Purposes of contracting

Why contracts are made?

Targets for the module:

1- Understanding the purchasing department role in contracting and contract management (who is
creating the contracts, how to manage those, what are the different points)
2- Contract types (assignment 4) and their area of application.
3- Learn about contract management (documentation of the contracts)
4- Contracting and negotiation: how do we should prepare our self for those and what should be kept in
mind during the discussion

COONTRACTS

why?

1- How customer needs

2- How Project leader see the need
3- How salesman are selling
4- How documented
5- How the price is structured for the customer
6- What customer really meant

Basic idea: there are different factors that we see totally different, every department see it with a different
point of view, even the customer has different views of their own needs.

That’s why we are making contracts, to avoid this different views and aspects.

Expectations vs. customer experience

Axis y: performance

Axis x: process divided in:

- purchasing phase (planning phase of the contract: why we are planning the contract and what should
be kept in this contract)
- Contract management phase

Expectations are very high at the beginning of the contract (high performance & high added value in the
future). However when the supplier makes the quotation usually it is unfortunately below our expected service
level. The suppliers saw the need differently and thought that this level is enough.

When we make a contract we usually expect that the value goes up and in the reality the quotation was made
and the access service level is even lower because quotation exaggerates.

After the contract has been made and the service level (even if it is lower than the quotation level) it goes
smoothly when the selling organization is interested about the contract but after sales personnel finds out that
the service level cannot be kept and the contract is implemented the way that they want they forget the
contract and the rest of the organization try to keep up the service level and unfortunately but usally the
service level is derceasing.
And this gap is usually quite high: expected value is increasing but actual level goes down = disappointment to
customer.

Find the right balance.

Benefits of contracting

- Reduce disappointment
- Increase benefits for both parties
- Minimize the risk of delays, arguments, quality issues
- Integrity to both parties

What’s all about

Contracts are tools to ensure that the decisions and agreements that we made with the suppliers al legaly valid
and binding. So, we make fix agreements. This is management of risks, because we try to avoid the differences
between quality wise Delivery time wise.

If the purchasing department has a good knowhow of contracting and the legal part of contracting it may have
quite an impact on the organization’s results.

The link of issues of the contract they are usually handle by the legislation department specially in the bigger
organizations. Purchasing departments responsibility is to follow up th contracts as well as managemtnt and
gather the contracting progress in anycase.

If we see that we don’t need a official contract with the suppliers, wee can use purchase orders. They are also
legally valid between the suppliers and purchasing dpt.7

If we see that we don’t need an official document with a long term plan we just make a purchase order. But if it
is more complex, more specifications and restriction needed, then should be made a contract.

We have to see the level of the cooperation if we need a contract or if the purchase order is enough.

Outsourcing contract it is a business plan for both sides of the parties. How to gain profit from both parties.

Also incentives and sactions, should be discuss so all the parties can understand the conditions of the
negotiation.

First Task 3: write down own thoughts what differences you see in the contracts in different industries?

- Are contracts used at all?

- What contract types?
- Length of contracts
5.3 CONTRACT MANAGEMENT & NEGOTIATIONS
Contract management

• Documentation management

• Performance management

Contract life cycle

1.Contract drafts / templates: start making some drafts from the contracts and planning the structures

2. Negotiations: begin to do the structure more precise, talk to the supplier about the content of the contract.

3. Agreement & signing: mutual understanding about the structure and the content, sign the contract.

4. Informing: both parties inform to their organization what is agreed, how is the work doing and what are we
expected to have with this contract.

5. Archiving, Implementation, Follow up: execution phase where contract is used in practice and you see how
itworks and follow up. If all of the stages of the contract are followed by suppliers and by your organization.

6. Management, Reporting, Analysing, Alarms/actions: if there are any problems, any alarms, how do we
behave with those, do we have to act or the supplier should act.

Management of the contracts is about: who is following the contracts? How are they documented and so on.

7. Termination or renewal: we have a contract for a certain term, decision if it is profitable to continue or not
and renew the time frame for the contract.
About contracting of projects (3 different stages):

- Pre-contractual stage: basic designed engineering, where the company is designing or agreeing on the
specifications
- Contractual stage: when the contract is closed, agreed, signed and then executed. In the execution
phase we are seeing wether it works, test the contract and the cooperation and the delivery of the
service.
- Post-contractual stage: what belongs to the claims, what went wrong and how could we handle it and
correct it.

Still, there are different point of views about contract life cycle, in specific in the “borders” detween the
stages.

CONTRACT MANAGEMENT CHALLENGES

Where are contract documents? Do we have a system that that keep up the list of the contracts? Or they are
still in paper?

Invoiced prices varies from what is agreed in the contract! – Do we even notice that?

How this contract can be updated?

Is the contract valid today?

Wasn’t that task on suppliers’ responsibility?

Do we already have a contract with this supplier?

Who is in charge about the contract?

Do we follow our contract terms?

Who is in charge of the contracts, financial dpt? Purchasing?

