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IACCM - International Association for Contract & Commercial Management Contracting Excellence Magazine
 

November/December 2014 Edition

 

Welcome to Contracting Excellence – the essential IACCM member e-zine bringing you news, insights, experience and practical approaches to key issues relevant to our international community of contract and commercial management practitioners.

 
Editorial Comment

Recognizing innovation in the contracting community

 
This year for the first time we are bringing you a special e-zine supplement showcasing the winning submissions at the Americas Conference held in Chicago earlier this year. From the impressive total of 81 submissions, we feature not only the 13 winners and finalists, and how they achieved what they did, but also a small number of particularly outstanding entries.
 
 

To view the supplement click here.

After a long and fulfilling career in contract and commercial management, I find it especially gratifying to see the growing influence and contribution of today's practitioners.  While some may still be struggling to establish visibility and recognition within their organizations, others are steaming full speed ahead - nothing is more energizing than meeting those enthusiasts at IACCM's annual conferences and in particular when we are presenting our Innovation Awards.

As we all know, 'innovation' has become a critical element of today's organizational success. No one can flourish without it. Members of IACCM are increasingly at the forefront with exciting new ideas and initiatives – as evidenced by this year's 81 entries in our annual Innovation Awards program.

Some of these were about new ways of operating, simplifying or streamlining functional process, raising skills, tackling bottlenecks. Others were about effectiveness – delivering new forms of agreement, empowering the business, raising measured value from contracts. Overall, they represented the imagination and determination of individual practitioners and groups to really make a difference.

Chairing IACCM events is in many ways a highly emotional experience. As founder of the association, I remember clearly the days when there was nothing, when no one could define the role of contract and commercial managers, when there were no meetings or aspirations for the future.

I am truly grateful to those who not only inspire us all with their ideas and initiatives, but also take the time to share their achievements for the benefit of us all.  Looking out at the sea of enthusiastic faces fills me with real pride and affection for the community that together we have established.

 
 

Are your contracts a waste of money?

 
What conclusions can we draw from the IACCM research illustrating a fundamental mismatch between what we know we need from our contracts, and what we spend our time creating? Is the contract the bad guy or does our approach need to sing a different tune? Let's find out.
 
 

The focus on indemnities and limits of liability in the IACCM Most Negotiated Terms1 survey, year after year, suggests that for many of us the primary role of the contract remains as a weapon (enabling us to punish the guilty) or an insurance policy (limiting our exposure if we make mistakes). 

Are those two objectives in line with creating business value? If they are, can we (realistically) achieve them through our current contracting focus?

To ask a wider question, given the time, money and emotional energy invested in creating and negotiating agreements, isn't it about time our organizations started to get their money's worth?

What is your contract for?

To assess the value delivered by our contracts and contracting process, we first need to identify why we have them in the first place.

In many organizations, the necessity of a written contract to underpin each commercial relationship is taken for granted. When asked, businesses and public sector organizations will cite risk management and value maximization as key drivers for the contracting process.

When it comes to how we manage risk and maximize value, however, there are many divergent approaches. IACCM's research1 illustrates in Figure 1 that our negotiation focus does not necessarily line up with our objectives.

 

How the contract can underpin constructive working relationships

(in decreasing order of importance)

Focus of negotiations (in decreasing order of time spent)

Defining clear, mutually understood, objectives

Limitation of liability

Appropriate risk allocation based on common understanding

Price, charges, price changes

Enshrining common performance measurement

Indemnification

Linking the contract to desired behaviors

Payment

Enabling application of contractual remedies

Service level

Figure 1 – Our objectives compared with focus of negotiations

This indicates a widely spread and deeply entrenched disparity in the business community as a whole: we negotiate based on legal rights and liabilities, but we determine success based on business outcomes. To examine this in more detail, let's examine a recent high-profile example of a contract that failed in its business objectives to such an extent that the legal protections it attempted to provide were rendered worthless.

Case study: “The dog with the degree”

BSkyB v EDS2 is affectionately known as “the case of the dog with the degree”.

This dispute came to court after EDS had consistently failed to perform in accordance with its contract with BSkyB. As well as seeking damages for breach of contract, BSkyB alleged that EDS had fraudulently misrepresented its ability to deliver in the first place.

The prosecuting QC demonstrated the lack of integrity of EDS' salesman, Joe Galloway, by procuring an MBA for his dog, Lulu, from the same online “college” that had awarded Mr Galloway's own degree. As part of BSkyB's (ultimately successful) efforts to demonstrate that EDS had fraudulently misrepresented its confidence in the project timescales, the revelation that Mr Galloway was demonstrably capable of lying to his own advantage were as damaging to EDS as they were amusing to the rest of the court.

The contract itself contained many of the provisions that most of us are accustomed to seeing in every deal, including two upon which the case eventually turned:

  • A limit of liability clause, capping EDS' liability at £30 million
  • An “entire agreement” clause, excluding pre-contractual negotiations and other correspondence from the contract.

IACCM's Top Negotiated Terms survey shows that limits of liability occupy more negotiation time than any other contractual provision. So we can safely assume that the £30 million cap on EDS' contractual liability was the result of a significant amount of legal, commercial and management effort on both sides.

In the event, Mr Galloway's untrue assertion that EDS had analyzed the project in detail and concluded that the proposed timescales were reasonable and achievable, rendered the limit of liability irrelevant.

Why? Because by over-stating his case in order to close the deal, the salesman was deemed to have induced BSkyB to enter into the original contract by deliberately misrepresenting its capabilities. Because of this fraudulent misrepresentation, the court denied EDS the right to rely on its carefully negotiated limit of liability and put it in the position of having completely unlimited liability.

So was the time and money spent by EDS in negotiating this contract wasted? Did the commercial and legal team fail in its essential purpose of helping the business manage its legal and commercial risk, and maximize value delivered?

Not just a legal problem

On a deeper examination of the facts, this case illustrates many of the common failings of contracts large and small, most of which never hit the headlines. It shows that relying on the limit of liability to act as an ”insurance policy” is a fundamentally flawed approach to contracting. And it demonstrates how essential it is that a good understanding of how contracts work is shared beyond the commercial team, into sales, project management and delivery.

Things started to go wrong in this deal very quickly after signature, when it became clear to BSkyB that EDS had neither the resources nor the expertise to deliver the project successfully and in accordance with the contract.

As with other high-profile cases (such as British Gas v Accenture3), the attention that had been paid to managing legal risk in the contract was not underpinned with sufficient focus on managing the operational and technical risk of the project. After all, had the project gone well and BSkyB felt that EDS was delivering what it expected, neither the limit of liability or fraudulent misrepresentation issues would have come up for scrutiny.

Looking back at Figure 1, we can see that if EDS had focused more on defining clear, mutually understood objectives together with BSkyB, and allocating risks between the parties based on a common understanding of the issues, things would have gone rather differently.

How can the contracting process help?

Many of us have come to a commercial role from other business areas. My own career spans engineering, software development, project management, bid management and sales, as well as law, commercial and contract management.

While this definitely helps me to understand the contribution of the different parts of a business to successful deal outcomes, it certainly does not enable me to assess whether delivery timescales for project ABC are realistic. I am not qualified to assess whether the technical risks of development XYZ are properly understood and quantified and neither, I suspect, are you.

This means that it is essential to engage all elements of the business in the contracting process.

In creating and negotiating contracts, those of us in commercial roles have a responsibility to engage each part of the organization whose performance is critical to a successful outcome. We must translate our contractual needs into language they can understand. Similarly, we must be able to decipher their input, removing ambiguity and ensuring that the organization is truly able to commit to timescales, deliverables and pricing.

We must be realistic, and not idealistic, about the capabilities of our contract managers to keep track of changes and follow the contractual change management process. And if that process is unwieldy or unworkable, the contract managers on both sides should be empowered to change it so that it works.

A basic understanding of how contracts work is essential for all those involved, whether they are in sales, delivery, finance or support roles. Each individual must appreciate how their contribution affects the whole, and should be aware of their role in the overall success of the deal. Had Mr Galloway understood the potential risks of fraudulent misrepresentation, would he still have stretched the truth in his communications with BSkyB to win the business? One would hope not.

Similarly, had the development team been properly involved in the contracting process, would the timescales put forward for delivery have been so unrealistic? Again, we would hope not.

So are your contracts a waste of money?

What can we learn from the experience of BSkyB and EDS? What conclusions can we draw from the IACCM research which illustrates a fundamental mismatch between what we know we need from our contracts, and what we spend our time creating?

One conclusion we can draw is that the “contract as insurance policy” approach is fundamentally flawed. Having fully comprehensive motor insurance does not mean we can drive without paying attention to the road. Similarly, having an indemnity from our supplier, or a limit of liability with our client, does not mean we should charge ahead with a project without taking all possible steps to manage the technical, operational and commercial risks.

After all, in the event of a collision (contractual or otherwise), one is always worse off than one would have been had it not occurred – no matter how good the insurance, or how big the award of damages.

So while limits of liability and indemnities matter, they are not all that matter. We might consider them to be our contractual ”safety belt”, rather than a substitute for careful driving. A more holistic approach to risk and opportunity management would undoubtedly serve us well.

A second conclusion is that, in order to derive true value from our contracts, we must ensure they reflect reality. The only way to do this is to engage those who understand that reality, and have experience at the “coal face” of selling, delivering and managing similar contracts. The mechanisms created within our contracts to measure progress and monitor performance must be practical, easy to use and easy to report on. Those that manage change must not create barriers to doing business.

And finally, we can see that developing commercial and contractual competence across all areas of the business is a necessity, not a luxury. When each silo within our organization understands how their actions or inaction can impact contractual risk and opportunity, we in the commercial and contracting arena will be invited to support, engage and assist them earlier and more often. And that, in turn, will truly enable the contract, and those who are responsible for creating, negotiating and managing the contract, to add value to the organization.

This month sees the launch of IACCM's face-to-face “Fundamentals” training courses. Providing sales, procurement, finance and delivery teams with an intensive overview of the contracting process, IACCM is creating tools to help your organization address these challenges and bring about real change. Embrace them. Otherwise you might just find that your contracts are a waste of money.

