Tuesday, January 25, 2011

Product Development

A number of things occur during the Product Development stage. When Companies develop new products and services they set a number of goals for the new product. They will have a target market segment or customer base they want to sell to. They will have a target price for the product both initially and over time. They will establish a target cost for the item that is needed to achieve an established product margin at the target pricing. They will also establish when cost reductions or further enhancements are required to either maintain the price or maintain the margin level as the price is reduced.

As part of the process they also will look for ways to distinguish their product in the marketplace. One company may add new or unique features or functionality as the main differentiator for their product. Other companies may focus on offering reduced functionality so they can reduce the cost and focus on a different, lower end segment of the business. Some companies may offer an item that has a number of unique features which are targeted toward a specific application or industry, to focus on that niche market. Companies add functionality to both attract customers, but also to protect their pricing.

This all occurs as they work to identify how they intend to sell and win against the competition.  In doing so they identify their value proposition, why a customer should want to buy their product or service. They will also do competitive positioning of the product against the potential competitors to double check their pricing strategy and understand what items they need to stress to get a competitive advantage.

At the same time decisions on Sales Channels for the product are made. Is the product to be sold to Original Equipment Manufacturers (OEMs), Value Added Resellers (VARs), Distribution, or Direct sales? For each channel they will establish a list price, discount structure, sales terms, sales promotions, and incentives. The channels strategy established by the Seller may determine what entity you may need to buy from and that impacts both the price you will pay and the terms that you can achieve.

The biggest potential impact to your negotiation is the Supplier's decision on sales channels.  Suppliers usually establish criteria for direct sales with all other sales needing to be purchased through third party sales channels. Some companies may not sell direct and do not have the infrastructure to deal direct. Even if they sell direct, Suppliers may be extremely reluctant to deal direct with you unless you meet the criteria for direct sales. Selling direct to a company that doesn’t meet the criteria for direct sales creates conflict with their channel and Suppliers want to avoid conflict with their channels as many rely on the channels for much of their sales. If you aren't a huge customer that the Supplier will want to deal with directly, you will normally be forced into buying from one of their established channels. This means that before the Product Development is complete, the Supplier may have already limited what you can achieve in terms of price and contract terms.

Program Management in Negotiations

Every Negotiator Needs To Be a Good Program Manager. Negotiators seldom have all the knowledge needed to be able to negotiate a major contract. They need input from users, technical experts, engineering, finance, sales and marketing and the business to define what’s needed, what’s important and what’s acceptable.  Agreements frequently are made up of a number of documents and many of need to be prepared by others. Most purchases face certain schedules or deadlines that must be met and to meet those scheduled or deadlines the negotiator needs to manage their own team and the supplier’s team to meet their commitments or deliverables when they are needed for the negotiation.   

Here are the types of program management tasks that negotiators need to be able to do:
  1. Define the scope of the negotiation activity. What are you buying?  What do you need the supplier to do and what will you do?
  2. Identify necessary resources. This means identify the people, equipment, materials that are necessary to support the negotiation.  It also means getting internal commitments that they will provide the support when needed.
  3. Identify the tasks, responsibilities, critical dependencies that will be necessary to reach agreement. This is a list that will grow as the negotiation continues.
  4. Implement a process to manage the schedule by identifying work breakdown, tasks, durations, whether activities must be performed serially or may be performed in parallel. Identify all tasks or deliverables that would be on the critical path to completion.
  5. Implement a process to manage change.
  6. Implement a process to manage cost / budget.
  7. Know how to use tools to manage performance.
  8. For products or services that require development, the Negotiator also needs to know what performance management tools are needed to be included in the contract.

For managing change and managing cost and budget the key element is evaluating and managing any potential tradeoffs that may need to be made. Scope, Cost, Schedule, and Quality are usually interdependent and a change to one may require a change to others. For example, a change to the scope, such as an increase or modification can cause the need for a change to the cost, a change in the delivery schedule or it can also impact the resulting quality. If you want to change the scope, but not the quality, that will impact the cost or schedule or both.

For deliverables by either party you want to identify the 4W’s & a H
  1. Who is responsible to provide it?
  2. What are they responsible to provide?
  3. Where will they provide it?
  4. When will they provide it?
  5. How will they provide it?

