsidiaries including the U.S. based sales subsidiaries. For the profits they make in those tax havens they pay no tax. To those U.S. and other country sales subsidiaries, the transfer price is a cost to them and they will add their local overhead and profit. The net income on the sale of that product will only be a small portion of the actual profit that was made on that sale. The remaining profit, as long as it’s held off-shore, is never subject to U.S. Tax. To repatriate that profit, a company is subject to a ten-percent tax. So there is also a negative incentive to bring money back into the United States to invest.

2.Companies will have services provided by subsidiaries based in tax havens or lower tax rate countries. For example Ireland has a corporate tax rate of only ten-percent versus the U.S.’s thirty-five percent. When they sell services to the U.S. subsidiary or other subsidiaries, they will include overhead and profit on those services. That profit accrues in that country, not the U.S. or the other subsidiary countries To the U.S, subsidiary the purchase of those the services is an expense. This means that the profits they make in another country are reduce the amount of taxes the U.S. Company pays on the profits they make.

3.For international shipment of commodities such as oil, the cargo may be sold a number of times while that good is in transit. All of the profits from those sales, since they occur in international waters, are international sales are not taxable.

4.To avoid conducting business within a country where the corporate taxes are high companies will do a number of things. They may make all international sales from a tax haven so the profits the make there are not taxed. They may even agree to have the sale occur while the item is in transit or in a free trade zone where the profit will not be taxed locally.

While a company may get some benefit of lower employee costs by producing products or perform services in low labor cost locations, that is not the biggest reason why they do it. In fact for many products the labor cost as a percentage of the total cost of the product is small. What they do know is if they produce it and sell it in a country that has a high tax rate they will pay more taxes on the profits they make. If they implement tax management contracting strategies on who they buy from, where they take delivery, what company they use to make the purchases, where the transfer price or service sales price is established they can use them to manage taxes they pay. The impact of that is huge. For some companies the difference can be a matter of survival. For other companies it’s a matter of greed.

In the U.S. the corporate tax rate is simply not working. Few companies pay it. It’s driving jobs and investment out of the U.S. It’s creating situations where companies like Cisco and Apple have huge cash reserves outside the U.S. The cost of using those monies to invest in the U.S. is as high as corporate tax rates in other countries. This creates a negative incentive for companies to invest in traditional manufacturing or services positions in the U.S. What the tax rate has also done is force companies to move those traditional manufacturing and service jobs out of the U.S. The loss of those jobs has only added to the U.S.’s and other countries problems as fewer individuals are paying taxes because they are out of work, or they are paying less because they had to take lower wage positions to survive. It has also put a huge drain on assistance programs compounding the problem.

I’d love to see Apple producing IPads, IPhones and IPods and all their other products in the U.S. I know that won’t happen until the tax laws change. Why should they? The tax laws are providing a negative incentive against investing in the U.S. and hiring U.S. workers to manufacture them.

Wednesday, March 21, 2012

What is a Successors and Assigns Provision and should it be used?

A standard successors and assigns clause would be something like:
“This Agreement shall be binding upon and shall inure to the benefit of the parties and their permitted successors and assigns.”

A successor is a third party that either acquired or merged with one of the parties to the agreement. Assigns are third parties that the agreement has been assigned to as may be allowed under the terms of the agreement. Generally you do not allow parties to assign the agreement to another party without your consent, but a common exception to that is when the
Agreement is used by a business and that business is sold to a third party.

In the book Negotiating and Drafting Contract Boilerplate author Tina Stark noted that courts have interpreted a successors and assigns provision five different ways.
1.To bind an assignee to perform.
2.To bind the non-assigning party to continue to perform.
3.To determine whether rights are assignable.
4.To determine whether performance is delegable.
5.To bind those successors and assigns to the agreement.

Since the intent isn’t clear let’s looks at how these things may be managed without such a clause.

1.To bind an assignee to perform. This can be managed by simply requiring that with any assignment, there must also be an assumption section or agreement where the assignee assumes responsibility for performance.