END NOTES

  1. IACCM Research into Attitudes to Contracting https://www.iaccm.com/resources/?id=5074&cb=1414062410&
  2. BSkyB Limited v HP Enterprise Services UK Limited (formerly Electronic Data Systems Limited) [2010] EWHC 86 (TCC)
  3. GB Gas Holdings Ltd ( Centrica) v Accenture (UK) Ltd & ors [2009]

ABOUT THE AUTHOR

As founder of Devant, Ltd, UK, and a professional speaker and Fellow of the Professional Speaking Association (PSA), Tiffany encourages her audiences to engage with the contract as a valuable business tool that increases sales, improves profits, creates more positive client relationships and helps manage risk.  Through her highly interactive, practical and entertaining training workshops, and through hands-on consulting and support, she provides the tools and the knowledge to put these principles into action. By taking the mystery out of legal jargon, translating contract terms into practical commercial risks and issues, and looking for solutions in the business, not just the contract, Tiffany empowers even the contract-phobic to become ace commercial negotiators!

Tiffany has authored two books:  

  • Deal Makers - how intelligent use of contracts can help you sell more, and deliver better! combines her extensive legal contract knowledge with her background in engineering, software development, delivery and sales to provide an immensely readable and practical perspective on how to use the contract effectively in business.
  • Essential Contract Drafting Skills - A Practical Guide aims to help experienced contract managers and lawyers take a fresh look at what they are drafting, and why, to maximize the usefulness and effectiveness of the contracts they create.

ABOUT DEVANT LTD

To learn more about Devant Limited, the company Tiffany founded, click on http://devant.co.uk.

 
 

Strategic sourcing issues you're wise to watch

 
You may think of new technology as driving business innovation - but strategic sourcing professionals need to be aware of its pitfalls. Social media and crowdsourcing are game changers. As a methodology, strategic sourcing has been around for decades, but the landscape is continuously evolving with 'next' practices and emerging issues that those in the field are wise to watch. Want to know why?
 
 

SMAC, for instance (social, mobile, analytics and cloud) is creating new issues and risks in contracting, even for traditional services. Big data, conflict minerals and cloud computing are adding to complexity, and virtual sourcing is having an unexpected impact. “Tail spend” is also gaining in importance.

Concept makes sense – but context is changing

Although strategic sourcing is still not “mainstream,” it has been around for several decades and it remains logical: if you reduce the number of suppliers you purchase from, you can increase your leverage and improve the price and other terms. The problem is technological innovation, collaboration and other recent developments are resulting in a transition that may be bigger than you think!

Social media and crowdsourcing are game changers

No one argues with the idea that social media is important for the B2C community…but plenty of questions exist as to how it can be used in a B2B environment, even more in procurement. Although most companies use social media for lead generation, brand awareness and customer service activities, it can also be used for supplier collaboration, innovation and vetting the quality of sourcing decisions.

Crowdsourcing can also be used to develop innovative, new solutions. In addition, social media can be used for benchmarking, gaining market insights and especially for attracting new talent. One study, “Social Media for Procurement & Supply Chain Management Professionals” (by Frank Rozemeijer, Nadine Kiratli and Ruud Olthoff) suggests there are three obvious ways that social media can be used in the procurement function:

  1. Gaining transparency through market intelligence by sharing best practices, searching supply markets for new providers and even tracking the professional movement of key supplier contacts;
  2. Engaging in peer-to-peer conversations on suppliers, products and more; and
  3. Using social media as a channel for negotiations, relationship building and continuous improvement with suppliers.

Social media is an effective communications tool, but can be so much more. Early adopters stand to gain significant advantage through its use.

Beware the traps of SMAC (social, mobile, analytics and cloud)

Taking it a step further, lately many people have been talking SMAC (social, mobile, analytics and cloud). These four technologies when looked at synergistically are thought to be driving business innovation, creating competitive advantage and dramatically changing how we live, work and think. But SMAC is a disruptive force that is creating new issues and risks in contracting, even for traditional services. Sourcing professionals need to recognize the potential legal pitfalls and understand how to maximize value given new contract terms.

One example provided by Mayer Brown (Legal Issues in Contracting for SMAC Services; May 9, 2014; Brad Peterson and Paul Roy), involves data your company may gather in the course of your business practices. Traps exist, including confidentiality and intellectual property provisions that could block a company from using data for the purpose of analysis. Mayer Brown recommends that companies review their contracts to ensure old provisions don't impact future analysis rights as you increase SMAC services.

Big data, conflict minerals and cloud computing add complexity

Never mind that natural disasters or global political unrest have a major impact on the supply chain with unforeseen consequences… new issues emerge that impact a sourcing professional's daily job on a regular basis. Concepts like “big data” and “conflict minerals” force organizations to evaluate how they are tracking and utilizing information.

Although big data has been more prevalent amongst marketers hoping to gain insights on consumers, the use of it for sourcing professionals is far-reaching. A GEP Trend Report (Strategic Sourcing and Procurement Outlook 2014) suggests that procurement professionals should start utilizing big data to “track supply risks, commodity price and capacity trends, swings in demand affecting supply patterns, and discover new supply partnerships.”

Also adding complexity are things like the Affordable Care Act and other regulatory items, which force sourcing professionals to take a break from their day jobs to understand how they must interpret and respond to new laws both for their employees and their customers. Think these don't affect a sourcing professional? Think again.

Virtual sourcing's unexpected impact

A combination of cloud-based technology, standardization of tools, templates and methodologies, and refinements to a “center of excellence” approach; combined with the decentralization of certain transactional procurement activities and an increased use of on-demand contractors, is resulting in a more virtual approach to sourcing.

As companies seek to save money and improve value, they are increasingly using contingent labor to have a more flexible, agile and remote workforce. This in turn is resulting in less overhead required for physical staff. That being said, the use of contingent labor involves its own set of challenges, as companies are being forced to understand the misclassification of these workers and the tax implications of employing them.

Tail spend is gaining in importance

“Tail spend” refers to generally low-value, high-transaction volume items that are procured outside the normal sourcing process, resulting in non-compliance and maverick spending. Often these categories involve suppliers that no one in procurement has ever worked with. The tail spend is often overlooked because gaining control of it is seen as time-consuming, overwhelming and non-strategic. But by tackling tail spend with a methodical approach, there are huge savings to be gained.

The profession, too, is changing …

Not long ago, if I told people I worked in the “sourcing and outsourcing” field, their eyes glazed over and in their minds they wondered how anyone could choose something so…uninteresting.  Yet few other positions offer so much variety day to day. No longer a back-office function for transactional procurement, careers in this field are now highly coveted. Industry events with a plethora of millennials  are proof of that.  The “strategic” is finally a valued part of “strategic sourcing.”

ABOUT THE AUTHOR

Sarah Holliman, Vice President of Marketing with the Sourcing Interests Group (SIG) has 15 years of experience in the sourcing industry. Prior to joining SIG's leadership team, Sarah was with AT Kearney, leading the marketing efforts for the AT Kearney Procurement & Analytic Solutions unit. She also spent five years at AT Kearney consulting primarily to financial services companies on topics that ranged from strategic planning to procurement cost reduction to back-office operations. Before joining AT Kearney, Sarah was in business development at one of the largest commercial banks in the US.

Sarah has held numerous leadership positions on non-profit boards promoting children, women, and educational issues, and has specific expertise in membership development, fundraising, and strategic development. Sarah has a BA from Furman University and an MBA from the Anderson School at UCLA.

 

 
 

Contract visualization - boost your brand and bridge the language barrier

 
Visualizations in contracts are gaining momentum as businesses seek greater clarity to boost their brand, increase efficiency, effectiveness and transparency. A new experimental study shows how it's done - and its surprising benefits for non-native speakers in helping bridge the language barrier. Conducted by Aalto University in Finland -- in collaboration with IACCM - the study shows that visuals are changing our contracting world. What follows are results and analysis by researcher and author, Stefania Passera.
 
 

Although visualizations in contracts are becoming more popular, some organizations are still asking the question “Are visuals really making contracts easier to understand?”

This article helps you visualize how you can use diagrams, charts and icons in commercial contracts - transforming them into tools that create value – with evidence that visual contracts can help non-native speakers to understand the contract as accurately as native speakers.  Visuals can also reduce the “cognitive load” for contract professionals: with their workforce more engaged in reading contracts, organizations can achieve better results with a fraction of the time and effort usually required.

A necessary evil?

Some organizations see contracts as “necessary evils,” taking a lot of time and effort, and sometimes so complex they are misunderstood (or not read), even by key people. But, as we know, this can result in costly mistakes, non-performance, sour business relationships and even litigation. Prototypes, experiments and examples then become crucial in helping businesses to understand if and how to harness the power of visual communication.

For this reason, I organized an experimental study, in collaboration with IACCM, to test whether contracts that have been enriched with visuals are more understandable, faster and more pleasant to read than traditional contracts. The study took place online in May 2014, and IACCM helped to reach out to participants and organize webinar info-sessions.

Study shows better understanding

A total of 124 IACCM members from 24 countries took part in the study. All were provided with a contract, either in a traditional, text only format, or a visually enriched version, and asked to answer six questions to test their comprehension of the text. A number of additional questions were asked to assess the perceived difficulty of the task and their user experience in relation to each type of contract.

The contract used in the experiment was a B2B agreement on the purchase of equipment. Sensitive information included in it was fictitious, but all visualizations were developed for a real-life contract of a Finnish industrial company participating in the UXUS Research Program1.

The designs used in the mock-up experimental contract (Figures 1-3 below) show how visuals …

  1. Improve the typography and layout of the document, highlighting key terms and sentences in bold typeface
  2. Use color as an extra cue to help find information, for instance in headings
  3. Clarify key parts of the text using charts, diagrams, timelines and flowcharts.

Diagrams that made a difference …

The following diagrams were among those used in the study …

Figure 1: Clause and diagram about the payment schedule, installments and preconditions to payment. © 2013 Aalto University. Design: Stefania Passera

Figure 2: Clause and diagrams about guarantees covering the advance payment and warranty period © 2013 Aalto University. Design: Stefania Passera

 

Figure 3: Clause and diagram about test runs of the purchased equipment
© 2013 Aalto University. Design: Stefania Passera

Experiment shows improved accuracy and speed

The experiment assessed how well participants had understood the contract by measuring their speed and accuracy in answering a series of comprehension tasks. The research participants were divided into two groups, one using the traditional, text-only version of the contract and the other a visually enhanced version. The wording and structure remained exactly the same, to ensure comparability.

Using the visual version of the contract the participants could, on average, reply correctly and faster to more questions.  Differences in accuracy and speed between the two groups are statistically significant, evidence that the visual display of contractual information has a positive effect on comprehension.

Figure 4: Performance in comprehension tasks was measured as answer accuracy and time taken per answer. © 2014 Aalto University

Daunting task may be easier than you thought!

