You will find a range of articles related to this in the International Journal of Logistics Research & Applications (www.tandfonline.com/toc/cjol20/current). Though some of the papers are dated, many of the examples remain valid.
You may find this article useful www.nl.dsv.com/en-gb/expert-insights/logistic-contract-management-pitfalls.
The following quote reflects the message we typically hear from the industry:
"Going forward, the industry as a whole needs to change the way contracts are perceived. Instead of the blood sport it has become, we need to move toward collaborative, results-oriented negotiations. Contracts need to be about creating value between partners rather than extracting value from one partner. They need to be based on outcomes and desired results and shared risks―and both parties need to share risk in a way that is proportional to the commercial benefit of the agreement. If we can get to a more collaborative environment, we will have healthier, more long-term contracts that breed innovation and create long-term value. That will improve the industry as a whole.'
COVID-19 clearly proved highly disruptive to the logistics sector and often resulted in new levels of communication and flexibility in buyer/supplier relationships - and sometimes even between suppliers. We have yet to see whether any of these more collaborative practices survive, but this seems to be a sector where the buyer could set a different tone, perhaps orchestrating increased focus on outcomes and developing a more 'integrated ecosystem' approach to its sourcing and contracting model.
I'll be happy to speak with you on this, but at a simple level we recommend dividing terns between those that are 'passive' (no direct impact on process - an example is indemnities) and 'active' (direct impact on process).
When a passive clause changes, the economic benefit will typically be through a trade-off - eg a compensatory discount for reduced risk. An active clause change is likely to have a direct impact - eg on resources required, time to cash etc.
• World Wide Technology
Thank you for your response. I am not sure I understand your reply. I will try to be more specific about what I am looking for. Our legal has developed a set of 33 contract requirements they would like to see in our contracts (we mostly use the supplier's paper). For each of the 33 requirements, legal has provided an ideal position, as well as fallback 1 and 2 positions.
Working with our legal, we developed a spreadsheet with points for a contract from 0 to 100. Each requirement is assigned a point value percentage, which represents its percentage of the overall contract score. Percentages of that overall point value are assigned to each position (Ideal, Fallback 1, and Fallback 2. Using this spreadsheet, we are able to come up with an overall contract score for each contract, showing how well a contract conforms to what legal requires.
By scoring each contract prior to negotiation, and after negotiation, we are able to show which contract requirements were improved by negotiation and the increase in the overall contract score. For example, we can show a stakeholder that over negotiations improved the contract score from 60 to 70.
What I am struggling with is how to show the stakeholder what that improvement represents to him or the organization in actual dollar value. I know there is a soft benefit to, say, for example, improving our indemnification language to include all third party IP infringement, not just U.S patent infringement, but how do I translate that improvement to a dollar value? Thanks in advance for your help.
Thanks for clarifying!
So based on your description, the score you have created is essentially a risk score - which in itself is valuable (and if you are not already doing so, you may want to think about ways to consolidate the results so that you can identify scores by segments, such as different categories, different parts of the business etc. This is great for management reporting, to show how risk levels may vary).
Unfortunately, 'risk' does not in general translate to a $ value, unless you can show that you managed to gain a trade off. For example, maybe you conceded a level 2 position on third party indemnity (because actually you decided the risk here was low), but in return the supplier conceded an improved service level or an extension of payment terms (both of which would have a $ value).
My original point was that many of the traditional legal terms don't directly translate to a monetary gain - they are more focused on avoiding loss or obtaining compensation for failure. But the business terms will represent financial costs or benefits - for example, speed of delivery, service level performance, the right to adjust volumes or usage. Your negotiators should be looking at opportunities to off-set agreement in one area with beneficial terms from the supplier in another.
I guess your challenge here may be that the 33 terms agreed with Legal are not in fact those which represent real economic value - but in that case, maybe you need two indices, one for risk level and the other for economic benefits. Your negotiators should be equipped to understand the right balance in any given situation - how real is the risk versus the opportunity for a gain.
I hope this makes sense, but if not, let's arrange to speak.
• JHensley Consulting
I agree with everything Tim wrote.
Re: two indices ("I guess your challenge here may be that the 33 terms agreed with Legal are not in fact those which represent real economic value - but in that case, maybe you need two indices, one for risk level and the other for economic benefits. Your negotiators should be equipped to understand the right balance in any given situation - how real is the risk versus the opportunity for a gain.")
As Tim said, a risk score for revised terms does not necessarily translate into economic value - so much of this math would be "informed speculation" so to speak. As you mentioned, "there is a soft benefit to, say improving our indemnification language to include all third party IP infringement, not just U.S patent infringement."
Since each situation is unique, the economic value would be a sliding scale based on the size of the contract. For buy-side sourcing and procurement, your monetary scale would need to be informed by an estimated value of the "typical" procurement order anticipated with the vendor. You may want to include a third index that provides you with anticipated volume. (Again, all of this is educated guesswork without knowing more about your business.)
Say the terms initially were at 100 in terms of risk, but then were reduced through negotiation to 50 based on your scale. Here's the fuzzy math part: we assign this particular clause a value of $10,000 per order if risk is at 100 (full risk = full expense to your company). The anticipated volume of orders impacted by this clause is 20 per year.
So the amount of monetary risk reduced (with guesswork disclaimers above) = (50/100) * 10,000 * 20 per year = $100k annually.
Is that what you're driving toward?
