Understanding Supplier Agreements
Supplier agreements are contracts entered into by businesses and suppliers who will provide goods to the business. The supplier can be a wholesaler, manufacturer or service provider. As such, supplier agreements can apply to any number of business relationships, such as companies who provide office supplies or importers who sell apparel. Most agreements these days contain similar language, because they have been well vetted and negotiated, which results in a standard template used by many parties.
Some of the most important contract terms are the price and payment terms, including the term of the agreement and the delivery schedule . Other factors include the location for delivery and whether open delivery is acceptable. Often, the contract will specify whether any fees will be deducted for late delivery and for how much.
Suppliers are sometimes required to obtain insurance and other forms of indemnification, including the time period for coverage after the delivery. For example, some supplier agreements impose a warranty to cover any defect in the product. Other contracts require the supplier to indemnify the business against any damages caused by the supplier.
Benefits of Supplier Agreement Management
The clear winners in the world of supplier agreements are the businesses that foster a culture of efficient supplier agreement management. Courserain researched the top recent statistics, and here’s what we found:
Operations and Performance
– Efficient contract management can mean a 23% increase in productivity.
– Contract and vendor management improves contract compliance by 22%.
Risk Reduction
- For every $1 invested in risk management, businesses enjoy a return of $3.87 in improved profitability.
- 40% to 70% of agreements are noncompliant with terms and conditions in the average company.
- A whopping 40% of contract value is lost to inefficient management.
Savings and Profitability
- Vendor information management boosts productivity and saves a company around $9 per vendor record.
- A 6% increased savings through contract management from previous years’ awards is common with effective programs.
- Increased contract value occurs for up to 10% of non-core businesses when using contract management.
- The use of an enterprise contract management system can save up to 20% in labor costs for contract professionals.
Opportunity and Growth
- 21% to 36% of sales are left on the table due to poor management of supplier contracts.
- 77% of CPO’s say contract management is essential for enabling business expansion.
- 20% of organization profits are stolen by vendors lacking contract visibility and controls.
- Better contract visibility can lead to a 10% increase in contract renewal rates.
CPOs place contract management as a top priority for improvement. This is linked not only to their delivery of greater cost savings but also process improvement and enterprise risk mitigation. When done correctly, supplier agreement management is the game changer necessary to ensure long-term success.
Challenges with Supplier Agreement Management
While technology is certainly a big factor in improving how companies manage supplier agreements, several common problems pervade business that are beyond the control of advanced business systems. Chief among them is the problem of communicating effectively on both sides of the supplier agreement. In many cases, supplier agreements can be copied and distributed quickly across departments and locations, leading to documents with outdated, inaccurate or conflicting information. It may be difficult to tell how old an agreement is if no one knows the date of the last revision, for example. Further, appropriate departments may not have ready access to supplier agreement records that are relevant to departmental operations, which can inhibit a rapid response to business needs.
Failure to meet compliance regulations poses another significant risk for many companies. The nature of supplier agreements makes them more likely to contradict the requirements of state and federal laws than agreements covering other types of transactions. An outdated record-keeping system can mean a supplier agreement with a product sold in only certain markets may still be in use, or that a contract that expired years before could still be visible and appear valid in supplier agreement management records. One of the most important benefit of having a streamlined process for supplier agreement management is maintaining real-time, accurate access to the entire past and current agreement history so that company policies and business interests can adapt swiftly when warranted.
Varying contract terms across departments, locations and business units can contribute to confusion, both internally and externally. Having contracts with different expiration dates or supplier agreements with different policies can create uncertainty about how to handle business relationships with common suppliers across the organization. Keeping contract terms and business policies coordinated across the company helps maintain supplier relationships and limit the strain that regulatory compliance and other responsibilities may put on business.
Streamlining Supplier Agreement Management
These best practices will be most effective if you take a first step and hold an initial contract negotiation. A negotiation allows you both to establish the terms of your relationship, define performance criteria and identify your tools for enforcement. Your general terms of service should govern the overall legal relationship and guide the content of each supplier agreement. The specifics of each agreement can then include the additional particulars that apply to that third party. Doing this will also simplify the process of adding suppliers as necessary, and help you avoid the time lost through negotiations each time you engage additional providers.