Each task and each deliverable then needs to be included on an “action item list” that gets reviewed by the team. The action item list for each task or deliverable would then include:
  1. Description of the task
  2. Responsible party
  3. Committed date
  4. Status as of the date of the review (early, on-time, late)
  5. Open issues, dependencies or problems   

At the end of every negotiation session you would update the list to add new tasks or or any new deliverable that were agreed. Then you go through the list to summarize what’s still open and what’s been closed. Having a structured, documented process helps remind and incent people to close on their open items and provides documented status to update your management or escalate problems with Supplier management.

Procurement Contract Negotiations

For any new viewers,  this Blog "Knowledge to Negotiate" is to assist Procurement professionals in learning how to negotiate procurement contracts by helping them build knowledge that is needed to understand and negotiate terms.

The November 2010 post Initial Knowledge Topics provides the list of topics that will be initially added.

Proof Reading Drafts and Final Documents

There are two times to “proof read” your contract documents. The first time is before you send it out to the Supplier as part of the bid, quote or proposal process. That is to make sure that its clear what the contract obligations are taken into account in their bid, quote or proposal. If you don’t provide it then, you need to be prepared to listen to the Supplier keep saying that what you are asking for wasn’t included in bid, proposal or quote.  The second time to proof read the document is before you execute it. Once the agreement is executed the intent of the parties will be determined by what’s included within the “four corners” of the agreement. Most agreements also have merger clauses that say that the agreement represents the entire understanding between the parties and courts will only look at information that is outside the agreement (parol evidence) if there is an ambiguity as to the intent of the parties. It’s especially important to proof read the document if there have been major changes and multiple revision levels created during the negotiation process.

Below is a sample of questions you should ask yourself when proof reading a contract:
Are the terms are clear and familiar?  To eliminate confusion and potential conflict always use words that are clearly understood by both parties.

For any terms that are unique or have multiple meanings, has a defined term been created to make it clear what it means?  For example, day can mean calendar day or business day and the difference between the two can be significant.

If there are multiple documents that make up the contact, have the terms used been checked to ensure they are consistent between the documents? In interpreting the contract all documents will be considered complimentary so you need to use the same terms throughout.

Have all sections and paragraphs of all documents been properly numbered for easy of use, and reference?  For example is you will point to a commitment in another section that cross reference needs to be correct.

Do all documents that will be incorporated into the Contract have titles and revision numbers or dates that make the description of them unique to that document? As there may be multiple documents you need to define which exact document is part of the agreement.

Does the incorporation by reference matches those descriptions? For there to be a valid incorporation by reference, the reference needs to match the document being incorporated.

Have all cross references made in the documents been checked and verified? This is important if you are relying upon a reference to held define a term or establish a commitment,

Have you reviewed the use of the words “and” and  “or” throughout the contact to ensure that their use is appropriate?  When you use “Or” it means that any of the options are acceptable and the party can select which of the options they want. If the options have a different financial impact on you, you may not want to provide options.

Has the order of precedence been established for all documents that are part of the agreement? Orders of precedence should establish the priority between all the documents that make up the agreement and any documents that are incorporated by reference into the agreement or documents.

Have all representations and promises made by the Supplier that have enticed you to award them the business been included in the contract?  Most contracts will have merger clauses that exclude everything except what’s written in the contract or incorporated into the contract and under the “4 corners” rule of contract construction, courts would only look outside of the contract if there was ambiguity.

Did you write the agreement in the active voice where sentences follow the normal sentence order of subject, verb, object? Active voice sentences are clearer and also define who is responsible for commitments.

Does each commitment define who, what, where, when and how the commitment will be performed?  For example: Supplier shall deliver the Product on June 30, 2012 Ex-works Suppliers dock

Are the words used to establish the committed performance clear? 

Do the words used represent the desired standard of performance for those commitments? The words you use establish whether it’s a firm commitment, or a level of effort that must be applied.

Are obligations defined as a right or duty? A duty you must perform, a right provides you with an option as to whether or not to exercise it.

For any conditions precedent, are those conditions clear? A condition precedent is an event or fact that must exist to trigger the commitment, If the commitment is important the things that trigger the commitment need to be clear. 

Have you reviewed the remedies for the failure to meet obligations?  Are they clear?  Are they adequate to meet your needs?  Can the remedy be reasonably expected to drive the desired Supplier behavior?