2.To bind the non-assigning party to continue to perform. As long as the assignment was allowed under the agreement the non-assigning party is not excused from performance. Assignment does not excuse either or the original parties from performance. The assigning party is only excused when there is a novation where the non-assigning party has agreed to excuse them.

3.To determine whether rights are assignable. If a contract allows for the assignment by either party and the assignment meets the requirements of the agreement for the assignment all rights and obligations both parties have in the agreement remain in place. In signing an assumption, the assignee has agreed to assume them. In allowing the assignment the non-assigning party has allowed those rights and obligations to be assumed, but with the assigning party secondarily liable. In agreeing to an assignment and novation, the non-assigning party has agreed to only looks to the assignee for performance and no longer has any obligations with the assigning party.

4.To determine whether performance is delegable. In an assignment the parties are not delegating anything. They are transferring rights and obligations under the agreement. The assignee, when they provide an assumption has agreed to provide all performance. The assignor is only excused from performance if there is a novation.

5.To bind those successors and assigns to the agreement. Assigns are bound when they sign an assumption. Successors who get contracts as a part of an acquisition or merger are not excused from performance. They remain obligated to perform until performance is excused. The law excuses performance under a contract only when:
•Subsequently illegality such as a change in the law that makes the performance illegal,
•Impossibility, where the work cannot be done.
•Impracticability, where it is not capable of being done
•Frustration, such as one party failing to meet their obligations can frustrate the other party allowing them not to perform
•Rescission, where the parties have agreed to stop it.
•Novation, where the parties agree that another party will complete the work and the original party is excused from performance, and
•Lapse; such as where the contract term may have lapsed without the work being completed.

My opinion is that you can accomplish anything a “successors and assigns” clause purports to do in the assignment provision by requiring that for an assignment to be effective the assignee must sign an assumption section or document agreeing to assume all rights and obligations under the agreement. With successors no language is needed as when they assume control over the original party they still have the rights and obligation. The sole exception to that would be when one party includes special termination rights in the agreement where they have the right to terminate the agreement if there is a "change of control" the the is acquired by a competitor. In that situation both parties continue to have their own respective rights and obligations until the party with right elects to exercise it.

Friday, March 16, 2012

Managing Confidentiality and Non-Disclosure agreements

Note: This is a duplicate to the post I added on my contract management blog. I have added it here because it provides a good list of terms that would be included in a well drafted NDA or CDA

I’ve worked on activities where confidentiality information needed to be strictly controlled where a limited number of copies was allowed, every page was numbered with the copy number, they needed to be retained in a controlled area with limited access. Access was managed on a need to know basis. Access required signing in and signing out.Information could only be reviewed. No copies or excerpts could be made. That is one extreme. I’ve also worked in activities where there was little control and higher potential risk.

In a non-disclosure agreement there are a number of common terms and the difference between one of strict control and loose control depends upon two factors. What the term requires you manage to ensure compliance and how you as a discloser or recipient choose to manage it. The following is a list of common requirements that may be in an NDA and what the contract manager may need to manage.

1.Parties. As the agreement applies only to the two legal entities that signed it you need to manage who you receive information from and who you disclose information to so it only goes to the party under the agreement. Subsidiaries are separate legal entities and would not be a party to an agreement signed by the parent company.

2.Effective date. The effective date establishes when the obligations of confidentiality go into effect. You do not want to receive or disclose information prior to that effective date.

3.Period for disclosures. This is the same as the contract term. Contract managers may need to amend the agreement if the need for disclosures extends beyond the agreed period or notify the team to stop disclosing or receiving disclosures if the term has lapsed.

4.Period to maintain information as confidential. This establishes from the date of receipt how long a recipient must maintain the information as confidential. Contract managers should be aware of the term so they can use their log of receipts to identify when individual disclosure obligations have lapsed. You can then advise the team on the need to no longer manage that specific information as confidential.

5.Limitations on what will be disclosed. The receipt confidential information creates potential liability for the recipient. You want to limit and control the flow of information into your company to manage that potential liability. One way to limit is to have a specific request from the recipient that identifies what they want disclosed. A second way is to require a separate agreement of document where there is a non-confidential description of what is intended to be disclosed and received to limit the scope. If you have a single product or service you could limit disclosures to only that information that applies to that product or service. If separate documents are used the contract manager should control, log and manage those.

