Global Leaders in Procurement & Negotiations (PSCMInstitute.com)

Category: Purchasing Contract Law

  • Here’s Why Your Legal Dept Holds Up Negotiations

    Here’s Why Your Legal Dept Holds Up Negotiations

    I’ll cut to the chase on this one: The problem is not the legal department.  The problem is you and your procurement dept.  Let me explain.

    There’s really a few pieces involved.  We’ll knock one of them out now.  The legal dept is viewed as overhead.  That means they will never be sufficiently funded, and all stakeholders get impacted by that.  But we can easily overcome this by doing some other things right.  Lets keep going.

    Another part to this problem is that procurement throws red-hot contracts over the fence to legal and asks them to swiftly approve.  You might ask “what else are we supposed to do?”. 

    Well, you have to remember that contracts are risk shifting vehicles, and there are two basic types of risk: legal risk and commercial risk.

    Legal risk includes the potential for financial loss, litigation exposure, vulnerability to damages, public relations exposure, etc.  In short, the legal dept is really focused on limitation of liability, damages, indemnification, insurance, dispute resolution, and intellectual property. That’s their basic scope. 

    And with all the endless hours the legal dept spends in negotiating those clauses, how often have they actually gone wrong for you?  The answer is never.  Most procurement professionals go an entire career without needing any of the provisions that legal negotiated for those clauses.

    So why do we negotiate them at all?  Because they’re like seatbelts.  You put them on 500,000 times in case something happens once.  They’re important, and we need them. 

    Now the remaining clauses are all related to supplier performance.  Clauses that define what the supplier is to deliver, tying payment to performance, and ensuring that there are pre-defined remedies for failure to perform to these measures.

    Do you know how often these factors go wrong? How about almost every single contract you sign!  And do you know how much training your legal dept has in negotiating these clauses?  How about almost none at all! 

    And it’s not their fault.  It’s out of their scope.  It’s in your scope exclusively.  Did you know that?

    Read this twice: The #1 mistake procurement professionals make is to assume that when a lawyer approves a contract, that means it’s a good deal for the business. 

    WRONG.  It could be a terrible deal for the business. The lawyers are just focusing on the legal terms.  The commercial terms, which you are supposed to own, the ones that always go wrong, aren’t a part of their focus at all. 

    And so all the supplier performance trainwrecks that you have are because of the above.  Contracts that are highly effective in mitigating the risk of things that NEVER go wrong, and highly ineffective at mitigating the risks that ALWAYS go wrong!

    Now we get to the third part of the problem.  Our profession likes to save the contract language for last.  We tell the supplier “let’s negotiate price/warranty/leadtime/etc first, then we’ll get to the Ts & Cs.”

    Well, I have news for you.  When you tell that to a supplier, you’ve just become red meat in front of a lion. 

    What they hear you saying is “let’s finalize the commercial terms so you have the business in the bag.  Then once you’ve fully secured the business and have nothing left to lose, we’ll review the contract, and you can redline the entire contract because there’s nothing I can do about it.” 

    Read this twice: Contract terms that are “saved for last” in negotiations will always result in endless heartache for both you and the legal dept.  And those contracts take three times as long for the legal dept to process, because so much more is redlined. 

    And why does the supplier redline so much more when you save the contract for last? 

    Answer: Because they can.  Because you encouraged and incentivized it.  Because they’ve already won the business. 

    The final piece that procurement does wrong which results in the legal morass above is to not be legally savvy themselves and to not have a Service Level Agreement (SLA) with the legal dept. 

    The procurement dept needs to know contract law the same way a mechanic knows a wrench.  The relationship must be that intimate.  And once this knowledge level is established, then an SLA can be negotiated with the legal dept whereby many of the clauses can be negotiated by procurement, absent legal dept involvement. 

    And if you do all the above correctly, by the time the contract goes to legal, the contract will have far fewer redlines, many of the issues will have been resolved by procurement already, and the supplier will not yet have the business in the bag, because the contract terms were negotiated first and not last.  Also, the commercial terms, negotiated by procurement, will be rock solid. 

    Lets move this profession forward together. You can do this.

    Now go off and do something wonderful.

    Be your best!

    Omid G.

    “THE Godfather of Negotiation Planning” ~ Intel Corp. 

