As I’ve continued with my research on the future faces of procurement, a consistent theme that has come up again and again is the need for increased interaction between the legal and procurement groups in organizations. Today, this interaction is often poorly handled, with clumsy templates being exchanged between the two groups, and in some cases, contracts not being used at all to cover major deals with suppliers, exposing the organization to the potential for major risk should issues come up in the supply chain. A typical example we found was at a large financial services institution:
The difficulty we had was that we had trouble attracting lawyers into a non-legal function (procurement). We had a procurement team, a contracts team, and legal people – and it wasn’t very efficient. And the lawyers weren’t interested in becoming procurement people. So we began to work with the deputy general counsel, and said we have a problem. Legal has given us 9 templates to use, a list of rules, and told us to go ahead. But the templates were continually being rejected by suppliers, and at one point we had 75% of deals on supplier paper! This created more risk for the bank.
This “clunkiness” in exchanging templates is a common issue, that comes up a lot in the oil and gas industry also. A typical legal clause that comes up is “Most Favored Customer” – which essentially dictates that the supplier must treat the contracted customer as their “best customer” (whatever that means) and give them preference in terms of allocation, attention in the case of problems that arise, etc. However, the very fact that the customer is forcing the supplier to sign such a contract, is in fact, probably rendering them as their “Least Favored Customer!” Not to mention the extra cost the supplier will factor into the deal during negotiations by leveraging what is essentially a non-enforceable requirement!
In my supply chain relationships class, we spend a lot of time discussing the pros and cons of contracting practices. One of the key elements we emphasize is what Tim Cummins from IACCM calls “relational contracting”. The idea behind this is that organizations need to use contracts as a mechanism for managing risk in the relationship, and to explore “what is possible?”, “what will we measure and review?”, “how often will we review these measures and identify gaps?” and “how will we communicate and resolve gaps once they are identified?” Because rest assured, issues will most certainly come up during the life of a contract!
Companies have developed some innovative ways to manage legal contracts. Some of these are noted below:
We are moving to becoming a triage service for legal. When the deal comes in, we give suppliers the contract document as a starting point, as well as risk triggers that we see associated with the deal. Procurement will always defer to the easiest clause, however – so we have to ensure that we know when to trigger a referral to legal, and establish the landscape early in the deal discussion. (Financial Services)
In every country we enter, we are asked to source locally in return for access to their natural resource. It is a fair return. But we have evolved to building out a more streamlined contracting process for global sourcing. We have an internal legal team that develops the templates, but they are not embedded in the groups and not with us in a negotiation. However, we are able to provide the supplier’s feedback on the contract to them and elicit their input. To further streamline this, we have developed alternative wording options for the different clauses that are pre-approved. We also have legal experts (who are not legal people) who can understand when and how to use this wording and are involved on the negotiation teams. They are also able to go back to legal and get direct access if there are questions. (Energy)
We are likely to see a much stronger marriage between legal and procurement in the future. In the NC State Poole College of Management MBA, we have defined a new JD/Supply Chain Management MBA joint degree, and I have several of these students in my MBA relationships class this semester. The program of study is flexible and individualized to provide each student with the best feasible combination of these two disciplines. We are already seeing a big demand for individuals with this competency, as several large oil and gas as well as financial services companies have expressed interest in these graduates. They are poised to be the new face of procurement in the near future!