Video from youtube – importance of contract mng

Beginning of the video:

- Cannot find contract

- Waste of time in searching and asking
- A lot of work that should be done
- Pressure & stress

End of video (with open windows)

- Reports in minutes instead of days

- Electronic copies accessible when you need them
- Clear performancehistory for category or supplier
- Document creation and versioning
- Financial certification and versioning
 - Turn reactive contract administrators into proactive contract managers

CONTRACT MANAGEMENT

Document management: very important to keep up with the contracts.

• Where and how contract documents are stored, who is responsible of those, where culd be found when they
are needed?

• Who has access to which document, are there constraints to access to documents?

• Information of new contracts to organisation

• Who is in charge of the contract

Performance management

• Implementation follow up at buyer and at supplier, both parties should know how is the deal and if the tasks
are fulfilled in the contract.

• Follow up meetings / metrics

• Do we get what was agreed

• Service & Quality

• Co-operation development

• Innovations

5.4 NEGOTIATIONS
• Negotiation is interaction between negotiating parties.

• Interaction is based on communication and listening skills. In this phase we can see the importance of social
skills, basic communication skills.

• Listening is more important than speaking! It is important all over the organization

”Person, whether in business or in private life doesn’t get what’s deserved, but get what is able to negotiate.”
C.L. Karrass

The Negotiation skill is important for the whole working life!

Negotiation process

Preparation:

- Decide your targets to negotiate to the supplier. Parties strengths & weakness
 - Define decision makers! What are the points that are coming up with the negotiation. What the ones
that would be critical for the decision.
- Threads and opportunities
- Market know-how
- Personal interests:
- Roles for participants
- Cost structure analyse
- Cultural aspects: make the environment more confortable or interesting for the supplier.
- Contract draft
- Negotiation place and time

Negotiation

- Create good atmosphere

- Separate business and personal aspects. is really important to separate from the business!! Avoid to
mix the two aspects (professional behavior)
- Listen as much as possible
- Handle first easy topics
- Learn to use/read body language
- Observe counterpart’s signs
- Bring up solutions
- Target to close the deal – time will create more challenges

Closing

- Summarise agreed topics → write a memo and sign it.

- Ensure other party has same understanding of agreed details
- Agree next actions for the contract
- Agree time for next meeting
- Show your thankfull to the orther party

Evaluation: term of meaurement

- Where you succeed?

- What areas can be improved?
- Did you intuitive decissions?
- What others did in the meeting?
- Your conclusions?
- What lessons learned for next negotiations?

Prepare yourself for negotiations

- COST, decide a target PRICE to achieve with the help of COST ANALYSEs & OTHER QUOTATIONS, it is
important to focus on PRICES & PAYMENT TERMS
- DELIVERY TERMS as an objective to reach DDP, & 100% DELIVERY ACCURACY with the help of METRICS
RESULTS (PERFORMANCE indicators). In the negotiation should be focused on TRANSPORT &
WAREHOUSING
 - PRODUCT/SERVICE SPECIFICATION it is important to have it CLEAR, AGREED SPECIFICATION for that
reason is important to have a SUPPLIER KNOW-HOW with the CAPABILITY TO PRODUCE
- QUALITY, important to have a SERVICE LEVEL TARGET to reach with the help of METRICS
(PERFORMANCE). Is important to discuss about QUALITY & SERVICE LEVEL
- OTHER TOPICS for example INNOVATION using a PARTNERSHIP APPROACH is possible to discuss about
LENGHT OF CONTRACT PERIOD

Tips for negotiations

• Let your counterpart speak first, ‘’ throw the first stone’’, to open the discussion

• Ask specific questions to get more information – ”peel the onion”, the objective is to gain more information,
reaching the main point of the issue and at the same time understand that we agree in the same way.

• Tell them their benefits of the topic – get them say yes!

• Negotiate first about the target range, instead of specific target

• Name as few arguments as possible

• Present your strongest argument first, is important to show yourself secure about your topic and that you are
feeling at ease.

• Pick up your negotiation partner’s argumentation, listen to their needs an necessities

• Focus on your negotiation partner’s weakest argument, sometimes could be a good weapon to look like more
prepared and ready

• Highlight the importance of your arguments and not their accuracy

• Only say what you wanted to say → If you don’t have to say nothing – say nothing!!

• If you are attacked, don’t react, be still and calm to eventual provocations.

• Hand/transfer the problem over to the negotiating partner

Options for negotiation strategy

The possible strategies to adopt during a negotiation:

Dominating strategy:

- Feeling strong with agreement arguments

- Feeling secure

Problem solving strategy:

- Cooperating
- You still need certain factors to win
- Both parties are winning
- Both knows very well each other and what are the objectives
 - Trust the supplier

Accomodating strategy

- Supplier wins

Avoiding strategy

- No cooperation
- Avoiding the conflict
- Don’twant to close the deal

Ofcourse in real life is impossible to adopt for the whole negotiation one strategy but there will be a
compromise between those.