    P.S.  We are pleased to announce our new brand: Procurement and Supply Chain Management (PSCM) Institute.  Our new website is www.PSCMInstitute.com.  We have a special offer waiting for you: sign up for Free Membership and get exclusive access to our Power Purchasing Pro course, normal price $397.  Many other benefits await.  Register now!

  • Your Purchasing Contracts are Killing You – Here’s Why

    Purchasing Contract TrainingI’m going to keep this one really short. I want you to look in the mirror and ask yourself how much free, productive time you have every day on the job as a purchasing professional.

    Be honest. The truth is, and I can say this based on my years of global experience, is that you are spending the vast majority of your day firefighting.

    It’s not for a lack of intelligence or capability. I know that too. It’s because you have been focusing on symptoms instead of root cause.

    You see, the contracts purchasing professionals are putting in place are written to be SAFETY BELTS when an accident happens. Wouldn’t you rather have a really good set of anti-lock brakes?

    On top of that, how often do those massive contract “accidents” (lawsuits, massive damages claims, Intellectual property infringement, etc) really happen? Once in your career, at most.

    And the one thing that is taking all your time, every day, is excursions. Customer and supplier excursions. A standard contract template does nothing to prevent those.

    You need to be customizing your contracts to PREVENT excursions and to have PRE-DEFINED remedies, so that you are not putting out fires, because the supplier already knows what to do when a fire starts.

    The lawyers will never do this for you, because it’s not their job, and they don’t have the training to do it.

    And guess what happens when you start having all this free time on your hands as a result? You guessed it. You get to start working on strategic activities that enable your job satisfaction, your career trajectory, and your income growth.

    I will say again what you’ve heard me say many times before:

    “NOBODY GOT ON THE FAST TRACK TO BEING THE NEXT DIRECTOR OF CORPORATE PURCHASING BECAUSE THEY WERE SO GOOD AT PUTTING OUT FIRES.”

    Read that again. Read it every single week for that matter. It is the ultimate truism in the world of purchasing.

    Well, I’m here to help. I’m going to conquer your fear of contracts, and I’m going to will you and motivate you to stop being reliant on the legal department. The legal department isn’t looking for what you’re looking for anyways.

    I’ve got a solution that applies to every purchasing professional in every geography, in every industry, in every commodity, at every job level, and with every set of regional laws. I guarantee it.

    You could spend 20 years languishing and trying to figure this stuff out on your own. Or you can take advantage of what took me 20 years to put together, and pound it all out in one week.

    Here’s the offer, and I really got my arm twisted by my marketing manager to make this offer because he wants testimonials before increasing the price. Frankly, I didn’t want to do it.

    I’ve got a game changing 5 hour personally taught purchasing contract law course that’s perfect for you.

    Click Here to take the 30 day test-drive offer now to see everything you’re going to learn so that you know that it’s right for you.

    We’re going to let only a hand full more go at this price before increasing it substantially.

    Today is April Fool’s day but this isn’t a joke and you’re not a fool.

    You owe it to yourself to take this no-risk, test-drive offer. Because if you don’t, you are missing the boat.

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  • Supplier Negotiation Strategies, Part 4

    Purchasing Training - Counter Intelligence
    Purchasing Counter Intelligence

    This is the last in this series for now – a series about supplier negotiation strategies. It’s all about counter-intelligence, and knowing what suppliers may do, and being able to anticipate, respond, and diffuse such strategies.

    Of course I have a multitude of content on such counter-intelligence strategies, but there is only so much I can do in a blog. Consider this an appetizer. The main course can be found in my Award Winning Online Training Solutions.

    The topic we’re going to focus on today is a big one. “Value based pricing” is what sales people spend hours, days, months, years, and eventually decades trying to perfect in their careers.

    Suppliers know the only way to do this is to appeal to the right hemisphere of your brain. The one that is responsible for emotions.

    For instance, when was the last time you saw a soft drink commercial that talked about their product having more bubbles per cubic inch? No way.

    They want you to buy their product based on them showing people having the best time ever while consuming their soft drink. It makes no sense at all. But guess what, it works.

    In order to sell you something based on its value, then the perception of value has to be built up. This is what salespeople excel at. Marketing and perception management.

    Ever compare a supplier glossy brochure to what the product or service actually delivers? Now you know what I mean.

    In order to maximize value based pricing, suppliers can’t sell you goods and services, because goods and services can be benchmarked. They will start calling their goods and services “solutions”.

    To quote Dilbert creator Scott Adams, “a solution looks suspiciously like a good or service, except it costs a lot more.” Right on the nose, Scott.