Personally, I'd recommend embracing the risk scoring as the key metric without adding in the monetary value (unless it's a tangible asset with value you can trace). With the subjectivity involved, adding in more assumptions to extrapolate out to "hard numbers" could potentially confuse leadership if they aren't aware of the guesswork behind them. If they can better understand the risk rating, then they will be able to see trends for the legal team - and negotiators - who are adept at lowering their risk without needing a dollar amount. Dollar amounts using the formula above could be gamed or skewed more easily than looking at the average risk score reduction achieved by a negotiator.
Finally, there are also CLM systems that will automate all of the above for you and your end users if you're looking to move out of Excel. You may be using one already that could have these indices added into it and do the calculations for you.
Furthermore, depending on the tool used, you can leverage AI to read third-party paper, compare it to your legal baseline for the 33 terms, and have it assign a risk rating automatically to be reviewed/confirmed by legal. That would require training the AI for your use case, which is often only accessible/affordable for large enterprise implementations.
Please let me know if this was helpful or if I'm off-base! Happy to discuss further.
Hi Steve, thank you for your question. Pricing trends for major equipment are not something we specialize in unfortunately and in the current circumstances, the answer would, I believe, vary enormously depending on the nature, type, and location of the acquisition.
• GMR Energy LImited
Believe there is no ready made global data base as of now. Each countries Govt. publishes data on whole sale price index/producer price index/purchasers price index( nomenclature varies) on each and every category of product including machinery, equipment etc. year on year and month on month. These data is generally publicly available and can be accessed and down loaded.
For example - there is Bureau of Labour Statistics in USA which pubishes all such data for the products manufactured in USA. In India its published in a bulletin every month by the central bank i.e Reserve Bank of India
Thank you for your comment and yes there is signficant research and resounding evidence to confirm that visuals can support clarity and understanding in contracts - no matter which element of the contract. And yes we would deem it perfectly acceptable to have graphics in certain sections - not all. There are some elements of the contract that lend themselves to visualization more than others. There is a lot of material in our Resource Library on this topic and this particular piece of research should help you too:
God day Sedef - well, again, I hate to see a good question like this sitting there all along unanswered, so here goes my contribution.
Firstly, if you get to create your own KPI's, I think that this is an awesome opportunity for you. It's a great opportunity for you to pick some criteria on which to have your performance judged by.
I think it's an opportunity though for you to think about whether or not you want these KPI's to relate to your performance alone, or contribute to or align directly with organisational performance. This could be a factor of where you feel you are as a team with procurement maturity, as well as your ability to influence the organisation's plans. Let me explain by way of example.
Four years ago, for our team, it was all about how quickly we could turn around tenders, time to contract, and the number of complaints (which thankfully were none) about the conduct of our tenders. So for us then, the KPI's were team focussed and didn't really track well into organisational plans.
Fast forward to the present day, the team has pushed back into the business to be engaging with them at a much earlier stage. The KPI's we are moving to are around developing category plans with the business and presenting them to the senior leadership team, monitoring and reporting on the significant contracts in their portfolio and working with the teams on meaningful social procurement outcomes that are relevant to their categories. As you can see, these are less about the team, and track really well into where we want to be as an organisation.
Oh, and like all KPI's, it perhaps goes without saying, but make sure that they're SMART (Specific, Measurable, Attainable, Relevant, and Time-Bound) or SMARTER (adding Explainable and Relative to the mix).
So Sedef, my advice would be to jump the opportunity to set your KPI's, and make them relevant to where you are and where you want to be. I think you are the best person to work that out, rather than me just telling you what you need based upon your one paragraph question.
Have fun with making them - and it would be great learning for others within the forum for you to tell everyone what you ended up with !
• Ngamuru Advisory
Following on from Darren's excellent points, I wanted to find out how you went? Did you find the missing one? I started my Performance Based Contracting (PBC) journey in 2004 designing, implementing and managing performance measures (not just KPIs!). Over this time I have seen many, many performance measure that can be used depending on what you are trying to achieve. Indeed, over the years we have actually formed the opinion that there are more than simply KPIs, since most humans can only handle 3 - 5. Therefore, having dashboards of 20 it too much information. So while there are a number of websites that can give you a variety of performance measures, can I suggest you have a look at why you want to measure; what is the outcome you are trying to achieve? Is it the standard project ones (scope, schedule and cost), or are there other things such as the health of the relationship, the culture of safety, etc. And if you think you can't measure the last ones, you can! Just takes a bit more work to set-up. So best to work that out first.
To help, as an IACCM Fellow I write on blog where I write about this (www.performancebasedcontracting.com), which sometimes become articles for IACCM (part of the role of an IACCM Fellow). Therefore, I'd suggest you have a look here and see if this helps. There is probably a lot of content (all free!), but hopefully it helps.
Anyway, I hope this helps you on your journey. And don't be afraid to ask for help!
Interesting question. I commend you on your efforts to assess CCM performance. As you say, to take your analysis further forward, you need to be able to compare against some form of industry or sector-wide benchmark. Within the IACCM, we have a deep set of benchmark data - collected over many years across multiple sectors. There are two major sources: 1) the IACCM Capability Maturity Assessment (which looks at organizational efficiency with objective insights into today's performance, comparisons to the outside world and a realistic assessment of the business impact); and 2) the Skills and Competency Assessment (which considers unique benchmarks that support organizational development.) IACCM offers a confidential and objective analysis of current performance and compares your results against industry norms and world-class standards.
Key to making use of these benchmarks is the consistent application of a robust question set. This is what allows the application of an apples-to-apples comparison. I'm not saying that you would need to repeat the survey you have conducted, but I think you may find that some repeat work is necessary though.
Please message me at firstname.lastname@example.org if you are interested in progressing this further. Paul
• PRS for Music
Thank you for responding and yes I would like to talk to you to understand what the IACCM can offer.