6.Process for disclosures and receipt. A good NDA will identify contracts on both parties that all information must flow through. If you have this responsibility as the contract manager you would want all information going both ways to flow through. You need to maintain copies of what has been received or disclosed. You want to maintain logs of what has been received or disclosed. For receipts you to ensure that requirements for managing confidential information that has been met.

7.Requirements to mark information as confidential. For any outgoing disclosure you want to ensure that the required marking requirements are met before the information is mailed or transmitted. If others may receive or transmit information you need make sure that you are copied on those messages.Recipients should require that all confidential information provided to them must be adequately marked so that it will be properly managed. Common marking requirement will list the information as confidential and the fact that it is proprietary information of the named discloser.

8.Requirements with oral disclosures. If oral disclosure are allowed under the agreement, there will also be a requirement that they be confirmed by a writing. For oral disclosures made by the other party, you need to be copied on those and you should confirm the receipt and accuracy of the confirmation with the party that received it.

9.Standard of care to be used in managing the information. The standard of care is established through the language used in the NDA. Most of the time the requirement will required the same degree of care as the recipient uses to protect their own confidential information. If there are higher standards the Contract Manager needs to ensure that processes and controls are in place to meet the required standard.

10.Rights to use information disclosed. NDA’s may allow or restrict how the recipient may use disclosed information. The contract managers primary role with respect to this is advise individuals of any restrictions on the use of that information so readers will manage it accordingly.

11.Parties a recipient may disclose to.In today's business you have employees, consultants, third party contract employees and third parties that may have a need to know. A contract manager needs to review the NDA for any restrictions. Frequently agreements allow disclosures to third parties provided that they are subject to the same obligations of the agreement. The contract manager should verify that NDA’s are in place with those individuals and the terms of those NDA’s meet the requirements of this NDA before any information is disclosed to them.

12.Standards for those disclosures. Common standard can include limiting disclosure to only those parties that have “a need to know”. Some companies may require that any third party have a separate NDA directly with them or require that consent they consent to third party disclosures. This occurs when companies are extremely sensitive about their data. Having an NDA directly with the third party allows them to go directly after that third party in the event they breach their obligations. The contract manager needs to be aware of those standards to ensure they are followed.

13.Responsibilities for disclosure required by law. If a disclosure in required by law, such as through a court order, the recipient must make those disclosures of be in contempt of court. As such recipients look for those to be an exception to their obligations to maintain the information as confidential. A well-drafted NDA will place an obligation on the recipient to provide reasonable prior notice of such order so the discloser has the reasonable opportunity to obtain a protective order preventing that disclosure. Court orders are normally provide to the company’s legal department and the Contract Manager may need to advise the legal department of the specific obligations for them to respond. If confidential information is being disclosed to a court under and order it should be marked as such to put the court on notice that it is confidential.

14.Exceptions to the obligation to maintain disclosed information as confidential. In the NDA the parties will agree upon what events will end they recipient’s obligation to maintain the information as confidential. Some fairly common events are:

a.The information is already in the recipient’s possession having been rightfully received without a nondisclosure obligation.

b.The disclosed information is the same as information the recipient had previously developed independently on their own.

c.The information is publicly available when received, or becomes public through no fault of the recipient

d.Information was disclosed by the discloser without complying with the requirements or the NDA

e.The information is disclosed by discloser to a third party without the same a nondisclosure obligations.

Exceptions only apply to the specific information that would be excused. The obligation to maintain any information that is not subject to and exception remains in effect for that other confidential information until that either has an event that will except that or the term for holding the information as confidential has lapsed. The confidential information that is disclosed is the discloser’s proprietary information. The recipient has no right to use it. Exceptions only end the responsibility to maintain it as confidential, they don’t grant you a license to use that information. While a court ordered disclosures excuses you for the information that you disclose, it does not excuse you of your obligation to maintain that information as confidential. The contract manager’s responsibility is simply to be on the look-put for anything that would be an exception to the obligation and communicate specifically what no longer needs to be maintained as confidential.