    There are a few ways to deal with this. And all of it has to do with letting the left hemisphere of your brain take over.

    Think of that gum commercial.. “nine out of ten dentists recommend chewing our gum”. That’s data. You need to make decisions with data. Salespeople are masters of manipulating the perception of value, but they can’t argue with facts and data. It’s their kryptonite.

    The first strategy is to make sure your supplier selection matrix is performance results and specifications based. Glossy brochures and marketing pitches and fancy suits should not be a part of the consideration model.

    Counter glitz with data, and negotiate pricing and total cost based on the documented and measurable performance results you will be receiving.

    The second is to take the supplier’s glossy brochures and marketing presentations and tell them “I’m sure you won’t have any problem if I make this an addendum to the contract and make it a material breach of contract if any of these capabilities are not met by your solution, right?”

    Don’t say it with attitude, just be matter of fact. What should the supplier be afraid of? Their solution is supposed to do all these wonderful things, right? If they get nervous and start to jumble their word in response, it’s because you caught them.

    They are not used to anyone connecting the dots and making their sales pitches a part of the contract. This is your right. They are trying to pitch a powerful solution and they want you to pay for a powerful solution. So what you should receive is a powerful solution, right?

    The third way is to bring them down to earth and say something along the lines of “here are the specifications we are measuring. Can you please confirm for us how you are committing your product and service support will perform to these? We’re going to compare suppliers based on price competitiveness to this criteria.”

    What you’ve just done with this third strategy is to take them out of solution space and pull them straight into specification space, which is where they don’t want to be. Let that left hemisphere take over.

    Take control, and don’t let marketing presentations and fancy hype and glowing testimonials bias your negotiation and decision making process. Put that left hemisphere in high gear and force the supplier to negotiate with you on your terms.

    From now on, every time you hear suppliers use the words “solution”, race back and read this blog again.

    I have a special announcement. I’ve launched a 5 hour Purchasing Contract Law online training series, personally taught by me. This is the last few days for special Members Only pricing.

    In addition, I will also give you a free e-copy of my latest book on the same topic – Purchasing Contract Law (227 pages). World Class Contract Management

    Click here to find out all the details. Prices go back up in a few more days. Don’t miss out!

    Omid G

  • Purchasing Training ~ Are You Managing Contract Spends?

    Purchasing & Supply Chain Management LawJust about the worst thing that happens in our profession every minute of every day is the overspending of contracts.

    If you ask me what’s one of the biggest sins that purchasing commits, this is the one I’d pick. Busting your tail to negotiate a great contract and then letting the contract get overspent… throwing cold water on all your efforts.

    When you let a contract get overspent, meaning you negotiate for one amount but you end up spending more than that, you are basically giving your supplier an out of cycle Christmas present, wrapped in a pretty red bow.

    And suppliers love you for it. Don’t think for one minute that they are going to tell you a contract is overspent.

    And why should they? They are in the business of making money.

    And contracts don’t expire when they are overspent. Expenditures against a contract do not affect its legal validity, unless you put some provision in there that expressly states so, and no standard template contains such a provision.

    What’s really bad is that I’ve yet to meet a buyer that’s not plagued by this issue. There’s probably billions of collective dollars being left on the table, with thousands of suppliers laughing all the way to the bank.

    Make it stop, please. It’s so avoidable.

    I know the problem. Your systems don’t easily track spends. Pulling the data is difficult, like pulling teeth. And then finding your supplier in the system may be difficult too, because one supplier could have 5, 10, or 20+ listings. Which one do you pick? And do you add up the expenditures for all of them?

    On top of that, you have 50 other responsibilities and deliverables that seem higher priority. It’s a hot mess in reality, and don’t think companies with multi-million dollar ERP systems are better off.

    So what to do? It’s really simple. Start holding suppliers accountable for tracking spends against contracts. Tell them that you want a monthly report stating spends against contract value, and for them to advise you before a contract is ever exceeded so you can act on that.

    Better yet, make this supplier monthly expenditure tracking mechanism a contractual requirement. Failure to do so is a breach of contract.

    And don’t forget, you can always renegotiate a contract. It’s your right. You don’t need to wait for it to expire. You don’t need to wait for the supplier to agree.

    You don’t need to wait for anyone to agree. It’s your contract!

    If you’ve overspent it, you should renegotiate it.

