Hi Brian. Liability, indemnity etc are common terms which reflect the inherent deal risk or at least the desire for risk allocation. However, the rubber hits the road when you look at the Statement of Work (SOW) and Service Level Agreements (SLAs). The SOW is where the buyer/supplier either is fully informed about the requirements, roles/ accountabilities, and risks, hence, whether they have to factor in a contingency for risk (which is defined in ISO31000 at 'the effect of uncertainty on outcomes'). The more uncertainty then the more risk and the more contingency the supplier will typically build into the price. Then the SLAs typically attract 10-15% of contract value'service credits' for non-performance (the intent is to reflect the value of the margin). Depending upon how tough or unrealistic these are negotiated will also impact how much contingency the supplier will try to add in to the price. Trust this helps you Brian
Public Works Advisory, NSW Department...
It depends on the intent for which data will be used.
CPI measures inflation as experienced by consumers in their day-to-day living expenses whereas ECI indicates whether employment cost changes are rising or falling
If the 'change in labor rate' data is used for, to adjust compensation so that purchasing power is maintained, then the CPI would be a good source. However, if data will used to compare salaries so that it remain competitive within the labor market, then the ECI could be used.
BlueCross BlueShield of South Carolina
It is a good topic to talk about. I struggle with what metrics to report on. It only takes one bad contract to cost the organization lots of money but it is hard for people to grasp it. How do you report on that? Currently, I report on the number of contracts the organization has and the amount of money expected to spend under a contract. Cost savings and cost avoidance is reported by my department through our category managers. I believe the category managers take the first offer from a vendor and then subtract the final number after negotiations to calculate cost avoidance. Cost savings is calculated if the organization will contractually pay less under this contract than it historically has for that same commodity. These definitions were agreed to by both our CFO and our Director.
• Century 21 Vanguard
Patrick, are you familiar with IACCM's "10 Pitfalls" research? This study looks at the top value erosion areas. Flip the erosion perspective and you'll quickly find key areas where by improving your capabilities you will improve ROI. Please reach out to me if you wish to discuss this in detail.
• BlueCross BlueShield of South Carolina
Thank you for the excellent recommendation. I've reviewed the research in the "10 Pitfalls" and it has provided me with concepts that I will research further internally.
Patrick, in addition to this first part of the "ROI of Contract Management", I'd also recommend to continue reading Tim's part two of that blog: blog.iaccm.com/commitment-matters-tim-cummins-blog/the-roi-of-contract-management-part-2 You may have already read how the article describes how the Contract Management role has evolved. Now, in this new section, you will have the chance to identify the benefits that can be achieved when creating and demonstrating value from such a role.
I think you are confusing two points here, one is transparency in cost base as a fundamental basis to developing the trading relationship, understanding cost drivers and risks (and hence contigencies) for both parties, and one is the commercial basis of pricing.
By agreeing a baseline through open book (as means of auditing that baseline and hence adjustmets from it) you can then start to bring in incentivisation for better performance, for cost improvements etc through gainshare provisions.
Supplier X may have a target margin of Y%, and the pricing may be firm, but there is no reason why the parties cannot agree open book with a stated target margin for the supplier, and have a gainshare provision that rewards and therefore shares any upside.
Conversely, if a Supplier has a genuine issue and can demonstrate an emerging situation through open book, it should produce a more collaborative engagement to address the matter sooner rather than later.
Open Book does not mean "If you get any more above your target margin I want it all" - question the basis of the trading relationship if it is!
Human resources may be considered as a liability from the accounting/financial reporting point of view because of the overhead costs associated with its upkeep and maintenance. However in my opinion and from an overall business point of view - the skills, capabilities, experience and IP of the company's human resources can be considered an asset. No company can run efficiently and generate revenue without a competent pool of staff.
• Century 21 Vanguard
Perhaps you can elaborate on your post. Are you talking specifically about contract management and its value?
• Management Web
Thanks Katherine Kawamoto for your kind help,
The topic is elaborating for better understanding.
We know goodwill is considered as an asset but we can't calculate the exact value of it. We consider it as an asset because goodwill enhances the profitability of the organization.
We also consider preliminary expense as an asset for the contribution to gain profit.
At the same way skilled manpower also helps the organization to gain profitability. And it is the most valuable and productive factor for the organization. So why human resources or skilled manpower aren't consider as an asset to calculate the total assets in the balance sheet?
You don't own your human resources. So you cannot present them on your balance sheet as an asset because your employees can quit any time they like. You can argue that it is different if you have labor contracts that bind people to your company for a certain period of time (football clubs do it), but if an employee wants to leave you should write off a lot of the value (motivation to deliver results will be gone) and it will not be easy to find a metric for that :-)
You are right in linking HR to goodwill. In practice, goodwill can hinge on one person (think: Steve Jobs). But then again, if you are a company whose goodwill is linked to one person, then you have a problem to fix.
You might consider questions that allow you to determine whether the scope of how you might utilize the contractor/supplier is consistent with how the referring organization has utilized the contractor/supplier. Unless your firm and the referring organization have that common ground, the relevance of the subsequent questions might be sub-optimized.
Also, please consider the option of finding references without the assistance of the contractor/supplier. In many instances, the feedback which you receive might be skewed or biased in the favor of the contractor/supplier.
If you are in the US, definitely check vendors against various federal lists (such as Denied Parties List) which can be found at the U.S. Commerce Dept.'s Bureau of Industry and Security (Lists of Parties of Concern).
And, you will want to know if the vendor has been terminated by a client and if so why.
One question you might consider asking: What problems did you run into while VendorX provided the services/products and how did VendorX resolve them?
This should help determine how they will behave AFTER the "sale".
What is the nature of the business your firm conducts? The types of reference information will vary based on your industry and possibly the type of services you are obtaining from vendors. For example, a financial firm might ask more questions about compliance with certain laws related to finance. If your firm has a global ethics policy, you might be required to get your clients to comply with certain standards. A US business would want to know about a vendor's FCPA violations. And so forth. I would suggest sitting down to map our the various standards
Your first example strikes me as a saving, and if budget has been set for activities that are then postponed then assuming it isn't diverted elsewhere or money spent to bredge any delta - i could also see that being classed as a saving.
Key for me is tracking the money back to the budget and getting validation from the FD CFO etc.
What has happened to the requirement(s):
If you no longer have the need for the service/product you were intending to purchase then in my view it isn't a saving: you have simply avoided wasted expenditure.
If you require an alternative product/service, or are extending existing contracts then you could consider the delta between the new contracts/purchases and the extended/current contracts as a saving: this would apply to either cancellations or postponements.