15.Rights of use of ideas, concepts, know-how or techniques contained in discloser's information by recipient. Even if you collected and returned all copies, excerpts of the confidential information, there will always be “retained information” meaning information that is retained in minds of the individuals that read or worked with that information. To protect against infringement claims the parties may agree to allow the other party to use that retained information. A contract manager has no obligations in this area,

16.Disclaimers: The following a disclaimers that are common

a.Information is provided “As is”. This is used to both avoid liability based on dependence on the information and to avoid any responsibility to correct the information.

b.No grant of right or license under any copyright, patent, trademark owned or controlled by the other party; This simply reaffirms that in disclosing the information the discloser is not giving up any proprietary rights they have in the information.

c.Does not obligates either party to disclose or receive any information, perform any work, enter into an license, business engagement or other agreement. This makes it clear that in receiving information you are not being obligated to enter into any other activity or agreement and if the parties do agree to go forward a separate agreement is required. As NDA’s can provide information before there is an agreement, or may be used to provide information about additional or future products or service this is important.

d.Does not limit either party from offering competitive products or services or entering into business relationships with other parties. Simply receiving confidential information should not preclude you from conducting business with others. The discloser is still protected by both the proprietary rights they have in the information and your obligation to hold it confidential.

e.Does not limit assigning or reassigning employees. Except in situations where the information is extremely sensitive each party should have the right to assign the work of their parties wherever that want. For highly sensitive information a discloser may want to prevent assignment of recipients employees to work for competitors for a defined period.

f.Does not create any joint relationship or limit the ability to enter into business relationships with others.

g.Does not authorizes either to act or speak on behalf of the other; or These last two make it clear that the parties are both acting independently and can continue to do so as long as they meet the obligations of the NDA.Contract managers should be aware of all the disclaimers that exist so the can advise the business how the relationship works.

17.General Legal Terms. Common general legal terms that should be in NDA's or CDA's are:
a.No assignment
b.Amendments require written modification
c.Termination Rights
e.Applicable Law
f.Order of precedence when multiple documents are used,
g.Merger of prior understandings.
h.Additional or different terms and conditions (if any):

If the NDA involves technical information that is subject to control by the Government there will also be the obligation that the Recipient will comply with all applicable export laws and regulations and controls for technical information disclosed.

Contract managers should familiarize themselves with the terms to manage the agreement in accordance with the terms and advise people of what they are in the event of a problem or dispute.

18.Limitation of Liability. In most non-disclosure agreements you won’t find any limitations on the types of damages that may be claimed or any limits on the amounts that my be claimed. The reason for that is a breach of confidentiality obligations will frequently cause all the different types of damages including lost sales and lost profits. The limit on the amount that would be recovered is the actual damages the party sustains and can prove. For a Contract Manager if you are responsible to manage disclosing and receiving confidential information that is an extremely important task. The losses your company could have from not managing that properly are far and above any losses that you could sustain under other agreements as they will have both limitations on the types of damages and limitations on the total liability.

Monday, March 12, 2012

Per Item versus per line item

I had a reader ask me the different between “Per Line Item” versus “Per Item” in a quote. I thought I would share my response.

A line item in a request for quote could list a single quantity, where it would have the same meaning as per item. More frequently a line item may list a quantity and be soliciting a price for that quantity where the Per line Item reference would be the extended amount (unit price x quantity).

When the reference is to “Per Item” it means a single item. If you received a per item quote it would show the cost per item but would not show an extended amount.

To eliminate any potential confusion your request should make it clear exactly what you want for a response. For example, you could request three things.
1. The cost per item.
2. The per line cost based upon the estimated quantities included in the line item.
3. The per line item cost for a firm commitment to purchase the quantities.

As bids or quotes are frequently incorporated by reference into the contract, it’s important to make those clear just like every other part of the contract.

Wednesday, March 7, 2012

Managing P.O. Formats for Multiple Countries.