    If push comes to shove, that’s what the termination clause is for, but you really shouldn’t have to go there.

    It’s really simple. You tell the supplier that you negotiated those terms for $x and now you are spending more than that. They are getting economies of scale above and beyond what both of you bargained for, and so they need to come back with a revised proposal that reflects this increased amount of business.

    In my breakthrough skills courses, you will learn contract clause language that will force the supplier to track such expenditures for you, relieve you of detrimental reliance lawsuits if you underspend your forecasts, and also the biggest thing of all…

    …I have the mother of all secrets, which is how to extract savings from the money you already overspent the contract by. I’ll reveal this HUGE secret to you in my new training you can find here: https://purchasingadvantage.com/purchasing-contract-law-training.

    Anyway, the money you already overspent the contract by is not “water under the bridge”. I cover how to retroactively get additional savings on those monies. Money back to you, from checks the supplier already cashed and put in the bank!

    It’s not too difficult, but it is what I consider one of my member’s only type topics and it’s beyond what I can get into a blog entry.

    Suffice it to say that you should

    a) know exactly how much the value is of every contract you negotiate (and make sure your supplier knows too),
    b) know how much is spent against that contract on a regular basis,
    c) have measures in place to prevent over spending, and
    d) have measures in place to address circumstances where a contract is overspent so you don’t leave money on the table.

    Doing world class purchasing doesn’t have to mean that you are solving supply-chain world hunger. Sometimes the basics bring the biggest TCO value propositions. Don’t mess them up.

    In terms of low hanging fruit, this is watermelon. Go get it.

    Don’t forget to take a look at the brand new Purchasing Secrets of Contract Law Training  I’ve put together for you.

    See you next week!

  • Purchasing Contract Training

    Is the Purchasing Contract Your Best Friend or Your Worst Enemy?

     

    Purchasing contract training
    Best Friend or Worst Enemy?

    A friend of mine recently was going to sign up to a lease for a business location for her family counseling business. Business was booming for her. She had a non-profit organization that was funneling lots of money her way. Life was good.

    I asked her “why don’t you let me take a look at the contract for that leased space before you sign it?”. She gave me a copy. It looked good, really good. All except for one thing: there was no termination clause. She didn’t have a way to escape the lease if business went sour.

    I told her this, and she insisted it wasn’t necessary. After all, times were good for her.

    I quite literally forced her to have a clause put in. We made it as termination for cause clause, sometimes also called termination for default. This is different than termination for convenience, which no building owner would ever sign up to in a lease agreement.

    The termination for cause trigger was related to her losing business contracts or otherwise becoming unprofitable. In her mind, this could not and would not happen, and it was a totally unnecessary exercise that was only meant to appease me.

    However, it did happen.

    About six months into this three year lease, her big non-profit funding agency pulled the plug, and she was left holding the bag, with no path to recovery. She was able to get out of the lease just like that.

    Had we not inserted that clause, she would have been financially devastated, because it was a big space. And it happens.

    Another person I know shut down a pizza shop they owned, and they did not have a termination for cause clause in the contract. As a consequence, they made lease payments for 18 months on an empty shell of a building. How painful is that?

    The point is, contracts can be your best friend or your worst enemy. The fact that this was a building lease example is irrelevant. The interesting thing is that it was not what was in the contract that was the problem, but rather what wasn’t in the contract. You have to know what you are doing to look for both.

    Want another example? A government contract was put in place with a road and bridges building contractor in California. The government agency wanted to make sure the supplier would not finish the project late, so they put a delivery/delay incentive clause in the contract.

    A delivery/delay incentive both gives a penalty for finishing late and a bonus payment for finishing early. If you call it a “penalty”, then the courts will look for there to be an incentive clause as well. However, if you call it a “price reduction”, then you don’t need the incentive clause. I’ve yet to meet a purchasing professional who knows that.

    The project was to take 137 days. The supplier worked around the clock and shocked the government purchasing department by getting it done in 66 days (!!). As a result, the contractor got a whopping $14.8 MILLION incentive payment (not a typo), over and above payments due for the actual work performed. Oops.

    I define “purchasing hell” as when the supplier is doing exactly what the contract states, and you are mad as hell about it. And guess who the only person to blame is? Yes, we need to be accountable.

    There are a wide assortment of contract clauses that can create really bad situations for you, and for the vast majority of them, the legal department is not going to catch them for you. The reason is that they are looking for legal risk, not all risks. A contract with legal approval can still be a terrible deal for the business.