The two groups were also asked to subjectively assess the difficulty of using their assigned contract version both before reading it (expected difficulty) and after (effective difficulty), via the comprehension task. The “before task” measure was taken to demonstrate whether the two groups differed in their expectations or preconceptions about the task difficulty, based on their previous experiences with contracts.

While there was no difference between the expected and effective difficulty experienced by the group working with the traditional text-only contract, the group working with the visual contract experienced less difficulty than they had expected. This suggests that the visual version of the contract provides a better user experience than traditional contracts.

Figure 5: Difficulty perception before and after completing the comprehension tasks with either the visual or textual contract. © 2014 Aalto University

Visualisations help non-English speakers

A very interesting result of this study emerged by statistically analysing the interactions between different variables: that visual contracts can help non-native speakers to understand the contract as accurately as native speakers.

This has significant implications because, now that English is the principal business lingua franca (used it in its infinite local variants, more or less skillfully),very often, both contracting parties rely on English, even though none of the negotiators or contract managers are English native speakers.

Visual communication, apparently, can also help us avoid the pitfalls of spoken and written English (and legalese).  As expected, native speakers display a more accurate understanding than non-native speakers when reading a traditional textual contract. However, the comprehension accuracy of the two groups is statistically equal when using a visual contract. Moreover, even native speakers are more accurate in the comprehension tasks when using a visual contract.  This strengthens the position for using visuals beyond text-only content. Contract visualizations can also prevent misunderstandings and enhance clear communication in international and domestic contracts.

Statistical analysis shows that comprehension speed and accuracy is not affected by cognitive style2 (the favorite thinking style of each person, who can be categorized as a verbalizer, or a visualizer), their level of education or whether they have a background in law. This means even highly educated people and jurists perform better with a visual contract!

The experiment featured six comprehension questions, so a perfect accuracy score would be six points (1 per correct answer).

 

Figure 6: Comparison of accuracy in comprehension for native and non-native English speakers, in the two experimental groups. © 2014 Aalto University

“User experience” matters

And what about user experience - the overall evaluation of the readers' interaction with the contract, emerging from, and at the same time feeding, the readers' perceptions, emotions, predispositions and motivation to read3?

User experience might seem a “soft” value, which has not much to do with “serious” business tools as contracts. However, in our professional roles we remain human beings, with feelings and values, with a need to be engaged and motivated by meaningful interactions with people and things.

Research has shown how positive experiences contribute to purchasing decisions and creation of strong, successful brands4, so the power that comes with designing positive experiences should not be underestimated, even in a B2B context. We would never accept a poor, unclear, cumbersome, frustrating, boring user experience from our smartphones, so why do we let our contracts “mistreat” us?

…and so does how we feel

Visual contracts outperform traditional textual contracts in two ways. Firstly, we look at the score on the PANAS scale, which is a measure of positive and negative emotions elicited by a specific event, ranging from 5 to 25 points 5,6. The visual contract elicits more positive emotions (eg inspiration, determination, alertness) and fewer negative ones (eg hostility, frustration, shame) than the textual contract.

Figure 7: Comparison of the positive and negative affective reactions elicited by the two contract versions. © 2014 Aalto University

Secondly, we look at the score on the HED/UT scale, which is a measure of two dimensions that contribute to a user's positive attitude7: The first dimension is the hedonic, deriving from the gratification and pleasantness of the experience, and the second is the utilitarian, arising from the satisfaction of instrumental, functional needs. The two dimensions are considered at once, creating a matrix: the top-right quadrant is the optimal positioning, where we find pleasant and useful products. Other products might be either pleasant or useful, so the other dimension has to be strengthened. Products in the bottom-left quadrant are neither pleasant nor useful, so serious rethinking would be needed!

Figure 8: Comparison of the two contract versions in terms of utility and pleasantness. © 2014 Aalto University

Conclusions

Since we are using English as a business lingua franca (often when none of the parties is a native speaker), misunderstandings and inaccuracies are common in contracts. Visualizations can help clarify and restrict the meaning of the contract text, furthering clear communication between the parties, helping them saving time during drafting, revision and negotiations, and avoiding costly mistakes down the road.

Visualizations can reduce the cognitive load experienced by contract professionals, so organizations can ensure that their workforce is more engaged in reading contracts, achieving better results at a fraction of the time and effort usually required.

Visualisation also improves the overall experience of contracts, possibly boosting the brand of an organization as it communicates values such as transparency, openness to collaboration, and innovativeness.

For more information on the study see also the pdf. here

END NOTES

  1. http://uxus.fimecc.com/ (See also Improving contract clarity - Ask the Expert presentation)
  2. Blazhenkova, O., & Kozhevnikov, M. (2009). The new object-spatial-verbal cognitive style model: Theory and measurement. Applied Cognitive Psychology, 23(5), 638–663. doi:10.1002/acp.1473
  3. Hassenzahl, M., & Tractinsky, N. (2006). User experience - a research agenda. Behaviour & Information Technology, 25(2), 91–97. doi:10.1080/01449290500330331
  4. Voss, K. E, Spangenberg E. R., Grohmann, B. (2003). Measuring the Hedonic and Utilitarian Dimensions of Consumer Attitude, Journal of Marketing Research 40(3), pp. 310-320
  5. Watson, D., & Clark, L. A. (1994). The PANAS-X: Manual for the Positive and Negative Affect Schedule-Expanded Form. Ames: The University of Iowa
  6. Thompson, E. R. (2007). Development and Validation of an Internationally Reliable Short- Form of the Positive and Negative Affect Schedule (PANAS). Journal of Cross- Cultural Psychology, 38(2), 227–242. doi:10.1177/0022022106297301
  7. Spangenberg, E. R., Voss, K. E., & Crowley, A. E. (1997). Measuring the hedonic and utilitarian dimensions of attitude: a generally applicable scale. Advances in Consumer Research, 24, 235-241

ABOUT THE AUTHOR

Stefania Passera, MA, is a Doctoral Researcher researcher in MIND Research Group, a multidisciplinary team at Aalto University School of Science, Helsinki, Finland.  She has a background in graphic design, and since 2010 she has been researching and experimenting with the topic of contract visualization. The goal of her work is to make contracts clearer, easier and user-friendlier through visualizations that can help readers to make sense of complex information. Stefania has been working with private and public organizations in Finland on the development of user-centered visual contract documents, redesigning and piloting new generation visual contracts. She is also a freelance designer, university lecturer and the initiator of the international series of events Legal Design Jam (www.legaldesignjam.com).

Her paper “User-Centered Contract Design: New Directions in the Quest for Simpler Contracting” (co-authored with Helena Haapio, PhD) was awarded Best Paper at the IACCM Academic Forum 2011.

 

 
 

Foggy contract language - is there ever a place for ambiguity?

 
Is there an intelligent school of thought behind the use of foggy contractual language? Could ambiguity be intentional, and 'agreements to agree' mask an unwillingness to commit? Discover key best practice tips to help eradicate some of the bad habits that plague contractual documents.
 
 

A reputation for ambiguity

Contractual documents have a terrible reputation for being lengthy and unintelligible. In fact, 'legalese' is now accepted terminology to describe a hybrid of the English language that seems to be specially reserved for contracts. Essentially legalese describes complex wordy clauses, sometimes with very archaic language.

I remember reading a quote which to this day makes me smile every time I review a contract drafted in legalese – “Why do they use so much Latin when so few of their clients are Ancient Romans? Is it a conspiracy?

Although legalese -- for the most part – is phasing out in favor of a more civilised practice of clear and simple drafting, its legacy is seemingly unshakable and contracts continue to have a default setting of undecipherable complexity.

Tim Cummins' blog Vagueness in Contract Terms¹, responds to a question on whether or not imprecise terminology such as 'reasonable efforts' or 'timely execution' could be justified as good practice in contracting. If clear and ambiguous language is the intention, I would be inclined to say not. Why? Because the rights and obligations of each party should not only be clear and concise, but also objective.

Much debate over some of the descriptive words exists in contracts today, such as 'reasonable', 'timely' and 'best'. On one hand, they supposedly define a required standard, but on the other, a growing number of practitioners suspect they introduce subjectivity which enables a party to evade commitment.

What might happen if the statement, 'you will do x at 9:00am', is replaced by 'you will use reasonable efforts to do x at 9:00am'?

The ambiguity of 'reasonable efforts' and similar terms could reduce an objective, clear set of terms to a 'try your best' document. But what if this 'try your best' attitude is part of an otherwise legal and rigid document that acknowledges the working relationship between the parties? If things go wrong a 'try your best' contract may not leave much to fall back on.

Don't rely on ambiguity

Sometimes a negotiator is well aware that the other side won't agree to certain wording without a fight. Rather than endure a difficult conversation, they opt to draft something vague, reasoning that if it becomes an issue, they can successfully argue their interpretation reflects their hidden intention – an intelligent tactic, spot of cowardice or foul play perhaps?

No matter how you view this practice, ambiguous terms should not be accepted as a valid alternative to negotiation. The purpose of the contract is to reflect the whole intent of the parties, not just the essentials of the deal.

I always prefer a challenging negotiation over fudging terms. We strain relationships when we allow the clause at the heart of a dispute to remain ambiguous and the parties to interpret it in opposite ways. A contracts professional must protect the best interests of the business. It is better to negotiate and understand any risk to mitigate or manage it, rather than sweep it under the carpet of ambiguous, vague drafting.

No one likes litigation, but litigators love loopholes.  So, if a contractual dispute arises, those ambiguous clauses are the litigators' best friend. Even if you don't end up in litigation, time is money. Hours wasted by management trying to mediate through a sticking point based on an ambiguously drafted clause will cost the business valuable time and resources.

Lethargic drafting – more than sluggish

Beyond the loopholes created by ambiguity is what I call 'lethargic drafting.' In commercial contracting, one size does not fit all. A manufacturing contract for the provision of goods absolutely cannot be signed to cover the provision of services. Likewise you cannot take a set of terms for the provision of services, substitute the word 'services' with 'goods,' and sign it.

This is another slippery path to ambiguity and confusion. True, this practice may save time preparing and negotiating appropriate terms at the front end.  But once it is signed, the time spent deciphering the obligations of each party in a document plagued with non-applicable terms will instantly negate any perceived benefit.

Agreements to agree – usually worthless

An 'agreement to agree' is also an ambiguity culprit, looking something like “any rate increase shall be agreed between the parties” or “the parties will meet at a mutually agreeable time to agree an action plan.”