I was contacted by someone asking my advise about purchase order terms and how many different versions you should have if you have operations in multiple countries. I’ve seen a variety of approaches but I prefer simplicity.

I recommended having two basic versions of purchase orders. One would be for international purchases and the other would be for local purchases. The local version would be based off the international form but tailored to meet laws, business practices of that country. The local team would add what is needed to comply with those laws, write it in their local language and be responsible to maintain and update that form. For that purchase order form you would also want the applicable law and jurisdiction to be that country. Each country would have their local version.

The reason why I recommend an international purchase order form is because most suppliers will not sell on terms where the sale would be a local sale in another country. For it to be a local sale, the supplier would need to be registered to do business within that country and they would be subject to local laws and local taxes. So the actual point of sale is usually the supplier's dock or stocking hub prior to importation, and that makes the Buyer responsible for import. Since the supplier is not conducting business in that country they not making a local sale and they do not have to comply with any local laws. As the importer of record, the buyer you need to ensure that what you are buying and importing does comply with those local laws.

The primary concern would be to make sure that the supplier agrees that the product or equipment you are buying complies with local laws such as environmental laws like RoHS (Restriction on Hazardous Substances that is enacted in the EEC). If you were buying anything related to communications you would also want them to comply with what is called “homologation laws” that apply when devices are connected to local communications or phone networks.

If you have a limited number of locations that buy items you could probably include a catch all phrase in the international purchase order such as "At the time of shipment Supplier warrants that the Product complies with the applicable laws of ___________, _____________. and ___________. that are required to import, and use the Product." If you were purchasing the item to resell, you would expand the scope to address those needs. If the supplier routinely sells into those locations through subsidiaries or distributors they should know what those laws are and not have a problem with that.

The international purchase order would be your standard terms and conditions with the requirement that the product itself must comply with local laws of the specified countries.
For the international purchase order I would pick the applicable law and jurisdiction that I
was most comfortable with which would mean that applicable law used in the parent company agreements. Making it the local law for the individual country doesn’t provide you with an advantage. If they don’t have a legal presence in that country you can’t force them into court in that country. Subsidiaries are separate legal entities and if your order is with a parent or other subsidiary company, you can’t go against the local subsidiary on a contract with a different legal entity. If you are buying through a supplier subsidiary in your local country that would be a local sale.

For simplicity you could post all of the different versions on the internet and the point to the URL in the P.O. form and have the URL specify something to the effect that for intra-country purchases the applicable local law version applies and for inter-country purchases the international one applies.

Tuesday, March 6, 2012

Rights, Duties and Representations

Many contract terms define rights and duties. What's the difference?

A duty is something that you must do. Duties are established by using the words "will" of "shall" and establish future obligations that must be met.

A duty establishes things like work or tasks that must be performed and the use of will or shall in the terms establishes that work or task as a duty to be performed .

A right is something thing that the person that has the right can decide whether or not they want to exercise that right. Rights are usually established using "may", There is no obligation on the party that has the right to exercise the right.

Rights are most frequently used in conjunction with an option a party may have under the contract or with remedies.

For example in a termination for cause provision the non-breaching party will have certain rights:
1. They can terminate the agreement and sue for damages.
2. They may leave the agreement in place and sue for damages.
3. They can decide to waive their rights and not do anything.

They are not obligated to terminate because termination is a right and not a duty

Some drafters may add language such as "buyer may, but shall not be obligated to," to make it clear that they are not required to exercise that right.

A representation is a statement of a fact at the time the contract is entered into.

Warranties may include representations that a specific fact at the time of signing or the contract is true. For example "Supplier warrants that the product complies with applicable laws" would a representation of the fact at the time of signing of the agreement.

Warranties can also create future duties. For example "Supplier warrants that the product shall comply with applicable laws at the time of delivery" would create a future duty to make modifications to the product as needed so that it complies with the applicable laws.

Remedies for the breach of a warranty are rights that the non-breaching party can determine what remedy should apply from a list of agreed remedies.

Monday, March 5, 2012

Using Supplier Retail Sales Against them In an OEM Negotiation.