Once you have your supplier agreement in place, it’s critical that you automate your contract tracking process. It’s essential that terms are enforced and that you gain the maximum benefit from your suppliers. Automating your contract tracking process will ensure you meet deadlines without having to monitor each one individually. This can be as simple as a spreadsheet that records contract start and end dates. Alternately, an automated program that includes reminders when contracts are set to expire will inevitably make your life easier.
Finally, under the best practices outlined above, your supplier’s performance should be regularly reviewed against the stated contract terms. Are there better options? Are deadlines constantly missed? Is your supplier’s customer service acceptable? Regular audits of supplier agreements can answer these questions and allow you to react appropriately when problems do arise.
How to Use Technology for Supplier Agreement Management
Mastering Supplier Agreement Management: Best Practices for Success
In an increasingly data-rich and interconnected business ecosystem, the role of technology to facilitate and streamline supplier agreement management cannot be overstated. From contract lifecycle management (CLM) software to cutting-edge data analytics tools, technology can serve as a powerful ally to individual lawyers and sophisticated legal teams specializing in supplier agreement management.
The role of technology in supplier agreements advocacy can be broken down into several categories, including contract lifecycle management software, data analytics platforms, automated compliance checks and more. Companies with long-standing supplier relationships may already have a robust record of past negotiations that can provide valuable lessons for future contract negotiations. However, the increasing volume of new supplier agreements means that companies often struggle to keep up with document management, workflows and other demands that arise during contract negotiation. CLM software solutions are designed to help companies manage the entire lifecycle of a contract, automating mundane tasks such as contract creation and renewals. Companies that implement this type of software can gain greater control over their contract terms as well as extend the supplier satisfaction of their current legal service provider .
Data analytics tools, meanwhile, can be particularly helpful in exposing risky contract terms that might otherwise go unnoticed. With the assistance of third party data analytics, sophisticated legal teams can proactively identify any non-standard contract terms that may lead to dispute between businesses and their suppliers. By collecting and analyzing data about past supplier agreements, companies are also able to forecast the potential success of future negotiations.
Contract automation software can also be a valuable tool for ensuring compliance with regulatory requirements. Many industries are required to comply with a wealth of reporting requirements, even when working with a relatively small number of suppliers. By automating certain compliance processes, companies can save time and better plan for their future supplier agreement needs.
The key to mastering contract management and negotiation strategies is not always obvious at first glance. While some companies may imagine that they could simply consult with the proper attorneys and move forward with their supplier agreements, the reality is that the most successful operations are proactive in their contract management strategies and utilize available tools to avoid costly disputes.
Supplier Agreement Management Best Practices
Beyond negotiation and closing the deal, the hard work of supplier agreement management requires continued attention to detail and a collaborative spirit. Some best practices include:
- Always be open to communication. Vendors control much of their own supply chain; they can have significant power over pricing, availability, and specifications of the goods and services being provided. At the same time, good vendors are easy to deal with and interested in being a partner. Be the kind of customer that your vendor wants as a partner. If you are having problems with a supplier, reach out to them before things get worse. At the same time, if the vendor is not communicating and you are having issues, consider whether a notice provision in the agreement gives you the options to at least require communication on a regular basis.
- Maintain the strategic relationship. Remember that you and your vendor are cooperating, even though there may be a competitive aspect of the final product or service. Everyone wants their customer’s business. Stay open to the big picture and avoid getting bogged down in what you agreed to in a contract that might not be relevant anymore. What kind of forecasting do you share? Can you be transparent enough to most effectively manage changes? Your agreement management process may need to be modified as the relationship grows, but be proactive and work together, don’t wait until you have to live with the agreement as it stands.
- Reinforce quality. Many agreements contain provisions dealing with quality control, such as service level agreements, testing, and acceptance. Failure to insist upon best efforts in these areas will, over time, erode value. Make sure you notify your vendor or customer when there is an issue, no matter how small, and take the opportunity to remind them of their commitments. Conversely, give credit and recognition when things are done well or better than expected to reinforce class "A" behavior. This approach will yield better results.
- Review on a regular basis. Expectations change over time. Even the best written contract will have some provisions that may become unnecessary later or ones that need to be improved to reflect new market realities. There are also some provisions in some agreements that have a tendency to be ignored over time. Use the five "Whys" to get to the root cause of a problem (and be careful not to wrongly assign the root cause to the other side). In some cases, you may have to amend the agreement to be fair to both sides. In other cases, you may want to consider moving on to someone else to meet your needs.
