Why the contract goes with the RFP

Dave HenshallStrategic SourcingLeave a Comment

Why the contract goes with the RFP

Why the contract goes with the RFP – It is surprising that with the progression from traditional tendering, to Strategic Sourcing and Category Management in many organizations that we still find the practice of issuing RFP’s without the buyers required terms and conditions widespread. This is because these organizations have introduced the tools but not embedded the skills.

The introduction of the buyers contract template at this point  is a significant component of moving from old world procurement to Strategic Sourcing because the contract is integral to supplier selection.

Pitfalls from excluding the contract from the RFP:

The most obvious is the signal it sends to potential suppliers:

“They don’t know what they want.”

Immediately, the Buyer is perceived as week, and the door is opened for the supplier to introduce their template, frequently unchallenged until after the supplier selection. In such cases, we have seen the contract still under negotiation and unsigned 12 months after work commenced.

The impact of such practice is to concede negotiating power to the Supplier. They will then ‘dig in’ for the long term to minimize the contractual risk for their organization at the expense of the Buyers.

Apart from the time and resources wasted and increased contractual risk, the Sourcing process is sub-optimized, and its duration extended, and contractual risk increased for the Buyers organization.

Excluding the contract from the supplier Selection process:

Leaving contract negotiation until after supplier selection removes the contract from the selection process. Meaning no competitive leverage is applied to the final contract terms. In such situations, the Buyer is at best misguided in trying to save time and at worse, putting their company at increased contractual risk.

When they come to negotiate terms based on the Suppliers contract, their negotiating position is weakened because they must now attempt to move the Supplier from their starting position rather than the other way around. All without any competitive leverage to apply.

Benefits from including the contract with the RFP:

The contract will state the Buyers requirements for quality, service, delivery, etc. It defines the risk acceptable to the Buyers organization and defines how the two parties will work together to deliver the desired outcomes. So the contract becomes an integral part of supplier selection, and also how the contract will be managed. A reflection of the suppliers ability to meet the buyers needs and work with your company may be in their willingness to work with your contract document.

If you are dealing with multiple Suppliers, using your template will facilitate similar terms to apply to all your suppliers and buyers will become more expert in negotiating their company’s terms.

Including the contract with the RFP makes contract negotiation part of the sourcing process, which promotes:

  1. The contract used in proposal evaluation.
  2. Incorporates standard contract language and practices, promoting risk identification and mitigation.
  3. Performance based-contracting with agreements including a requirement for ongoing cost reduction and performance improvement.
  4. Effective service level agreements.
  5. Fewer resources needed to reach better decisions.
  6. Reduces overall cycle time.

Leaving this task until the end does not work to anyone’s advantage and will prolong the contracting process.

Summary:

The Buyers contract, properly drafted, is the best way to a successful contract because it starts from the baseline of your company’s business needs.

Suppliers will not do the Buyer any favors because you awarded them the work and started contract negotiations afterward. They will simply exploit the situation.

The Buyers contract template, therefore, is a significant negotiation management tool for procurement professionals dealing with multiple suppliers over time.

In conjunction with ‘Buyer beware’ should be ‘Buyer be bold’ and be first to the table!

Nuff said …

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