Legally, an 'agreement to agree' is not worth much. It is not a commitment, but rather a commitment to try to reach a commitment at a later date. This is as absurd as it sounds! Yet 'agreements to agree' occur often in many contracts. Whether this is down to a lack of due care, inexperience, or an unwillingness to commit -- best practice would replace 'agreements to agree' with clear commitments.

At times the contracting parties are genuinely unsure about certain elements of the deal.  This should not be overlooked. A deal may include several unknowns that must be acknowledged within the terms of the contract, but cannot be set out as clear obligations. That's ok. If both parties acknowledge there is some uncertainty and agree it will take time to fine tune, I would suggest adding an amendment to the agreement when any uncertainty is clarified. Forging ahead, trying to put clear rights and obligations in place to cover uncertain circumstances can do more harm than good.

Best practices

As an advocate of clear and simple drafting, I would share the following best practice tips when you face ambiguity:

Time – are you struggling for clarity?  If you have to re-read a clause repeatedly to make sense of it, the clause probably needs improvement. Further, a contract has an entire agreement clause for a reason. If you need to dig out old emails or miscellaneous documents to understand what was agreed, your contract has not adequately captured the deal. If you are facing this, the logical step would be to put in place an amendment to resolve any ambiguity.

Language – is it sensible or verbose?  Write the draft so everyone can understand it. No one gets a medal for range and complexity of vocabulary or length of words. The contract is not reserved for the legally trained - it is a business document to be used, managed and understood by all the relevant people in your business.

Effort – does the shoe fit? Make sure the terms fit the goods or services to be provided. The contract is the deal on paper and it needs to make sense. Sometime this means investing a little extra time and energy, but it is the right thing to do.

Post award management – get clarity before signing.  A well drafted contract with clear terms is easier to manage post signature. Clarity on rights and responsibilities will benefit all parties.

Succession planning. If you draft and negotiate contracts don't forget your successor. Facilitate the work of any successors by thinking about the present and the future. Successors should be able to pick up the contracts you have negotiated and understand the deal each contract captures. Don't let them walk into a minefield of confusion.

Clarity is your friend

In reading Tim Cummins' blog Legal work beats being a fast-food cook,³ some of us will have been shocked (or possibly just amused), to see the statement “the statistics suggest that being a funeral director is about twice as good as being a lawyer.”

Fortunately Tim concluded with some words of encouragement. “Contracts – and their successful delivery – underpin prosperity. So we should recognize that our job has tremendous potential for social meaning; now we just have to work harder at developing the skills, methods and knowledge to ensure the way we work actually translates to the benefits that can be achieved. Next year, perhaps we can have climbed up that ladder of job meaning!”

We can each do our part in transforming the bad habits that plague our contractual documents and climb “up that ladder of job meaning”. The next time you negotiate and draft an agreement, keep this article in mind.

End notes

  1. See https://www.iaccm.com/resources/?id=6670&cb=1410041580
  2. Fujitsu Services Ltd v IBM United Kingdom Ltd [2014] All ER (D) 223 (Mar)
  3. https://www.iaccm.com/resources/?id=7727&cb=1410038979

ABOUT THE AUTHOR

Fayola Yeboah has worked as a commercial contracts professional for market leaders in the aerospace/defence, biopharmaceuticals, oil & gas and automotive industries.Fayola is currently Senior Contracts Manager for Enterprise Rent-A-Car's European Sales Operations, based at their European Headquarters in the United Kingdom.

Enterprise Rent-A-Car is the largest car rental company in the world, servicing both B2B and retail business, with an annual turnover of more than $15 billion to a rental and leasing fleet of over one million vehicles spread across approximately 8,200 locations worldwide.

 
 

General or specific? Wording matters in a supplier's code of conduct

 
Asking international suppliers to observe a code of conduct is standard practice. But what if your supplier's code of conduct (SCC) uses language that is broad and unspecific? Don't worry, this won't always mean it is less effective. But be aware, the language you choose will critically affect the way the code is used - and may have legal consequences. So choose wisely.
 
 

Social responsibility in supply chains remains a hot topic because of recent events like the fires in Bangladeshi factories. While sourcing companies need to have ethical norms in place for suppliers' behavior, they must be drafted in such a way that they balance the protection of their reputation, their business relationship with the suppliers - and avoid any negative legal consequences.

All of this starts with the language of SCCs. Several companies have been accused of drafting their SCC in such general terms that it was basically useless. Other companies are very much in favor of precisely formulated codes, which they see as more effective and legally enforceable. However, the issue is not so black and white.

Keep it as precise as possible…or not?

The conventional economic rationale pushes contractual parties to formulate contractual terms as precisely as possible to prevent any disputes and litigation.1 However, there may be a strong case for avoiding complexity and leaving some aspects of the contractual relationship either unregulated, or regulated in a more open manner.

A few reasons why

  • Company's size matters - Small and medium-sized companies often produce less elaborate and precise SCCs than large companies. Why?
     
  • They may not have the resources to invest in corporate social responsibility (CSR);
  • They may not be in a negotiating position to impose CSR requirements on their business partners;
  • They have primary interests that are simply closer to their domestic location.
  • Or, most likely, they think they don't need to, because the attention in the CSR area remains focused on large multinationals.
     
  • The purpose of SCCs - SCCs are usually a part of supply chain contracts. However, their aim may be to communicate goals and values to their business partners, rather than explain them to a judge at some point in the future; to motivate ethical behavior rather than to enforce it. In that case, broader interpretations are appropriate.
     
  • Keeping the contract flexible – If the SCC uses standard terms it may be difficult to amend them, and they may require things not relevant to the specific deal. In extreme cases the requirements in an SCC may become a deal breaker. Keeping the wording more open allows the parties to interpret and adjust the content to the changing regulatory environment, their business needs and unforeseen events without the need to renegotiate.
     
  • Crossing boundaries, crossing cultures – A more generalized format will also allow the same wording to be used in various jurisdictions and help to overcome any differences in the parties' cultural and legal understanding of the issues in question. For example, the age limit for what constitutes child labor can differ across countries, especially those that are not signatories to the respective International Labor Organization (ILO) Conventions.
     
  • Requirements that cannot be controlled - The controllability and verifiability of corporate CSR performance and contribution to sustainable development can be a major problem. Some companies try to work through this burden by introducing specific goals for their suppliers.

For example, from 2009 and without any legal pressure, Verizon Communications Inc. has required its suppliers to reduce the energy efficiency of network components by 20%.2 Because this is a measurable feature, the wording of the respective contractual requirement can be precise.

Alternatively, it may simply not be possible to effectively control or quantify compliance with some requirements. In such cases, more general wording works better. For example, ArcelorMittal requires its suppliers to “…to maintain effective policies, processes and procedures to manage their environmental impact…”3

  • Is there a threat of legal sanction? SCCs tend to be more specific where there is a specific underlying legal regulation or threat of a statutory sanction. This occurs mainly in relation to topics regulated by (supra)national law.

For example, the REACH Regulation prescribes detailed rules for the obligation to register chemical substances in products marketed in the EU.4 Because legal enforcement is stricter, the buyer has to make sure the supplier understands precisely what is expected.

On the other hand, in the climate change area, EU companies are not subject to any specific rules on emission reduction in their supply chains, therefore SCCs in this context tend to be more broadly drafted.

SCC language may influence suppliers' behavior

As discussed above, parties may have valid reasons for leaving SCCs vague. However, any vagueness opens up room for ambiguous interpretation and thus casts doubts on the applicability of the underlying contract law and enforceability of the terms. Such doubts undermine the notion of the binding nature of the terms, which is an important incentive for compliance, even if the parties do not actually intend to use the formal enforcement mechanism.

This corresponds to the philosophy that “the binding force of the law is an idea in human minds”.5 People align their preferences and morals to the model behavior prescribed by legal norms. If suppliers suspect that a provision would not be enforceable, the level of compliance may be lower. On the other hand, if suppliers face strict obligations, they may fear legal and relational consequences and hide any non-compliance.

Therefore, when drafting SCCs, companies should weigh the advantages of broad language – ie its flexibility, wide application, and accent on relational tools - against the advantages of precise language in relation to proactive management of legal risks and perception of SCCs as legally binding. To do that they must be aware how the language of the SCC would be interpreted should a dispute arise, and how specific it would need to be, for it to be formally enforceable.

What would the judges say?

Disputes over SCCs rarely come to the courtroom. However, while the attention of media, NGOs and customers remains fixed on the ethical performance of international suppliers,  sourcing companies need to know if their CSR requirements are actually enforceable or not. In order to be enforceable, an SCC must form a part of a contract and cannot be too ambiguous.

The same applies to the provision that implements SCC into the contractual text. Courts will interpret the code and contract in two steps: first identify the parties' intentions and then, if they cannot be determined, establish the meaning that a reasonable person would assign to the document in question.6

For example, Article 14.2 of the Verizon Australia Supply Agreement7 reads as follows:

“Buyer is committed to conducting its business in an ethical, legal and socially responsible manner. Buyer expects its suppliers to share this commitment and has therefore established a Supplier Code of Conduct set forth at http://www2.verizon.com/ethics/ which Company agrees to adhere to.”

Should the suppliers understand the words “agrees to adhere to” as accepting an obligation to comply with the code, or merely that they support the values expressed in it? And can Verizon take a dispute to the court successfully if necessary?

Parties' intentions

To answer the above questions, the first step is to determine the intentions of the parties. This is easy if there is a declaration regarding the effects of the code in the contract's preamble or in some pre-contractual documents. If that is not the case, we should look into the circumstances of the contract.

For example, does Verizon request suppliers to sign the code before concluding the contract? Does it state anywhere that compliance with the code is a prerequisite for any business relationship? If yes, then Verizon's intention would clearly be to establish binding obligation.

The conduct of the parties provides further help. In the code, Verizon reserves the right to audit suppliers' compliance. It is important whether the company actually conducts such audits and how it reacts to any negative findings.

If the supplier can prove that the company knew about any non-compliance but did not act upon it, the court could rule that Verizon did not intend to cause a binding effect. And conversely, if the supplier follows the code, accepts regular audits and implements corrective plans that are imposed, the court could deduce that he/she considers the code binding.

Parties' conduct is closely connected to the establishment of contractual practices, which may be examined when interpreting a contract. Therefore, it is relevant to gather information about the parties' previous dealings. Did they include a similar document in their previous contracts and how did they treat it?

International implications

Objective test

If there is no clear evidence of parties' intentions, then the so-called objective test is conducted.

