The Top 4 Nightmares in Contracting and Keys to Avoiding Them
When managing relationships with hundreds of vendors, keeping track of contractual obligations is an enormous challenge. Dates, pricing, agreed upon deliverables, and so much more can get lost in the day-to-day. Despite our best efforts, sometimes contracting nightmares – become reality.
How do you learn from these mistakes and avoid them in the future? Mike O’Brien, App Orchid’s Chief Procurement Officer and Head of ContractAI recently had a chat with several procurement leaders to talk about some of the biggest challenges they’ve faced. Here are four nightmare scenarios that may sound familiar, along with a look at how technology can aid your existing guardrails to prevent bad contracting scenarios from happening in the first place.
1. Was that the price we agreed on?
How do you manage the mountain of data when you are working with literally thousands of suppliers? If you are not on top of the contract terms, your company can get taken advantage of. And, without a system for keeping track, unauthorized changes in terms can fall through the cracks.
Quave Burton, VP of Indirect Procurement at Mattress Firm, had an experience with this scenario she does not want to repeat. The company was notified of a price increase by a supplier. “The idea that we would not have terms in place regarding price increases was just not credible,” Burton said, “That was a big red flag for me.” The problem was, no one could find the contract.
The company had been spending a few million dollars on the supplier’s services over the past few years, so finding out what they had agreed to was crucial. Yet, when contracts are sitting in a file a shared drive, they can be hard to track down.
A fully executed contract was finally located in the legal department. As it turned out, the price increases levied by the supplier over the past 18 months were outside the bounds of the MSA. Fortunately, with the information uncovered and openly shared, Mattress Firm was able to negotiate a settlement and the contract terms were honored moving forward.
2. When a contractor’s PR problem becomes your PR problem
What happens when a supplier does not honor their commitments to their own employees? When a contractor doesn’t pay their employees or taxes, it could eventually become a PR issue for companies they do business with. That’s exactly what happened to Eric Cohan, Chief Procurement Officer with HCL Technologies.
Once they realized the issue, Cohan’s company made sure to establish “step-in” rights in future contracts. Without step-in rights, you don’t have much recourse if a supplier is not doing right by their employees. With the proper terms in place, you can manage the obligation and even shift those employees to a new supplier if need be. In addition, step-in rights help you avoid overpaying to compensate employees for a vendor’s mistakes, along with the challenges of being associated with a company that doesn’t treat their employees well.
3. The Bungled Termination Letter
Sometimes supplier relationships are not the right fit. It happens. However, assumptions can also create more problems than necessary. Purvee Kondal, Sr. Director, Technology & Engineering Sourcing and Vendor Management Office with the Albertsons Companies remembers just such a situation.
When a supplier requested a termination letter, one of the business partners of her company got the memo and made the termination happen. The problem: they didn’t run it by legal, sourcing, or procurement before drafting and sending the letter.
The result was that the supplier contract was voided, but that is not actually what the supplier had requested. The supplier, it turned out, was not looking to ditch the relationship – but rather, terminate a specific aspect of their service.
With the contract voided, though, the supplier could now ask for new terms (more money!) Which they definitely did.
4. Getting “Timed Out”
App Orchid’s own Mike O’Brian, CPO and Head of ContractAI, relates an experience from a previous procurement role.
The company was negotiating a large contract with a vendor with deep pockets. The negotiation and redlining process was dragging on into its ninth month! During that time, the vendor made changes to pricing and other terms. O’Brian recalls, “They were able to stall longer than we were able to hold out, so we wound up with less favorable terms on what was supposed to be a quick and simple contract negotiation.”
How can you avoid these contracting nightmares?
Asked another way, how do we change the way we manage complex contractual negotiations with potentially hundreds of vendors?
You can have excellent systems in place and a top-notch team managing the procurement process, but without the technology to augment those systems and people resources, you will end up being overwhelmed and the nightmares will continue.
Here are just a few things the right technology can do to help keep contracts progressing smoothly, and the information flowing as needed:
- Ensure the contract is accessible to those who need to read it
- Keep the terms as simple as possible
- Maintain records of the terms
- Define who is managing the contract
The good news is that your team does not need to memorize hundreds of pages of contract terms.
Technology can manage a lot of coverage over agreements. Understanding deliverables and obligations within contracts and being able to do that at scale makes governance that much simpler. This helps us deliver more value to a business over time.
The use of technology like AI is very new in the field of procurement. It is helping procurement pros totally reassess their processes. Instead of so much time, energy, and brainpower going into writing up a huge contract and then managing it, AI can take so much of that burden away – and help avoid some of these common nightmares.
ContractAI is built around a simple principle: Decide what is acceptable and cut to the chase. By creating terms on the most common clause options that are within your company’s acceptable parameters, the process becomes much more efficient and reduces your exposure to risk. By making contracts accessible and consumable, companies can not only standardize parameters for what is agreeable, but keep those agreements at your fingertips – so there are never any questions about the terms.
