Contracts are the lifeblood for any organization. Effective procurement agreements not only drive efficient business transactions, but strengthen the buyer-supplier relationship. Spelling out contract terms is even more important with changing business landscapes, a strong control environment and public commitments on ESG and DE&I.
Below are 7 key focus areas for negotiating a successful procurement contract:
- Pricing terms: Commodities volatility has cooled down for sometime now and it is helping the enterprise with additional growth capital. If you have cost models, reevaluate the global indices and link it to the appropriate input commodity to keep the price movement as per market scenario. In the case of the fixed price model, lay down the terms of revision. For instance, if Brent crude oil price fluctuates by 5% on either side, the price should be revised by 1%. The goal in either scenario should have the clauses for price movement to minimize the ambiguity.
- Risk mitigation plan: I’ve faced a situation where my supplies were impacted due to issues with a downtier supplier. To assess and de-bottleneck your supplies, you should ask your vendors about their sources and contingency plans to ensure uninterrupted supply in any adversity. The contract should have a clause on a periodic review of risk mitigation plans and information sharing. Wherever the risk is high, the supplier must hold additional inventory as contingency.
- KPI disclosure: A non-compliant supplier can cause more reputational damage to its associated brand. To keep things in check, call out the requirement of the periodic update on regulatory compliances and financial health. The ESG targets for suppliers, like carbon reduction and renewable energy usage, must be specified in the contract as per the organization’s commitment. Sooner or later, the onus of driving Scope 3 emission reductions will come under the purview of bigger brands. Similarly, based on your organization’s DE&I goals, set the expectation in terms of a diversity target for the supplier.
- Preferential treatment: Customers should have a holistic understanding of a supplier’s business in terms of key customers and revenue contribution. Negotiate for the preferential treatment clause and superior position as it can be a big savior in times of exigencies.
- Force majeure: When negotiating, add a clause for unforeseen events like natural disasters, pandemics and labor strikes, and how the contract terms will be impacted for both parties. This became a lifeline for many organizations, including India’s biggest multiplex chain Inox, during the COVID-19 pandemic as they could invoke force majeure and renegotiate the contract obligations.
- Innovation: Innovation is responsible for 85% of economic growth which is a biggest factor in organization’s growth. To scale up innovation, organizations are collaborating with suppliers for new product development. To avoid the conflict related to intellectual property rights, creative development and profit sharing, have details in the contract that foster innovation culture
- Data protection: Data privacy and security is vital in today's world. Any malicious activity can leak critical product information or bring the entire operation to a standstill. Clauses related to data protection, data retention, information sharing and use of open software must be clearly laid out to avoid a data breach.
A contract is a powerful document to ensure compliance, mitigate business risk and reduce the scope of ambiguity or conflict in procurement. With contract season right around the corner for next year’s cycle, a thorough review of clauses alongside a legal team will ensure long-term business resilience.
Praveen Kumar Soni is a procurement manager at Colgate-Palmolive.