There is no standard wording of SCCs or their incorporation of contractual clauses that would be recognized internationally. It is a question of companies' style and policies. Therefore, neither the common meaning nor the objective test of a reasonable person will help much, as in the sea of various approaches we cannot determine a common meaning of the clause as the reasonable person's view differs significantly across jurisdictions.

Furthermore, the nature and purpose of the contract does not help us either, as one of an SCC's main characteristics is that it is disconnected from the subject matter of a contract. The main objective of the contract – i.e. to have goods delivered – can be achieved without assigning a binding effect to the code.

More guidance can be derived when interpreting the provision in the light of the whole contract. From a structural point of view, the placement of a provision within the text suggests how great a value parties assign to it, and therefore helps in interpreting the contract and the code. There are five general rules for structuring a contract:

1.  General provisions should be placed before special provisions;

2.  More important before less important provisions;

3.  More frequently utilized before less frequently utilized provisions;

4.  Permanent before temporary provisions; and

5.  Miscellaneous provisions should be placed at the end of the body of the agreement.8

We should also look at the actual text of the code. The preamble states that “…Verizon's suppliers and their agents and permitted subcontractors shall support Verizon's core values by conducting business with integrity, by treating others with respect, by striving for performance excellence and by accepting accountability for their conduct.” The words “support” and “strive for” point towards soft obligations, ie obligations to exercise best efforts rather than to achieve full compliance. The expression “accept accountability” also does not suggest that the obligation would be absolute.

Finally, contra proferentem interpretation is followed, ie that an ambiguous provision should be interpreted against the party that drafted it.

If you took the time to study both Verizon's SCCs and the respective contract carefully, you would find that in essence all the interpretation rules used in international contract law point towards the unenforceable character of the analyzed provision.9 The conclusion would have to be that suppliers have the obligation to invest efforts to support the values of Verizon; however, possible non-compliance with the code would not constitute a breach of contract.

So…which language to choose?

The precision of language in SCCs has wide implications on their actual and legal effects. It is not a general truth that precisely formulated codes are better than broadly formulated ones. But it is true that wrongly chosen language can undermine the goals of SCCs your company wishes to achieve and may possibly put the company in danger of negative legal consequences.

What to do?

First and foremost, identify what you want to achieve through your SCCs. For example, do you wish to merely motivate suppliers to behave ethically? Or to effectively control their behavior? Is the SCC meant primarily as a shield for your brand name or as a marketing tool? Or all of these together? Once you have clearly identified what the actual purpose of the SCC is for you, then you can choose appropriate language.

If your company does not want to prioritize any specific purpose but to balance all, the language is an important starting point, but alone is not enough. You must combine this with other features of the SCC. The following combination seems to be optimal:10

  • Precise language – to clearly communicate requirements to the suppliers;
  • Strong contractual commitment – to signal the seriousness of the ethical demands;
  • Relational assistance – to ensure that suppliers do not feel threatened and therefore hide non-compliance, but approach the code as a collaborative process, and
  • A clear and detailed monitoring and enforcement system – to secure the highest compliance possible.

You can read more about this topic in the author's new book titled, Sustainability Clauses in International Business Contracts
 

END NOTES:

  1. Eggleston, K, Posner, E A, Zeckhauser, R, 2000, “The design and interpretation of contracts: Why complexity matters”, Northwestern University Law Review, 95(1), 91-132, p. 104-106
  2. 2011 Annual Report: Financial and Corporate Responsibility Performance, p 20; available at http://responsibility.verizon.com/reports (last accessed 11/01/2014)
  3. ArcelorMittal, Code for Responsible Sourcing, Article 5.4, http://corporate.arcelormittal.com/corporate-responsibility/transparent-governance/responsible-sourcing (last accessed 11/01/2014)
  4. Regulation (EC) No 1907/2006 of the European Parliament and of the Council of 18 December 2006 concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) [2006] OJ L 396/1
  5. Ratnapala, Suri, 2009, Jurisprudence, Cambridge University Press, p 113
  6. 1980 UN Convention on Contracts for the International Sale of Goods, Article 8; UNIDROIT Principles of International Commercial Contracts, Articles 4.1-4.8; Principles of European Contract Law, Chapter 5, Articles 5:101-5:107; Proposal for a Regulation on a Common European Sales Law, Chapter 6, Articles 58-65
  7. Product and Service Supply Agreement of Verizon Australia Pty. Limited, version PSSA –Australia_051010-2, available at http://www.verizonenterprise.com/resources/legal/au-vzb-pssa_en_xg.pdf (last accessed 11/01/2014)
  8. Yeates, J L, “Best Practice in Contract Drafting”, accessed at http://www.gordonarata.com/720DE/assets/files/lawarticles/Best%20Practice%20in%20Contract%20Drafting.pdf
  9. Peterkova, K, 2014, Sustainability Clauses in International Business Contracts (Eleven International Publishing)
  10. Ibid.

ABOUT THE AUTHOR

Katerina Peterkova, PhD, is a postdoctoral fellow at the IntraLAW Center, Aarhus University, Denmark. Prior to her academic career, Katerina worked in several legal firms. In both worlds she specializes in international contract law and corporate social responsibility. She has recently published a book on Sustainability Clauses in International Business Contracts (Eleven International Publishing, 2014). Katerina can be reached at peterkova.kate@gmail.com.

 

 
 

Commercial contracts without an arbitration clause - a very costly risk!

 
So, you want to leave an arbitration clause out of your commercial contracts? Can you afford to waste hundreds of thousands of dollars, pounds or euros litigating disputes? If your company has money to burn, don't read this article. But if you're looking out for your company's interests, you will want to.
 
 

The benefits of even a well-drafted contract cannot be fully realized if the contract cannot be enforced without spending an inordinate amount of time and money. If a dispute arises and the value of what is at stake is below a certain level – whatever that level may be for your company – resolving it via litigation is impractical.

Protracted negotiation to try to settle the matter out of court will, at some point, also prove to be detrimental to your company. There are many other potential costs to consider besides out-of-pocket expenses.  For example, depending on the situation, you may be faced with:

  • Reduced working capital
  • Extraordinary provisions on your company's financial statements
  • Storage costs
  • Wasted personnel-hours spent negotiating
  • General uncertainty as to the outcome of the dispute

There is, however, an effective way to avoid this situation: an arbitration clause.

 What is an arbitration clause?

An arbitration clause is simply a short provision in a contract that requires the contracting parties to resolve any disputes through private arbitration, rather than litigating them in court. These clauses have become popular of late since, litigation is becoming ever more expensive and the process inconvenient and time-consuming. In many countries, litigation can often take between one and three years to conclude.

Binding arbitration is a means of resolving disputes outside the courts, where the parties to a dispute refer it to one or more persons (an "arbitrator") by whose decision they agree to be bound. The neutral third-party arbitrator reviews the evidence presented and issues a decision that is legally binding and enforceable in a court of law (an "award"). Arbitrators are not required to follow the stringent rules and procedures, nor the technical Rules of Evidence used in court. Arbitrators typically follow a set of rules established by the parties to the dispute, or those established by the arbitral institution specified in the contract's arbitration clause.

Benefits of arbitration

It is the aspect of an award being “enforceable in a court of law” that is important. The courts and legislators in many countries realize the commercial importance of being able to resolve disputes in private and in a less formal and less costly way than a public trial. They also realize the importance of being able to enforce the resulting award using the power of the courts – as one would have to do with any court judgment resulting from a trial – should the losing party fail to carry out the resolution imposed by the arbitrator. And, of course, the importance of being able to do this without necessitating a “re-litigation” of the matter post-arbitration, since that would defeat the purpose of opting for arbitration over litigation in the first place.

Although arbitration has become more involved of late, it is still usually less expensive, more convenient, and more expedient than going to court. Many arbitral institutions have simplified rules and streamlined procedures. In addition, an arbitrator has more flexibility to move the process forward and thwart any attempts by one party to use “tricks of the trade” to delay the process and drain the other party of their resources. Another significant benefit of arbitration is its international acceptance and the ability to enforce arbitration awards cross-border, often more easily than enforcing judgments of a foreign court.

Although enforcement of the arbitration award is not necessary in the vast majority of cases, it is legally binding and enforceable in court by virtue of the various similar arbitration Acts enacted in many countries and an international "Convention on the Recognition and Enforcement of Foreign Arbitral Awards" (aka The New York Convention) signed by 149 countries including the US, Canada, the UK, Australia, South Africa, India and China. The convention requires courts in the countries that are signatories to give effect to private agreements to arbitrate and to recognize and enforce arbitration awards made in any of the other contracting countries as if they were judgments of their own court.

Online arbitration

The benefits of arbitration are even more evident when an online arbitration service is used, similar to that provided by my company, eQuibbly.  This is especially true for supplier disputes below a particular monetary value where expediency is paramount. With eQuibbly, the entire process takes place online in a private and secure virtual room, where the parties explain their disagreement, upload and exchange evidence, answer the arbitrator's questions, and receive a legally binding and enforceable arbitration award.

What if there is no arbitration clause?

There is another important reason to include an arbitration clause in your contracts: arbitration is not otherwise compulsory. Without an arbitration clause, both parties to a dispute must consent to the arbitration. Where an arbitration clause exists, however, it is irrelevant whether one of the parties does not want to arbitrate the dispute and refuses to defend itself. The dispute can still be referred to arbitration and the arbitrator can still issue an enforceable award, much like a court would.

In a situation where no arbitration clause exists in an agreement, the contracting parties may still agree to arbitrate a dispute after the fact - although it is usually more difficult to agree on anything after a dispute has arisen. Even after litigation has commenced, a judge will usually consent to the parties' request to defer to arbitration as a means of resolving the dispute.

Arbitration clause example

To avoid the costs of litigation, be prepared and insert an arbitration clause similar to the one below into your commercial contracts – and be sure to name the arbitral institution that you would like to administer the arbitration. As always, seek independent competent legal counsel for any legal advice prior to making any changes to your contracts.

Any controversy or claim arising out of or relating to this contract, or the breach thereof, upon the request of either party, shall be settled by final and binding arbitration. In the event the total amount in dispute is below [$x000,000], it will be administered by [eg] eQuibbly online at www.eQuibbly.com under its arbitration rules, in lieu of litigation, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof for enforcement purposes. In the event the total amount in dispute is [$x000,000] or greater, it will be administered by [name of arbitral institution] under its arbitration rules, in lieu of litigation, and settled by [one, three] arbitrator(s) appointed in accordance with said rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof for enforcement purposes. The place of arbitration shall be [city, country], and proceedings shall be conducted in the [language] language unless otherwise agreed.

