In last Friday’s first rant, I shared some thoughts and anecdotes about the role contracting can play in helping companies more quickly realize identified savings. In this rant, I’ll focus on some of the roles contracting can play in identifying additional savings and risk-reduction opportunities from a business perspective versus just a legal one. Perhaps the biggest mistake companies make with contracting is that they treat it as a process separate from supplier negotiations. In my view, the two should be intrinsically linked. Consider the following examples of how companies can apply contracting approaches in the context of the sourcing and negotiating process to improve results:
- By integrating price escalation and de-escalation clauses into the sourcing and contracting process, companies can tailor a category management strategy to optimize for savings potential or commodity price opportunity/upside/risk (or a balanced savings and commodity price risk strategy that falls somewhere between the two extremes).
- Organizations that are more advanced (from a sourcing perspective) can begin to explore how suppliers’ price and value contracts are based on individual underlying elements (e.g., lesser vs. greater indemnification clauses, liability limits, etc.)…
