As a next step, the vendor manager should meet individually with each vendor (if possible depending on the number of vendors; otherwise, select a vendor audit team to assist) to gain a deeper understanding about the vendor, its organization, products and services, history of the vendor-client relationship, contractual obligations, recent events, and to resolve any outstanding issues. This vendor checkup provides a clear view on which vendors are true partners with the firm and which vendors simply have arm’s length relationships for specified products or services.
Finally, the vendor manager should rapidly implement vendor performance management processes to manage the vendor relationships based on the self-reporting and audit cycles described in this chapter. This rapidly drives out underperforming vendors and ensures that fees paid to vendors are providing the company the maximum possible return.
Beginning New Vendor Relationships
Getting off to a positive start with new vendors is critical to the success of projects and to the overall productivity of the firm. The vendor manager should develop an on-boarding checklist and one-page information document for new vendors. This document includes information about invoicing, addresses, key personnel, and so on that will ensure that the vendor and organization are ready to work together smoothly. One process we have seen work well is a “readiness” check performed by the vendor manager one week before the vendor comes onsite. This checklist, which is signed off by all involved internal parties, ensures that the internal team is freed and ready to begin work with the vendor on the agreed-to start date, the dependent products and staff are ready to go, the work space is ready, the contract is signed and filed, and the vendor has reconfirmed the start date. If any of the items are not checked, the date is postponed. A process such as this ensures that no vendor shows up before the company is ready. This process saves critical downtime for both internal teams and vendor teams. It helps to keep vendor costs down—in the spirit of the partnership and, ideally, benefiting the company in the long term.
Vendor Contracts
A solid legal agreement should always form the foundation of any vendor relationship. While contract negotiations can be painful, contracts often out-
Purchasing, Procurement, Vendor, and Asset Management 393
live the tenure of the individuals negotiating the terms on either side. We have seen many contract negotiations fall short of the proper due diligence because the individuals involved had personal relationships or ample reason to trust one another. After these individuals have left their respective firms, their successors are left to interpret what may have been agreed on but not documented, producing contention and sometimes resulting in a termination of the agreement entirely. Therefore, it is in both companies’ best interests to clearly document their agreement for working together.
In every case, the contract should explicitly set forth the terms that govern the relationship and define each party’s responsibilities to the other in unambiguous detail. Further, the contracts for many vendor relationships, such as IT services or software, are most often turgid, impenetrable, and complex. For purchases of any material significance, we recommend engaging attorneys or company legal counsel with experience negotiating contractual terms for large purchases or long-term, complex agreements. These professionals have seen the outcomes from poorly negotiated contracts and know which contract terms are of material interest, and they can identify the sometimes hidden, but significant, clauses in a contract. Chapter 19 contains information on entering into contractual agreements, as well as obtaining legal counsel.
We have seen that the outcome of poor contract negotiations is often detrimental to the client company, who is generally the loser in interpreting ambiguities in the contract. In one case, a product vendor found enough room for interpretation to ensure that the new features in its product be considered a “new product” and required new product use licenses to be purchased by the end client. The new features to be added should have most likely been included in a typical upgrade to the product and, therefore, provided free to all clients paying maintenance fees.
Negotiating the best terms for a vendor contract requires understanding the potential organization requirements not only today, but also in the future. In two other examples, clients have made smart decisions on possible future business actions and protected their rights contractually. In the first case, we assisted a mid-size firm in the spinoff of a subsidiary unit. Fortunately, some forward-thinking negotiator had crafted terms that allowed the licenses for the application system used to run the business to be split between entities and reassigned in the case of such a transaction. This point was at variance to the standard contract from the application vendor and would have likely resulted in significant new license fees payable to the vendor had it not been contracted in advance.
In another case, a firm decided to outsource a portion of its operations to a third party. The vendor that supplied IT systems to the firm was also in the business of outsourcing. The vendor protested vigorously against a third party operating its system, arguing an invasion of its intellectual capital rights and asserting that its licenses could not be reassigned to third parties.
394
The Back Office: Efficient Firm Operations
Again, a prescient negotiator for the firm had included the irrevocable and perpetual right to assign the application license to any third-party vendor chosen as an outsourcing partner. Certainly, there was no consideration of outsourcing the technology department at the time of the contract signing, but the negotiation team made sure that all options were covered.
Several important contract terms for vendor services and products are described in the following list. Because of the broad number and types of vendors used by a typical professional services firm, the specific terms will vary from contract to contract; therefore, this list should be treated as merely a starter set for any vendor negotiation conversations:
• Insurance: In many cases, clients taking on significant business risk require the vendor to maintain malpractice insurance (often called errors and omissions [E&O] coverage). In any case, critical vendors should be required to provide proof of general and professional liability coverage.
Additionally, the firm may choose to be specifically named as an additional insured under the vendor policy.
• Completion sign-off: Acceptance of services or delivery of the services, particularly for large projects or implementations of critical products, is an important negotiating point. Typically, the vendor chooses the first possible logical point in a project or service implementation to require payment. The risk to the firm is that the product may not perform as promised or the services are not completed as agreed. To reduce the risk that the company will be obligated to pay regardless of performance, specific acceptance criteria should be constructed. For services, detail the specific deliverables required for satisfactory performance of the contract, the requirements for the deliverable, quality metrics for acceptance, and required delivery dates and milestones.
• Assignment rights: Product vendors generally prefer to restrict the assignment privileges of the customer. However, this practice is not in the customer ’s best interest. To allow for company reorganizations and potential merger and acquisition activity, the customer should include a provision to assign rights and transfer the contract in the event of ownership changes, reorganizations, and to subsidiaries and minority interest affiliates.
• Product license and maintenance fees: The best case in purchasing product licenses is to obtain a perpetual, fully paid-up license that requires no annual license or maintenance fee. However, many product companies charge maintenance fees and aren’t willing to support or provide upgrades unless an annual maintenance fee is paid. Set the future maintenance fees before the contract is signed; otherwise, the vendor will gain tremendous leverage during future fee negotiations. Maintenance
Purchasing, Procurement, Vendor, and Asset Management 395
fees should begin only when the product or service passes the accep-
tance criteria, not when actually delivered.
• Nonsolicitation clauses: It is in the interest of both the client and the vendor to specify that neither party may solicit to hire each other ’s employees or customers, both during the contract and for some period
(usually 24 months) after the termination of the contract. This is generally not an issue for professional services firms, which employ delivery staff who would not be likely to join a vendor supplying a service outside their expertise.
• Description of products or services: Ensure that the description of the product or service to be provided is unambiguous and complete. Often, disputes arise postsigning on what specific service or product was
agreed on. With product vendors, this is generally an easy exercise, but it can be particularly difficult to define for business consulting or other professional services vendors.
• Right to withhold payment: Ensure the right to withhold fees if vendor services are not properly delivered or product upgrades are not delivered as promised. The end customer or a clear and unambiguous deliverable or result should be the arbiter of what constitutes proper delivery.