The right way to do Vendor Management – part 3

Part 3 Contracting well.

This is part three of four of the Right Way to Do Vendor Management. In the first article, we overviewed vendor management as a system, with requirements about choosing the right vendor, contracting well, and measuring and monitoring vendors. In the second article, we overviewed vendor selection and choosing the right vendor. This article is about contracting well. Stay with us – it’s actually more interesting than you think.

The vendor contract is not your friend. It’s written as protection for the vendor to insulate the vendor if you don’t get the results you’re after, and it shifts risk for the vendor’s negligence or failure to provide services to you. The only thing it will be really clear about is how much you have to pay, when, and what happens if you don’t. Fiserv, FIS, Jack Henry & Associates, etc., have very good lawyers.

The guidelines list sixteen well thought out “considerations” (contract terms) that should be addressed in each vendor contract negotiation. In addition, the guidelines tell us that an understanding of a vendor contract should be part of the selection process. We could not agree more.

First, a note about negotiations and power. Negotiations are about effective use of power, a requirement to get a fair contract. Your power comes from your money: The vendor wants it. So, as long as your vendor feels it may not get your money (competitive pressure), you have power.

You have to know how to not give your power away. Putting off negotiation of contract terms until you’ve made a vendor selection (and probably told the vendor) is a monumental mistake because you just gave away your power before the deal is done. You’ve eliminated the need for the vendor to make any meaningful concessions because it’s going to get the money. The vendor might throw you a bone, but it will not make any serious contract changes. Why should it if the vendor knows the money is coming?

Second, a quick lesson about a rule of contract construction called the “parol evidence rule” This is not about evidence that’s recently out of jail (parole), but parol evidence: something stated or declared by word of mouth.

The rule says a written contract, meant to be the entire understanding of the parties, should only be interpreted by what is written in the contract and any promises made outside the contract (e.g., what the salesperson told you) is not admissible to determine what the contract means. In other words, if a promise is not in the contract, it does not exist. And vendor contracts have an “integration clause” that says the written contract is the complete statement, killing any chance promises made during the courtship process are meaningful in a court of law. We told you vendors have good lawyers.

Vendor contracts do not say what a vendor’s product or service will do, relying instead on phrases like “use commercially reasonable efforts.” “Use commercially reasonable efforts” means the vendor will try to deliver, and if the vendor tried (and failed), it still met its contractual requirement. If you don’t believe us, ask if you can promise to use commercially reasonable efforts to pay.

By taking the time to know what contract terms you want, such as performance terms, and making that part of a vendor selection process, you can use negotiation power to the fullest extent. We recommend developing a list of important contract terms that address the sweet sixteen considerations, grade vendor contracts based on how the vendor contract addresses those issues, and how willing the vendor is to meet you halfway on your requirements. (We go so far as to calculate a numerical score of a vendor’s contract to be used as a key consideration in vendor selection, and it works.)

The final part of contracting well is to build a way to measure results. Bring the vendor into the process to define the scorecard you’ll use to measure those results and ask the vendor to provide the data you’ll need to run the scorecard.

Finally, a note about “legal review.” Addressing key contract considerations is your responsibility, a separate obligation from legal review. The guidelines do not require a legal review for every contract. When you are considering a significant purchase or if the system is truly critical to your ability to deliver services, then a legal review would be appropriate. But not all legal reviews are equal.

From what we’ve seen, the usual review is done by a lawyer who doesn’t understand your business that well and, in technology contracts, how things really work. Legal reviews by good lawyers who are not industry or technology savvy result in comments about venue, choice of law, limits of liability, and, maybe, warranties. Important, sure, but the review often misses key legal/business terms, like limits on automatic renewal terms, defined deconversion costs, confirmation that systems will work together, performance requirements, and service level agreements requirements.

If you’re going to spend the money for a legal review, then spend it well and vet your lawyer, too.

(Our next article will focus on Part 4: monitoring vendor soundness and performance.)

Maple Street, Inc., is the provider of the Vendor Advantage System® and the only complete vendor relationship management system. Maple Street delivers lower expenses, improved vendor performance, and effective risk management, and provides an outsource service so you can focus on what you do best: exceeding your members’ expectations.

Contact Mike Crofts at (800) 513-6839.

Michael Crofts, President,

Maple Street, Inc.