ABOUT THE AUTHOR

Lance Soskin is the president of eQuibbly, an arbitration service where arbitrations are conducted entirely online by arbitration attorneys with industry expertise. He completed Law & MBA degrees at Osgoode Hall Law School and Schulich School of Business, was called to the Bar, worked at Osler, Hoskin & Harcourt law firm, and subsequently was an investment banker for Scotia Capital in Toronto and then Merrill Lynch in New York.

 

 

 

 
 

Cloud offerings - look before you leap!

 
Although cloud solutions are cresting a wave of popularity, organisations should carefully assess the licensing and operational characteristics of this delivery platform before jumping aboard. It's critical to understand how various delivery platforms differ, consider all costs -- and read the fine print.
 
 

Cloud offerings known as Software-as-a-Service (SaaS)1 present several advantages over on-premises delivery of software, such as bundled charges, reduced time to implement, flexibility, and scalability on demand. However SaaS is generally licensed differently, and as a service model poses some challenges of its own in terms of data security and portability between providers. You should consider such differences before selecting delivery platforms for application workloads.

First, understand the difference

Traditional delivery mechanisms for application workloads include on-premises hosting2, co-location services (customer's own infrastructure which is co-located in a third party data centre), and managed hosting services3 . SaaS extends the range of delivery mechanisms yet further, by including the application software managed by a service provider. SaaS gives customers the option of using cloud providers' applications running on cloud infrastructure (e.g. networks, servers, operating systems and storage), all of which are managed by the service provider. 

Usage rights for application software installed on-premises are generally purchased via a once-off perpetual licence fee, and restricted to a particular version of the software only. Customers are typically required to pay an annual maintenance charge if they wish to secure ongoing version rights and obtain vendor support for software bugs. The annually recurring maintenance charge is usually levied as a percentage of the initial licence cost (approximately 22% – 25%) and is often a cause of friction when vendors seek to increase it, for little or no additional benefit to the customer.

The significance of this licensing model is that the purchased licence is an asset, and its value may be written off over the prescribed accounting period. Theoretically, customers may use perpetually licensed software for as long as they wish (subject to compliance with licence terms), enabling them to “sweat the asset” beyond its book value. However a practical end date for software life, and the requirement to refresh, is often imposed by the need to maintain supportable and interoperable IT infrastructure.

By contrast, the right to use the SaaS provider's application software is generally purchased via an annually recurring subscription fee, which bundles several charges together. The single annual fee (usually a per-user charge) covers software use rights, platform use rights, and support.

Given that SaaS subscription fees automatically include version rights while the subscription remains active, it may be attractive to purchase applications which are developing rapidly in functionality, and which are frequently updated with material enhancements, under this model. However once a customer ceases paying the annual subscription charge, the rights to use the bundled stack cease.

Somewhat confusingly, subscription licensing is also available for some on-premises deployments of software (such as Microsoft's Subscription Enrolment for on-premises desktop deployments under its Enterprise Agreement volume licensing arrangement). The point to remember is that subscription fees for on-premises software cover application software only; whereas the subscription fees for SaaS cover use of the application software and the underlying delivery infrastructure.

Some of the attractions of subscription licensing are that it incurs lower upfront costs, is purchased from operating expense budgets (vs often constrained capital budgets) and is renewable annually, allowing customers to match usage to demand. On the other hand, perpetual licensing retains its appeal for some customers because it provides greater predictability of costs over the longer term, and gives the customer ownership of the software asset. Some customers in capital intensive industries (such as mining) are not necessarily driven by a desire to reduce planned capital spend too drastically, as they risk losing deferred tax benefits based on depreciation schedules.

Consider all costs

The cost savings enabled by SaaS are often quoted as a reason for preferring SaaS over on-premises deployment of software, so it is worth spending some time on this topic.

The business case for any investment will usually assess the benefits or returns from that investment against its cost. The business benefits of cloud services are readily identifiable: essential characteristics such as broad network access, rapid elasticity, resource pooling, measured service and on-demand self-service4 theoretically give rise to the business benefits of reduced time to implement, increased flexibility, and scalability on demand.

In addition, it is true that SaaS pricing can provide tangible cost savings in the areas of labour, licence and maintenance charges, and IT infrastructure charges. (Customers save the cost of having to stand up and support their own servers, operating systems and storage to host the application software).

Watch for hidden costs

Some of the perceived licence savings you may get by moving to SaaS may result in additional licensing costs if your SaaS application accesses data contained in an ERP system, or ERP functionality. ERP vendors (eg SAP) have strict licensing rules about any use of their software functionality independently of the technical interface used to access it.

Under SAP's “indirect access” rule, any user access of functionality or data must be licensed. For example, if your SalesForce software accesses SAP systems or data on a real time basis, SalesForce users must be appropriately licensed for SAP also. Similarly, if you deploy a third party application such as SalesForce on the SAP NetWeaver integration platform, you may need to licence that application also to use SAP functionality.

I mention these additional licence costs simply to ensure completeness when building the business case; costs apply equally to on-premises and SaaS deployments.  A further aspect often overlooked when considering investment in SaaS is the category of once-off deployment costs.  Although annually recurring subscription charges are readily quantifiable, mitigating an application workload to a cloud delivery platform may incur costs in one or more of the following areas:

  1. Network - cloud based applications are increasingly accessed by customers via a thin client interface, such as a web browser, over the public internet. For first time SaaS deployments, this may necessitate a review of network architecture and bandwidth to ensure security and an optimal end user experience. It is worth noting that access to reliable and available network connectivity can be an issue in remote geographies, meaning SaaS is not always a suitable deployment model.
  2. Implementation services – consulting costs may be incurred for SaaS software configuration, implementation and integration with on-premises systems.
  3. Training – IT staff and end users may require training in the management and use of the SaaS offering.
  4. Organisational change – some customer processes may require re-engineering to accommodate SaaS-specific requirements in areas such as user access provisioning.
  5. Cloud management platforms – if customers leverage public and private cloud deployments in a hybrid model, they may require new tools or third party integration assistance to ensure that the new services are properly federated with enterprise service catalogues, and consistently orchestrated and managed.

Importantly, the business case should also consider and mitigate the risk of lock-in, in the event that a SaaS provider running a mission-critical application workload implements substantial price increases once the initial fixed term contract expires. To ensure portability in such a case, you should allow for the costs that might be incurred by migrating between service providers. This would include extracting data from the first cloud provider and validating their completeness and accuracy; staging in on-premises infrastructure (if required) and then migrating to the new provider.

Read the fine print

SaaS providers generally adopt a highly standardised approach to contracting with customers, driven by their lower margin business models. Where a contract is fixed and offers little room for negotiation, reviewing its terms and assessing whether they are commercially acceptable should be an important part of your evaluation process. If a standard contract does not meet the following minimum requirements, you should consider whether the relevant SaaS offering presents an acceptable commercial risk:

  1. Changes in service terms – ensure the SaaS provider cannot change its licence model without at least six months' prior notice. This notice period is to ensure you have time for an orderly exit if required.
  2. Service architecture and technology - ensure the SaaS provider cannot change its service architecture (eg where data is hosted) and technology without at least six months' prior notice. You may need to exit if a new hosting jurisdiction renders you non-compliant with local privacy laws; or if proposed technology changes are incompatible with your on-premises architecture and security posture.
  3. Cancellation rights – the SaaS provider must not be able to terminate for convenience without at least six months' prior notice. This is to enable an orderly exit process.
  4. Return of data - ensure the termination provisions provide for all data to be returned in a predefined format within 30 days of termination at no additional cost, and for the SaaS provider to maintain, back up and secure the data until it is returned.
  5. Use by affiliates – perpetual licences generally allow for use of the licensed software by affiliated group companies, subject to definition of “affiliate” in the licence agreement itself. Consider whether your SaaS terms allow similar group access, and if it is required by members of your corporate group.

…then make your decision.

As illustrated above, SaaS is not necessarily the right answer for every application workload.

In determining if it is the right solution for you, the first step should be to scan the market for service providers. Is there a viable SaaS provider for the relevant functionality that you trust, and who has the requisite financial and commercial credentials for an ongoing corporate relationship?

If there are no SaaS providers who immediately pass this initial filter, then consider more traditional software deployment models as alternatives – e.g. via a managed hosting service. 

If viable potential SaaS partners exist in the market, your next step should be to assess the relative merits of on-premises vs SaaS deployment models in a structured manner. As discussed above, cost and budget impact are key financial attributes often discussed when deciding between the two; but operational factors which may be relevant to your application workload, such as ability to customise, data sovereignty, degree of control, portability and security should also be included in the assessment.

Finally, don't forget to review and evaluate the contract terms and attendant commercial risk.

Table 1 shows how on-premises vs SaaS offerings generally compare against each of these attributes. How you rate them will depend upon the nature of the SaaS offering you are considering, and the specific requirements of your application workload.

Attribute

On premises

SaaS offering

Use rights

Perpetual

As long as subscription payment is maintained

Version rights

No (unless customer also purchases maintenance)

Included

Budget impact

Capex

Opex

Ownership

Customer

SaaS provider

Platform

Provided by customer

Included in SaaS

Cost

Upfront costs high

Pay as you go

Ability to customise

Depends on vendor

Configuration only

Data sovereignty

Customer controls location of data

SaaS provider controls location of customer data

Control of environment

With customer

With SaaS provider

Portability

Migration to cloud may require application and data remediation

SaaS to SaaS portability unlikely (may require on-premises staging)

Security

Access via corporate network

Access via internet

Contract terms

Software licence terms can generally be modified via addenda; customer specific discounts may apply

Generally fixed, no customer specific discounts

Conclusion 

Although SaaS deployments are gaining popularity, using the traditional on-premises software deployment model may be better for specialised applications if they contain sensitive data, or require large data transfers, or the customer wants to control and customise. In this scenario, a perpetual licensing model will appeal to customers who view the software as a long-life asset which will outlive its depreciation schedule.