Is the limitation of liability is appropriate for all commitments and remedies? Do you need to carve certain commitments out of the limitation?

Are the contracting parties are appropriate for the commitments? Does the party that you are contracting with have the assets and resources to stand behind the commitments they are making?

Do the individuals who will sign the agreement have the requisite authority? The lack of authority makes a contract voidable.

If the contract is with a higher risk supplier, have terms been added or modified to help manage the potential risk? Most Buyer templates are written for use with average risk purchases from average risk suppliers.

Has the effective date and the term for the agreement been clearly established? For the contract to be enforceable it must be effective. A party has met their obligations if the term has lapsed.

Have you included rights to terminate the agreement for cause and without cause? Change occurs and you need termination provisions for suppliers that either don’t perform or can’t meet your changed needs.

Are Buyer’s liabilities in the event of termination clear and limited? Part of any limitation of liability should be a cap on what Buyer’s maximum liability will be for both orders and terminations.

Is the product, service or software being purchased clearly defined in the documents?

Has Buyer’s rights of acceptance and any acceptance requirements been established?

Does the agreement include appropriate terms for manner in which you will actually conduct business? For example, if the Supplier will have a replenishment logistics hub, are the delivery terms, lead time, etc, consistent with that?

Are all Prices, Payment amounts and currencies clear and are written in both words and numbers?

Have you defined the meaning of time durations?  Are days calendar or business days and if business days, whose business determines it. For responses in hours, do you mean consecutive or business hours? Have you avoided time duration words that have multiple meanings like bi-monthly?  

Has the document been proof read to check the spelling, and correctness of the words used and punctuation is correct. Word processing spell checks only identify spelling errors. If a word is spelled correctly, but is inappropriate for use, it won’t catch those.

If working off Supplier’s document, have you reviewed it against your standard template to identify potential missing issues that may need to be added?  The key in supplier documents is to look at what’s included and what’s been deliberately not included.

Does the document clearly show the intent of the parties with respect to the commitment?  If needed include “recitals” in preamble of the Agreement to describe the circumstances and intent for entering into the agreement.

If the agreement points to another document to establish the complete term, you have verified that the term has been established and the language used and the use of defined terms is consistent?  If a commitment is important make sure it gets established.

Protection Against Seller’s Actions

There are several reasons why Buyer’s contracts need protection against Supplier’s actions or inaction.

The first reason is potential product liability claims for personal injuries. If a third party is injured by a product or the product causes property damage, any one that was part of the sales chain may be sued for negligence. Actions such as buying and reselling a Supplier’s product as is or using the Supplier's product as part of the Buyer’s product would make Buyer part of the sales chain. Reselling any excess would also make the Buyer part of the sales chain.

The second reason is potential third party claims that the Supplier’s product infringes their intellectual property rights. The third party may sue both the Supplier and Buyer for both damages and to prevent further use.

The third reason is protection against personal injury or property damage caused by the Supplier, the Supplier's Subcontractors or their employees. A Buyer / Supplier relationship may be interpreted as a form of agency. Under the law of agency, the Principal may be held liable for the acts of their Agent. So if the Buyer / Supplier relationship was viewed by the courts as a form of Agency, the Buyer would be the Principal in the relationship and the Supplier would be the agent making the Buyer potentially liable for the Supplier’s acts.   

As a result of these potential sources of liability for the Buyer, most Buyer generated contracts will include indemnifications: 

  • A general indemnification or hold harmless and indemnification provision will require the Supplier to “defend, indemnify, and hold the Buyer harmless against any third party claims for personal injury or property damage caused by the Supplier to a third party. 
  • An intellectual property indemnification will requires the Supplier to once again “defend, indemnify and hold harmless” the Buyer from such claims and will include specific remedies in the event of a claim is made for infringement of Intellectual Property rights. 
To ensure that there is substance behind the Supplier’s promise, most contracts may also include requirements to provide insurance that would be used to protect against the financial losses of such claims.

In an attempt to avoid claims under the concept of Agency, contracts may also include "independent contractor" provisions that attempt disclaim any form of agency from existing.  
That alone won't protect you as the court would be free to consider the actions of the parties. The more the Buyer managed or controlled the actions of the Supplier, or provided instructions to the Supplier, the more likely a court would be to establish that a form of agency existed.