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The 3 Procurement Contract Deadly Sins – Part 2

If you missed Part 1 of this series, go here:

Procurement pros in my experience tend to not like 2 things, pretty consistently:  cost models and contracts.

They would prefer that finance leads cost modeling efforts and legal leads contract negotiation efforts – the remaining Ts and Cs after price, warranty, inventory model, leadtime, etc have been negotiated.  

It’s unfortunate, and it leads to the 2nd Deadly Sin of Procurement Contracts: Letting the lawyers negotiate the contract Ts & Cs.

You may be thinking “who else would negotiate the contract Ts and Cs after I’ve negotiated all the commercial terms?”

The problem is, if you read the first part of this blog series (if you didn’t, stop now and go read it – these issues are highly interrelated), by saving the Ts and C’s for last, the supplier’s legal team will mark up your contract to death.

What happens next is you throw the contract over the fence to the legal department, who is already swamped and doesn’t share your urgency.  The legal department is where contracts go to die. 

What you wanted to have happen in days now takes weeks.  Waiting for legal to get to your contract, and even then, waiting for them to finalize review and then the back and forth with the supplier’s legal.  It’s endless. 

So what’s the problem?  The problem is not only that you allowed the supplier to markup the contract (see Deadly Sin #1), but also that you’ve shifted much of your accountability to the legal department.

Read this Twice: The biggest fallacy in contract review processes is that procurement pros assume that if a lawyer approves a contract, it’s a good deal for the business. 

Nothing could be more wrong. 

When a lawyer approves a contract, it means that the legal risks are sufficiently mitigated.  Lawyers are looking at limitation of liability, intellectual property, insurance, damages, and other related terms. 

What they are NOT saying is that the contract is a good deal for the business.   Lawyers are not trained on assessing if a contract is a good deal for the business.

Think about it this way, how many times have you had a contract approved by the legal department for which the wheels later came off the bus in terms of supplier performance? 

The Answer: Endless times.  All the time.  Too many times to count. 

Another question: how many times have you actually ended up needing the intellectual property clause? Or the limitation of liability clause? Or the damages clause?

The Answer: usually not once in a 30 year career. 

What does all this tell you?  Lawyers are only assessing a PARTIAL ASPECT of the contract.  They’re looking at legal risks.  They have no clue if the contract is a good deal for the business. 

What the lawyers are putting in place is seat belts and air bags.  You put on your seat belt 100,000 times just in case something happens once.  And decades go by without you needing them.  

What the lawyers focus on is the same.   It’s extremely important, but it’s rarely needed. 

So, what this means is that you need to be a lot better at not only preventing supplier markups, but also ensuring that you have full responsibility for ALL the contract terms outside of the ones referenced above that the legal department is looking at. 

Are you doing that today?

And when you do these things, what you send over the legal department is a much lighter marked up document, if at all.  They get to the contract faster and the contract is a better deal for the business.  

What needs to be put in place is an SLA (Service Level Agreement) with the legal department, outlining what clauses the procurement department is authorized to negotiate.

In addition, there can also be some legal provisions that are allowed to be negotiated absent the legal department involvement, subject to certain guardrails.

For instance, perhaps for all but direct materials and manufacturing capital equipment, procurement is allowed to negotiate limitation of liability to 3X the contract value with any supplier.  That’s a big time saver.

In return for receiving contracts with lighter review requirements, the legal department should now agree to a more aggressive turnaround time.  Maybe 1 week for each contract.

Then they should also agree to 1 or 2 “hot contracts” per quarter.  This means a contract that they agree to turn in 48 hours, for instance.  

Do these things, and you’ll have better results, faster results, a more comprehensive contract review process, and a better partnership with the legal department. 

But there’s a big gap still.  The biggest gap of all.  Stay tuned for Deadly Procurement Contract Sin #3.

Now go off and do something wonderful. 

Be your best!

Omid G

“THE Godfather of Negotiation Planning” ~ Intel Corp

P.S.  If you want to elevate the capabilities of your procurement department, making Negotiation a Corporate Capability, contact my office to discuss our Capability Building programs – they are much different than training, and with greater and more sustained economic results.