END NOTES

1.   The US National Institute of Standards & Technology (NIST) defines three cloud service models: Software-as-a-Service, Platform-as-a-Service and Infrastructure-as-a-Service. Descriptions of each can be found at:  http://csrc.nist.gov/publications/nistpubs/800-145/SP800-145.pdf

2.   On-premises hosting refers to an operating model in which the customer locates servers, operating systems and storage on its own premises, manages infrastructure performance itself, and stores data within its own local network

3.   Managed hosting refers to an operating model in which a service provider leases servers and associated hardware to a single customer, and manages the infrastructure on the customer's behalf. The equipment is located at the service provider's environment

4.   As defined by NIST

ABOUT THE AUTHOR

Bronwyn Ross trained as an IP / IT lawyer before gaining commercial experience in technology product portfolio management, and more recently working on buy-side issues in the IT procurement lifecycle. She assists clients with sourcing strategy, contract drafting and negotiation, implementing governance frameworks and designing organisational structure. She has experience negotiating SAP and Microsoft licence agreements for clients.

ABOUT HAMILTON SHAW CONSULTING

Hamilton Shaw Consulting is a Melbourne based consultancy founded by Managing Director Lisa Shaw in 2004. Focused on the ICT procurement lifecycle and technology related business change, the company has a reputation for delivering pragmatic analysis and solutions to meet its clients' business challenges.  Hamilton Shaw Consulting employs only senior consultants with more than 15 years' experience, able to turn knowledge into action and value for clients.

 
 
Public Sector Corner

Procurement at crossroads of change - panelists speak out at Virginia conference

 
Tim Cummins was one of four guest panelists sharing their views on procurement trends at the State of Virginia 26th Public Procurement Forum on Leveraging the Power of Procurement November 16-19 in Hampton, Virginia. A key theme in the conference was moving Procurement from an administrative function to a more strategic focus to deliver greater value and benefits to the state and its citizens. Find out what the panel said about how the procurement landscape is changing and why we need a more proactive change in our thinking. A video recording follows.
 
 

The panel inspired lively commentary from participants about challenges relating to procurement at the crossroads of a major shift. Studies show that 47 percent of today's procurement professionals will soon be considered redundant, according to recent research1.  To watch the discussion, click on Panel Discussion link. 

Guest panelists left to right: Kate Vitasek, Faculty and Lead Researcher, University of Tennessee; Chris Sawchuk, Principal and Global Procurement Advisory Practice Leader Hackett Group; Tim Cummins, CEO, IACCM; and Rick Grimm, CEO at NIGP. Jon Hansen, procurement expert, author and blog talk radio host, moderated the panel.

Panelists discussed how practitioners could maintain their relevancy in the coming years of certain change. Tim, who considered it to be a privilege to participate on the panel, shared IACCM's thoughts on transforming procurement to achieve better contracting outcomes.

Most impressive to Tim throughout the entire event was participants' often stated ambition to find ways to improve their professional effectiveness.  “We were delighted to see the many government procurement practitioners anxious to move to higher levels of procurement and deeper involvement with the business community.”

​Attendees included over 600 professionals in procurement and related functions.  More than 400 members from the vendor community also attended. 

END NOTE

1.  Procurement Insights, November 21.2014, Leveraging The Power of Procurement Panel Discussion Virginia Forum 2014, by Jon Hansen

 
 

'Go for gain - ditch pain' secret of successful claim management

 
Can professional claim management really make for better business relationships? The answer is an emphatic 'yes' - if claims can be resolved constructively for both parties. Effective claim management can be a powerful way to anticipate and avoid disputes that could otherwise lead to litigation - particularly when it secures or improves gross margin. Aiming for positive outcomes should always be the parties' 'default' option.
 
 

If contracting parties define claim management as “enforcing contractual rights in a professional manner while maintaining healthy relationships with stakeholders,” they can enable a positive approach of working in an environment of disagreement without going to court.

Your approach to any claim action is to avoid entering into a dispute resolution processes such as arbitration and litigation in the first place. Don't forget that litigation through jurisdictional courts is a formal procedure, involving judges who may or may not have the operational experience and technical expertise required.

Is your approach constructive or destructive?

Because claims actions tend to occur much more frequently in a project environment, whether your approach is constructive or destructive will depend highly on your project management team's level of knowledge and command of the this “claim method” – and their overall level of professionalism.  To build a claim in a professional manner you need to know the six key stages of the claim lifecycle. The second stage is critically important:

  1. Identifying a claim opportunity
  2. Internally preparing the claim (strategy and drafting, including definition of key topics to be addressed internally before deciding to submit a claim to another contracting party)
  3. Submitting the claim
  4. Internally preparing the claim negotiation
  5. Negotiating the claim
  6. Preparing the settlement agreement

Preparing a claim constructively enables parties to mitigate any sources of conflict in advance, and reinforce professionalism in project management.  This contributes to success of the project for both contracting parties in saving time and costs. Lessons from IACCM research clearly validate this (Refer to “The future of contracting” presentation published by IACCM in 2012).

Reassured by the team's demonstrated ability to manage contractual commitments effectively, customers also have greater confidence that projects will be delivered on time and in accordance with the quality expected.

What types of claims are covered?

Claims are defined as a “specific written request made by one of the contracting parties following a specific event arising during the execution of the contract.” They may arise from one (or more) of the following:

  • disagreements over contractual scope;
  • breach of contract such as delays and quality/performance issues;
  • suspension of a contractual obligation decided by the other contracting party;
  • whole or partial termination of a contract; or
  • a force majeure event.

The objective of a claim is generally to obtain from the other contracting party one (or more) of the following:

  • Compensation for additional costs incurred by submitting a claim for damages based on the “liability” legal concept.
  • Payment of a sum of money defined in the contract to compensate for prejudice/damage resulting from delay or non-performance (e.g. the performance ratio within photovoltaic markets) - a claim for liquidated damages.
  • Payment for additional works executed and/or additional equipment delivered at the customer's request but not considered subsequently to be a deviation from contractual scope - a claim for additional payment.
  • Time adjustment when an event - whether listed in the contract or not - leads to claiming a time extension. This will modify the contractual schedule and may result in a price adjustment.

Six questions you must ask when preparing a constructive claim

The internal stage in preparing a claim is critically important to ensure its legitimacy. The six questions are designed to make sure all the factual and contractual aspects of the claim are covered:

  1. What is the factual and contractual basis of the claim?

As a top priority, it is essential to answer the following questions:

  • What are the generating factors of the claim?
  • What are the damages incurred?
  • Is there a causal connection between the generating factors and the damages incurred?
  • What is the factual and contractual basis of the claim?
  • Which contractual provisions enable the claim to be legitimated or countered?
  • Is the claimant acting in good faith?
  • Does the Applicable Law defined in the contract enable the claim to be wholly or partially legitimated?
  • Who bears the burden of proof?
  1. What is the precise objective of the claim?

You need to define precisely the objective of the claim, which can be to obtain:

  • Payment of an invoice, liquidated damages (how much?), financial compensation (how much?) or a bonus (how much?)
  • Time extension (how long?)?

If a claim for damages occurs (i.e. to be compensated for additional costs incurred), it is strongly recommended to define a minimum and a maximum range as well as an acceptable compromise for both contracting parties.

  1. What are the strengths and the weaknesses of the claim?

A constructive approach to claim management requires being aware of the strengths and weaknesses of the claim with regard to its contractual and factual basis as well as its financial extent.

Regarding the strengths and weaknesses identified by the project team, anticipating the arguments of the other contracting party that will be certainly be raised during the negotiation will enable preparation of counter-arguments.

  1. Among the internal and external stakeholders involved in the claim, who are “my friends” and my “foes”, why and what are the consequences?
  2. What strategy will be implemented to achieve the set objectives?

To define a claim strategy you need to answer the following question:

  • What are my leverages? For instance (and based on an in-depth analysis of my contractual rights): can we threaten to stop the site activities, to suspend payment of invoices or go to court?
  • What are the risks related to this strategy? How can we eliminate these risks?
  • When is the right time to submit the claim?
  1. What are the risks related to the submission of the claim? Is there a risk of receiving a higher claim from the other contracting party?

In conclusion…

Prove it!  You must prove your credibility and professionalism in the eyes of your stakeholders. Professional claim management anticipates and manages any “bolts of lightning” surprises before and throughout execution of the contract.  If you understand and act on the above, you can help your organization mitigate any risks of litigation which can significantly jeopardize relationships with the other contracting party.

Invest in it!  However, gaining the added value of claim management is not cost free! Contract and claim managers need to be recruited or key project team members (e.g. project manager, purchaser...) given appropriate training so that they become perfectly familiar with the constructive claim method. Isn't that a worthwhile investment?

The good news?  We can share our best practices thanks to the IACCM network.

ABOUT THE AUTHOR

Guillaume Bernard is currently a Contract & Claim Manager in the Energy sector with particular experience in the execution of turnkey projects. He has a legal background with a strong contractual culture (Common Law and Civil Law), and has developed specific expertise in the setting-up of contract management functions within tender and execution organisations, as well as in the implementation of training programs in claim management.

 

 

 
 

How to minimize risk on specialty chemicals 'purchase-for-resale' operations

 
Can you adequately assess supplier risks without frequent on-site audits or visits? A DuPont team in Latin America piloted a virtual assessment approach with purchase-for-resale suppliers in the specialty chemicals industry sector. What they found raised a few potential opportunities you should consider.
 
 

The team reports back on the positive outcomes of the pilot – and finds its process for structured risk assessment and mitigation has opened the doors for fruitful discussions on what could be improved.

Challenges on managing risks of purchase-for-resale suppliers

A challenge for global chemical companies is managing risks within their contract manufacturing operations.  In the specialty chemicals sector, lack of readily available public information about the large number of relatively small companies is a major issue.  These companies often lack the workforce required to support frequent formal audits from their customers.  In the case of purchase-for-resale suppliers, it's not uncommon for suppliers to also be competitors.  This may lead to reservations in disclosing practices or even providing access to production sites, making it impossible to assess risks through on-site audits.

Yet the risks to a brand owner from purchase-for-resale suppliers are very similar to other types of contract manufacturing arrangements, such as toll manufacturing, where companies process raw materials or semi-finished goods for another company. 

Brand owners expect all suppliers to lead safe and reliable operations, protect the human rights of their employees and sub-contractors, protect the environment, and operate with high ethical standards. Purchase-for-resale suppliers often have their own brands to protect as well.  There's a lot on the line, particularly reputational risks related to product quality and when suppliers unfortunately fail to protect their workers or comply with applicable laws. Several factors conspire to make obtaining the assurance of compliance difficult.

So how do companies overcome these issues in the often “data light” environment that characterizes purchase-for-resale supply arrangements?