Most suppliers will sell their products through a variety of channels. For example that may sell the same product to OEM’s, VAR’s, Authorized Distributors and major retailers. If you are negotiating the contract as an OEM you might want to investigate how those same products are being sold through retailers or ask those questions in the negotiation as a way to counter specific supplier demands.

For example, I had a supplier want to include a high risk use description in our contract with them that would have required my company to indemnify the supplier if the products we purchased were used by our customers in any high risk uses. So I went on line to see how the product was sold by retailers. It was simple. Here’s the cost, here are the shipping and handling charges, here is the applicable taxes, and how many do you want to order. There was no restriction against high-risk use. There was no indemnification requirement. Armed with that information I asked the Supplier if products being sold through retail could wind up in high-risk uses. They admitted they could. I then asked them how they manage that risk. They admitted that they couldn’t. Then I told them that we would never agree to accept a risk and liability that they couldn’t manage on their own. If they don’t require their retail channel to manage it, don’t ask me to manage it because we would have all the same problems managing it that the retail channel would have.

For example in many retail channels it is normal to require the supplier to take back customer remorse returns. They may also require the supplier to take back excess inventory. If you find that a supplier is doing that with their retail channel customers, why shouldn’t you have those same rights as an OEM customer? In reality both of you are doing the same thing. You are both helping the Supplier sell their products to ultimate consumers. Why shouldn’t some of these rights be similar?

I’ve had competitors that wanted to refuse to sell me large quantities of their product that I needed to buy as part of a solution for a customer. Then I pointed out the flawed logic of that decision. I could still purchase the products from one of their resellers. I would cost more, but that cost would be passed on to the customer that specified them. Then I pointed out the flawed part of their logic. If we purchased our volumes through a reseller that would increase the reseller’s discount levels because of the volume. That meant that the remainder of the reseller purchases for that year would be at that higher volume level discount. By not selling to us directly it would cost them more.

While I would like to say that this drove them to agree to sell directly to us it didn’t.
We wound up purchasing from one of their resellers in another country who gave us a good price. They were happy to get the business because they knew that for the rest of their re-sales of that product would be more profitable because of the discounts they would get.The customer was happy as the cost was less than what they could buy it for in their country. The only one that really lost in the transaction was the supplier that said no.

Thursday, March 1, 2012

Breaking The Habit Of Only Thinking About Me

Yuppies were called the “me” generation for only thinking about themselves. In negotiations if you only think about it from your company’s perspective you will not get the most you can get.
You need to consider every issue from both perspectives. You need to think about what every point is worth to both sides, as each side will put a different worth on an issue depending upon their circumstances and their view of the cost or impact to them. Something that you may think of as minimal value to you may have significant value to them and vice versa. If you agree to something they consider as minimal yet you feel is important, they will view it as a minor concession and you should set the expectation that it was a minimal concession to you. Most books on negotiation highlight this point and want you to think about what value each party will place on a point. In the Field Guide to Negotiation Galvin Kennedy provides the simple explanation: “it is not what something is worth to you that counts, but what it is worth to the person who wants it.”

What differences in value you need to be concern about?

What are the differences between the parties for the cost of money, value of money, or cost of inventory?

Are there differences in needs for cash or cash flow?

What is the cost impact to both parties on the issue?

Are there differences in each company’s needs?

Differences in operational structures. Will their model fit your needs and vice versa?

Investments needed to provide the item. What is each party investing by the relationship?

What are the risks or costs if either party fails to live up to the requested commitment?

Differences in business models. How easy or difficult and at what cost will it be to provide the other party what they want?

Impact of risks on company. What are the risks of each party in the relationship?

Values placed on the business by each party. Who needs the agreement more?

What will be the impact to each of the parties if agreement is not reached?

What has each party invested to date? What will they lose if agreement is not reached?

As you set and manage expectations throughout the negotiation process expect that the other party will be downplaying the savings or value to them of a concession. Downplay the value of any savings or value to you of a concession they give to you, especially when the other party wouldn’t consider it to be a significant concession.