- Evaluate the effect of third parties. Finally, remember that you and your vendor have been in a non-exclusive relationship. While any new customer that your vendor obtains is not negotiating with you, its new contractual obligations are certainly affecting your bottom line. Consider including change of control and assignment provisions that will allow you to exit the agreement if circumstances change. Many customers will be able to consider a purchase or sale of your vendor and negotiate particular provisions to the deal in exchange for concessions.
Supplier Agreement Management Case Studies
Consider the experience of a mid-sized technology company that sought to reduce risks and improve service levels for its cloud-based offerings. The company’s procurement department aggregated the spend for these services across its various business units and then analyzed contract terms, payment terms, pricing, termination provisions, and other elements to develop master service agreements that would apply to multiple business units. This collection of master service agreements was then leveraged in negotiating with virtually every vendor the company does business with, including all those providing cloud services. As a result, the company achieved the benefits of savings and standardization, while its business users were able to continue to negotiate the terms they wanted for their unique service needs.
Another tech company has continued to invest in the development of a trademarked portal that allows business units to access templates and other information on terminology in supplier agreements to educate and notify them on best practices, trends, and allowable language. This "Playbook" provides an initial level of review for the company’s legal team to educate based on the vendor’s position on a particular deal and what redlines should be allowed or avoided. Each deal with a vendor is standard, with negotiation handled by the individual business unit. But the portal is a means for the legal department to limit the kinds of pushback the company’s legal professionals may face during negotiations, and it saves the legal department time and money by limiting the number of deals the company’s attorneys have to review. And the portal is much more efficient than hiring expensive outside counsel to negotiate a deal for the company with every vendor. The gatekeeping and capacity issues that arise when using outside counsel are greatly reduced, including issues arising from the competing demands and priorities of the various business units.
Future of Supplier Agreement Management
The world of supplier agreement management is in the midst of a major transformation as businesses and their partners adapt to an ever-changing landscape of regulations, industry standards, and customer demands. The future of supplier agreement management has several key trends that are shaping the way companies will work with suppliers in the coming years.
One of the most pressing issues facing the business world is sustainable supply chain management. As climate change and environmental concerns continue to dominate global discourse, consumers, businesses, and governments are increasingly demanding more sustainable practices from suppliers and manufacturers. In the future, companies that do not demonstrate environmental and social responsibilities through their operations may be at a competitive disadvantage. Supplier agreement management solutions in the future are likely to address this issue by providing greater transparency into supply chains and enabling businesses to better monitor compliance with sustainability standards.
Supply chain transparency and supplier compliance have become ever more pressing in the wake of the COVID-19 pandemic. Businesses are increasingly seeking solutions that provide visibility into all aspects of their supply chain so they can proactively identify and manage risks. This is especially true for food, beverage, and agriculture companies that must comply with a whole host of state and federal regulations. In the future, supplier agreement management solutions will likely take the form of smarter, cloud-based global contract libraries where businesses can store, retrieve, and search for information on multiple suppliers and supply chain practices. These cloud-based solutions will enable greater collaboration and integration between buyers and suppliers and will allow businesses to better anticipate and respond to potential problems down the road.
In the coming years , AI will play an increasingly important role in supplier agreement management. AI-driven contract analytics will allow businesses to quickly analyze the terms of supplier agreements and evaluate compliance with corporate policies and industry requirements. AI will also help businesses to identify potential risks and opportunities in their supply chain while reducing the administrative burden of reviewing supplier agreements.
As new laws and regulations continue to be enacted, the importance of supplier agreement management will only continue to grow. We are already beginning to see this in the wake of the US passing new tariffs targeting China. In the future, supplier agreement management tools will need to offer the flexibility to adapt to new laws and regulations quickly and effectively. Businesses will need to know how to navigate complex legal landscapes in order to stay ahead of their competitors.
These emerging trends will require businesses to adopt smarter and more efficient supplier agreement management solutions. Businesses will need to align their supply chain management practices with their corporate strategy in order to thrive in an era of globalization and compliance.
The future of supplier agreement management will involve a greater focus on sustainability, supply chain transparency, and regulatory compliance. To stay ahead of the curve, businesses will need to utilize smarter and more efficient supplier agreement management solutions. The best way to future-proof supplier agreement management practices is to adopt more flexible and versatile supply chain management solutions that can adapt to the changing business landscape.