Global Leaders in Procurement & Negotiations (PSCMInstitute.com)

Tag: Purchasing Contract Law

  • The 3 Procurement Contract Deadly Sins – Part 3

    We are now down to the 3rd Procurement Contract Deadly Sin.  And it’s the deadliest of them all.  If you did not read the prior 2 deadly sins, these all feed upon each other. Here are links to the other 2:

    The 3 Procurement Contract Deadly Sins – Part 1 – Global Leaders in Procurement & Negotiations (PSCMInstitute.com)

    The 3 Procurement Contract Deadly Sins – Part 2 – Global Leaders in Procurement & Negotiations (PSCMInstitute.com)

    This 3rd Procurement Contract Deadly Sin is also the most commonplace.  Everyone is committing this sin, and everyone is suffering from it.  Worse yet, nobody is talking about it. 

    This deadly sin makes you spend 70-90% of every day in unproductive fire fighting activities.  In unplanned activities.   In activities that become the highest priority, but don’t contribute anything to your career, income, or job results. 

    The final Procurement Contract Deadly Sin is this: writing of contracts for goods and services, instead of for *PERFORMANCE RESULTS*.  

    Let’s follow this painful flow:

    • The end user asks for goods and services. 
    • You solicit or tender for goods and services.
    • You negotiate for goods and services.
    • You contract for goods and services.
    • You receive goods and services.
    • Your end user complains, not about goods and services, but about PERFORMANCE RESULTS.
    • Since the contract was written for goods and services, you have no recourse and no remedies, because you got exactly what you contracted for. It just wasn’t what the end user actually needed.
    • You now have to spend your time fire fighting solutions because your end user is unhappy, your suppliers are confused, and the contract you wrote is useless to help resolve.  And somehow it’s all procurement’s fault.

    Sound familiar?  What would you say if I told you the Fortune 100 is absolutely struggling with this?  How about if I said the Fortune 500?  The Fortune 1,000?   Keep going. 

    The procurement profession is struggling with this issue, from top to bottom, in every industry, in every country, at every level. 

    Is that bad enough for you?  

    And what is being done about it?  Answer: absolutely nothing.  The contract templates are for goods and services and the lawyers don’t have it as a part of their scope to address this. 

    The net result is frustrated end users, frustrated suppliers, and exasperated procurement professionals that are full time fire fighters, against their will. 

    The answer is to rearchitect the entire procurement process so that end user demand is articulated in the form of performance results, performance results are solicited and negotiated for, and performance results are contracted for.

    And guess what happens next?  You guessed right: Performance Results are received.  

    No more frustrated end users.  No more frustrated suppliers.   No more full time fire fighter roles for procurement.  Much more free time on your schedule. 

    This is not just a theoretical panacea – we’ve taken over a hundred companies down this path and helped them transform.  Not a single one has looked back.   It’s the only way to go. And with all those employees no longer spending 70-90% of every day in wasted activities, productivity levels have gone through the roof. And they actually have time to work on strategy.

    If you aren’t working on this transformation, then you are a slave to this profession. It needs to be your #1 focus as a procurement leader.

    Now go off and do something wonderful.

    Be your best!

    Omid G.

    “THE Godfather of Negotiation Planning” ~ Intel Corp

    P.S.  The CPSCM™ IS THE ONLY certification program on earth that does a deep dive on this contract transformation that we just covered. Omid G is your private instructor for 32 very dense and fast paced hours – see the materials and hear his voice throughout – online and on demand!   Learn these skills to put your career and departmental results on the fast track for success.   Contact my office at support@PurchasingAdvantage.com for a free demo for your department or to discuss in-house Procurement & Negotiation Capability Building efforts for your team. 

  • 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!

  • 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!