Choosing the right approach

Some people believe greater control on contracts' terms and conditions is the answer to reducing third-party risk, particularly when it comes to process safety. Others may think that in a highly competitive market, the more stringent the contractual arrangement, the less likely it is that suppliers will respond to what they may perceive as disproportionately tight controls. 

Contracts with lots of clauses and large numbers of indemnifications are the enemy of flexibility.  A brand owner may inadvertently be driving off a potentially good supplier if the situation is not approached from a well-informed position on the risk factors that are relevant in a supply arrangement. 

The answer begins with a simple standardized process to understand supplier risks, support risk acceptance decision-making and enable implementation of effective risk mitigation strategies. 

The purchase-for-resale risk analysis

The proposed methodology was developed based on ISO 31000:2009 risk management principles and guidelines, a robust framework that DuPont has applied in other areas of risk.  The process consists of the four steps as shown in Figure 1.

Figure 1 - Framework for risk assessment for purchase-for-resale operations

 

Establishing the context

As ISO 31000:2009 recommends, the external and internal parameters you need to consider when managing risk should be defined, as well as the scope and risk categories to be assessed. 

DuPont shares the following documents with suppliers to establish the right context.  See Dupont References below. 

  • DuPont Supplier Code of Conduct
  • DuPont Position Statements on Human Rights
  • DuPont Position Statement on Child and Forced Labor and Human Trafficking
  • Confidential Information Protection Requirements for DuPont Suppliers
  1. Collect supplier information

The purchase-for-resale suppliers receive a request for information form and several self-assessment questionnaires consistent with internal guidelines and standards as follows:

  • Process safety management
  • Business conduct, values and behaviors
  • Human rights
  • Quality and contamination prevention
  • Supply reliability
  • Financial health
  • Health, safety and environment
  • Confidentiality, intellectual property & asset protection
  1. Review supplier information and documents

Another set of inputs to the risk assessment process is supplied by the contract administrators: 

  • Safety data sheets
  • Contracts
  • Local registrations and other legal requirements
  • Non-compliance records
  • Customer complaints and incident investigations
  • Supplier performance metrics
  • Supplier financial health rating

All available data and information is thoroughly reviewed and clarified as needed.

  1. Analyze business risk

In this step, with all inputs gathered, an event-based risk assessment is conducted.  Applying the “what if” technique, additional potential risks or failure modes for each supplier are identified.  Then their severity and impact is assessed. 

  1. Define risk mitigation plan

The team proposes risk mitigation plans and estimates the costs versus benefits.  Business leaders make the final decisions on the levels of risk that the business can accept.  The appropriate responses to mitigate risk considering short and long-term implications are chartered with an implementation timeline and resourced.

  1. Track implementation

All the activity defined to mitigate risk is tracked to ensure timely and quality implementation.

Sometimes, the risk assessment reveals that the best course of action may be to terminate a relationship with a supplier.  The supply chain teams must be fully engaged in ensuring continuity of supply throughout the process.

Piloting the purchase-for-resale risk assessment

Because this was a new process requiring the suppliers to willingly participate, the implementation team tracked metrics on acceptance and completion rates as shown in Figure 2.

Description Result
% of suppliers contacted 80%
% of suppliers who responded 100%
Average response time < 2 months
% of suppliers who completed all assessments 67%


Figure 2 Suppliers' pilot acceptance metrics

 

The data exhibits a high acceptance rate, with 100% of suppliers in the pilot providing responses. The team determined that the response time could be reduced; however, the pilot started during peak season for the business selected. Not all suppliers' answers were complete, and the team discussed whether a supplier visit or audit would be appropriate in those cases.  Most times, however, clarifying telephone calls along with the request for additional documentation such as certifications, procedures or equipment calibration records satisfied the verification process.

 

Suppliers' openness in responding to the self-assessments was greatly appreciated.  Many were proactively seeking feedback afterwards.  The exchange of information has opened the doors for discussions on what could be improved.  DuPont is committed to collaborating with suppliers, carriers, distributors and customers to ensure the safety and health of employees and communities, protect the environment, respect human rights and operate with the highest standards of ethical behavior.

The team has started to include new suppliers in the process.  The average response time has dropped significantly to less than two weeks, and 100% completed all of the assessments.  As the products purchased are for resale, the marketing teams are also very motivated to collaborate and ensure the process is going smoothly.

After the successful pilot, the self- assessment questionnaires are being refined.  The team is also looking to streamline the process and minimize the number of follow-up contacts after the initial request is sent out.

Conclusion

The structured methodology presented in this article for analyzing purchase-for-resale supplier risk is based on proven methods, increasing confidence in our ability to appropriately manage this type of third-party operation. Interestingly, companies that offer supplier sustainability management services also utilize virtual methods for first level assessments, heavily relying on supplier inputs.  This provides an opportunity to learn more about their capabilities and operating philosophy. The overall process is simple, fast, cost effective, and promotes core values communication.

References

  • ISO 31000:2009 - Principles and guidelines on implementation; International Organization for Standardization.
  • Cummins, Tim; Managing Contract Risks, 2008.
  • O'Keeffe, Philip; Procurement Contract Risk, Protivity and APICS White Paper
  • EMEA 2008, Making Sense of Opportunity and Risk: The Journey to Contracting Excellence, London UK, 2008.
  • IACCM EMEA Conference – Headlights or Tail Lights, Managing Compliance Risk in the Supply Chain; October 16, 2003.

Dupont references

ABOUT THE AUTHORS

Manoela Morais, Contract Manufacturing Administrator for DuPont Crop Protection, Alphaville, Brazil, led the implementation of a Risk Management system for Finished Product Purchase-for-Resale in Latin America.  Prior to her current role, Manoela worked as a Process Engineer, where she acquired experience in Automation & Process Control, ISO 14001, Process Safety Management and Contamination Prevention.  She holds a degree in Chemical Engineering and a Masters of Business Administration.

 

Heloísa Batista, Program Consultant with the DuPont Contract Manufacturing Center of Excellence, Alphaville, Brazil, is a Food Engineer who came to DuPont as an established food safety expert.  She has more than 10 years of experience in Risk Management within the food industry, and a strong background in implementing management systems as a consultant and auditor. 

 

 

María Arraiza-Monteux, leader of the DuPont Contract Manufacturing Center of Excellence, Wilmington, Delaware, has held manufacturing and technical roles at several manufacturing plants in the United States, Puerto Rico and France, and has been improving supply chains in the specialty and industrial chemical sectors since 2000.  María holds a Bachelor of Science degree in Chemical Engineering, and she is fluent in Spanish, English and French. 

 

 

ABOUT DUPONT

DuPont (NYSE: DD) has been bringing world-class science and engineering to the global marketplace in the form of innovative products, materials, and services since 1802.  The company believes that by collaborating with customers, governments, NGOs, and thought leaders we can help find solutions to such global challenges as providing enough healthy food for people everywhere, decreasing dependence on fossil fuels, and protecting life and the environment.  For additional information about DuPont and its commitment to inclusive innovation, please visit www.dupont.com.

 

 
 

Top negotiation terms - a webinar back by popular demand!

 
IACCM's review of market trends in 2013 tells us executives are demanding a more collaborative or partnering approach to their supply relationships. 


 
 

Listen to a recorded webinar and slides link that reviews those trends and how they will affect negotiations throughout the coming years. 

It largely repeats our first recording in July, but many IACCM members who missed it requested that it be repeated.  So it's back because you asked for it!

 
 
 
 

2015 Editorial Board

 Disclaimer

This newsletter is intended to keep readers abreast of current developments in the field of contract and commercial management. It is not, however, to be used or relied on as a substitute for professional advice. Before acting on any matter in the areas, readers should discuss matters with their own professional advisers.

This site is provided by IACCM on an 'as is' basis. IACCM provides this web site as a service to those people seeking contracting and commercial news and information. IACCM assumes no responsibility for consequences resulting from the use of information on the site or information obtained through links. IACCM will not be liable for any damages of any kind arising out of use, reference to, or reliance on any information contained in the site. IACCM is not responsible for the accuracy or content information contained in the site or in the links provided on its site. Links to and from IACCM do not constitute an endorsement by IACCM of the parties or their products and services.

Copyright

The content in this publication is copyright. Excepted as permitted, no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner.

All content included on this site, such as text, graphics, logos, button icons, images, audio clips and software, is the property of IACCM, or its content suppliers or an identified third party and is protected by international copyright laws. The collection, arrangement and assembly of all content on this site are the exclusive property of IACCM and are also protected by international copyright laws. Any reproduction, modification, distribution, transmission, republication, display or performance, of the content on this site is strictly prohibited.

Use of this site

This site or any portion of this site may not be reproduced, duplicated, copied, sold, resold or otherwise exploited for any commercial purpose that is not expressly permitted by IACCM. Unauthorized attempts to upload information or change information are strictly prohibited and may be punishable under the Computer Fraud and Abuse Act of 1986.

Published by IACCM, 90 Grove Street, Ridgefield, CT 06877, USA www.iaccm.com

2013/2014 Editorial Board

Disclaimer

This newsletter is intended to keep readers abreast of current developments in the field of contract and commercial management. It is not, however, to be used or relied on as a substitute for professional advice. Before acting on any matter in the areas, readers should discuss matters with their own professional advisers.

This site is provided by IACCM on an 'as is' basis. IACCM provides this web site as a service to those people seeking contracting and commercial news and information. IACCM assumes no responsibility for consequences resulting from the use of information on the site or information obtained through links. IACCM will not be liable for any damages of any kind arising out of use, reference to, or reliance on any information contained in the site. IACCM is not responsible for the accuracy or content information contained in the site or in the links provided on its site. Links to and from IACCM do not constitute an endorsement by IACCM of the parties or their products and services.

Copyright

The content in this publication is copyright. Excepted as permitted, no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner.

All content included on this site, such as text, graphics, logos, button icons, images, audio clips and software, is the property of IACCM, or its content suppliers or an identified third party and is protected by international copyright laws. The collection, arrangement and assembly of all content on this site are the exclusive property of IACCM and are also protected by international copyright laws. Any reproduction, modification, distribution, transmission, republication, display or performance, of the content on this site is strictly prohibited.

Use of this site

This site or any portion of this site may not be reproduced, duplicated, copied, sold, resold or otherwise exploited for any commercial purpose that is not expressly permitted by IACCM. Unauthorized attempts to upload information or change information are strictly prohibited and may be punishable under the Computer Fraud and Abuse Act of 1986.

Published by IACCM, 90 Grove Street, Ridgefield, CT 06877, USA www.iaccm.com