    Some clauses that can give you a one-way ticket to “purchasing hell” if you are not careful include warranty, acceptance, insurance, termination for cause, termination for convenience, indemnification, limitation of liability, definitions, identified breaches and remedies for breach of warranty, and many others.

    The point is not to scare you actually. My biggest regret on behalf of our industry is that, in general, purchasing professionals have a huge gap in contract law knowledge, with insufficient recognition of how big of a problem this is.

    Are you allowing lack of contract knowledge to hold you down? Are you relying on the legal department to catch issues for you? Are you just attaching a SOW or specs to the contract and calling it done? Are you looking at both what terms are in the contract and also what terms are not?

    Remember, the contract is just a generic template until you bring it to life. It has NO idea what you are buying, and only you can customize it to meet your specific requirements. If you are buying office supplies, your needs will be very different than if you are buying manufacturing capital equipment. Buyer beware.

    Don’t let lack of contract knowledge be a crutch for you. Make contract knowledge your biggest asset. If you do it right, you will save tons, and I do mean tons, of time on the back end. Almost all customer and supplier excursions are due to poorly written contracts that don’t specify performance and remedies for breach of performance.

    Develop knowledge in contracts, invest the energy up front, and enjoy the benefits on the back-end. Educate yourself and take these steps to find your purchasing advantage!

  • Purchasing Contract Law

    Purchasing Contract Law Training
    Purchasing Contract Law Training

    I was in the Bay Area the other day doing a purchasing contract law seminar, and was talking to one person during the break who was a senior procurement manager in a pharmaceutical company.

    He was frustrated with their contract review process. It’s a story I’ve heard a lot of times actually.

    It goes something like this: Purchasing sends contracts that suppliers mark up over to the under-staffed and overwhelmed legal department, where they gather dust for a seemingly endless period, until they finally come back to purchasing, and sometimes not before many back and forths with the legal department on various changes.

    Throughout this process, purchasing is frustrated that legal takes their sweet time with contract review, meanwhile (big surprise here) the legal dept is frustrated that purchasing keeps throwing a seemingly endless stream of heavily marked up contracts over the fence.

    His story was all too familiar. I wish I could wave a wand and make it go away.

    I remember experiencing this myself many years ago as well, when I first started purchasing. By the way, the training program that they had ready for me was quite literally called “sink or swim” (i.e. there was no training, and they had a name for that). No kidding.

    Anyways, I felt just like the pharmaceutical purchasing professional above: frustrated.

    My way of dealing with it was to study contract law (UCC, Common Law, CISG) to the point that I was completely independent.

    Long story short, it worked. As a result, my cycle time for contract negotiations ended up being 80% less than that of all of my peers.

    As I thought about it more, it hit me that the legal department was a CRUTCH that people were using.

    Worse than that, I also realized that suppliers knew this, and so they red-lined contracts knowing that the purchasing professional would just throw it over the fence to someone else to deal with – after price was already agreed to… so what does the supplier have to lose?

    Hint: as much as I did on my last diet (which I’m technically still on)… NOTHING!

    There’s so much more that purchasing professionals need to do differently with respect to how they manage and write contracts, but I truly believe that nothing beats taking time to establish a solid knowledge of contract law.

    If your experience is like mine, once you get good at it, you wonder how you ever managed your career without it.

    A friend of mine told me that once he got an SUV, he hated the trunk of his sedan (too small). Getting good at contract law is kind of the same thing; you will hate the feeling of helplessness that you had before and you’ll never want to go back.

    The other nice thing is, there are a lot of benefits to your personal life. You should see the contracts I have landscapers sign before they come wielding dangerous tools on my property!

    In that same contract law seminar that I was teaching, I had a case study at the end. It’s a real contract… and it’s bad, really bad.

    Guess what, a highly paid purchasing professional in a Fortune 50 company signed it (I knew the guy, he was a senior direct materials commodity manager), and it was so bad that it resulted in a lawsuit, and not the kind where his company was getting money. I white-out his name to protect the guilty when I teach that course.Trust me, you don’t want to be that guy (unless you like updating your resume).

    The nice thing is, this is not a curse, like being 5’2” and wanting to be a professional basketball player. Every purchasing professional can learn just enough contract law to be dangerously good.

    The best challenges in your career, as in life, are the ones that are surmountable. Just don’t talk to me about applying this logic to my diet!