Our experience has been that businesses are great at understanding where they have been but not always good at considering the future. Now, this doesn’t mean that you have to be a fortune teller but instead, readjust your gaze and ask “what if the past is not an indicator of the future?”
The other day, a company mentioned that their major supply contract for services was strangling them and they felt paralyzed to change it. When they explained what had happened, you didn’t need to be rocket scientist to see that the rush to bundle up the businesses activities and outsource it had left them vulnerable.
So that others don’t fall into the same trap, here are a couple of items to consider before signing off on large, multiple years service agreements:
1) Price rise & fall calculations
Often businesses only include price escalation calculations in their contracts, they forget that prices do go down and they should also be able to adjust the price when the market corrects.
2) KPI’s that are not aligned to value
Some KPI’s, specifically in large services contracts, can be achieved but the contract is a commercial failure. Be sure to align the KPI’s with the value that the contract is expected to generate for the business and not some nominal data.
3) Termination for Convenience
Many companies like having a Termination for Convenience clause in their contract as this gives them the ability to cancel the contract when the market changes. This can work well in some case but it can often come at a significant cost as suppliers will build the risk of this clause being invoked into their costs. Instead, consider a number of scenarios with suppliers to better manage the risk if the market changes.
