UNDERTAKING A TERMS AUDIT

Reasons For Undertaking A Terms Audit

Buy From: Buy Through: Buy With:

Supplier(s) or supplier Procurement agencies Trading group(s)

group(s) Co-ops
Trade organizations

Sell To: Sell Through: Sell With:

Local or international and Distributor(s) Agent(s)

commercial or public end Remarketer(s) Associate(s)
users Reseller(s)
 Categories of Terms

 Active clauses are those that demand underlying

resources or business processes for their
management, execution or control, such as
payment terms, contract or project changes,
warranty service or product delivery.
 Passive clauses are those that do not require any
underlying process – they only come into effect
as a result of some specific action or omissions
that affect performance of the overall contract;
examples of passive terms include force
majeure, limitation of liability and indemnities.
 Categories of Terms

 Active clauses are those that

usually have the greatest
impact on business efficiency,
operational cost and profit.
 Passive clauses are generally
perceived in most businesses
as the terms that deal with
risk.
 Consequences of Inappropriate Terms
 Other companies may be unwilling to do business with you because your terms are too
demanding in relation to their risk or margins.
 You may be inducing unnecessary levels and frequency of negotiation, delaying deal
closure and inducing avoidable costs.
 You may be containing consequences of failure, but missing opportunities for enhanced
profit, innovative solutions or stronger relationships.
 You may be missing opportunities to drive greater business efficiency through
standardization or planned term options.
 You may have missed new areas of risk that are not adequately addressed by your
current terms.
 When to Audit
For most companies, the tricky thing is to recognize when it is time to undertake an audit,
read the warning signs that perhaps your terms are no longer competitive or that maybe
you are missing a trick somewhere.
 Should terms be audited every six months, every year, every two years?
 Should all terms be audited with the same frequency or does the need vary?
These are the types of questions people ask – so what are the answers?
When to audit:
 If there is a conscious shift in market strategy or segmentation.
 The adoption of new internal software application or more general process re-
engineering?
 Reasons Why Best Practice Organizations Consider The Indicators &
The Pace Of Change In Their Marketplace
 Regularly re-read the general terms in order
to make sure they are still fit for the current
contracting needs.
 Obtaining legal alerts to advise on
forthcoming changes to laws or jurisdictional
issues.
 Set a recurring date for a general review and
sign-off.
 Cross-check any translations of the terms to
validate that any changes have been properly
incorporated.
 The Warning Signs

 A number of organizations develop key performance indicators (KPIs) for individual

business units including the Contracts Groups.
 A gradual degradation in KPI performance or perhaps even a prolonged period of
inconsistency is reason enough to warrant a Term Audit.
 Although an organization may have a KPI monitoring process in place, there are a
number of warning signs that can be suggested if a Term Audit is due.
 Ironically, the most obvious is when contracts group feel overwhelmed by the demand
for its services.
 This can often lead to growing misunderstanding.
 The Warning Signs

 As you become more sophisticated

in techniques, you will want to
include benchmarking. That is,
undertaking specific comparative
studies versus key competitors or
equivalent contract types.
 It is important to build links to your
trading partners to create
relationships that go beyond just
negotiation.
 Understanding Impacts
 Many organizations especially when buying goods or services, introduce terms that are
designed to meet specific functional goals, without understanding or assessing their
wider impact on performance.
 Unbalanced terms tend to create an adversarial or blame-based relationship. They
frequently constrain flows of information and encourage dishonesty and mistrust on
both sides.
 At its worst, poor contracting and relationship management will lead to a loss of loyalty
between parties. Given that customers depend on their suppliers to deliver core business
capability, this is a major risk to take.
 This loss of loyalty is often not visible until it is too late; but there are warning signs,
such as adversarial relationships, loss of comparative innovation regular switching of
resources and an unwillingness to cooperate.
 Undertaking A Terms Audit

 It is important you list the main steps you need to undertake. These are to ensure you
are both identifying the major opportunities and prioritizing them.
 Remember, your audit is in part to address the things your trading partners are telling
you need to be changed, and in part to drive your own performance improvements.
 At other times, changes in the law or in technology may be driving changes that are
primarily about simplification or efficiency.
 Whatever you might do, you will need a good understanding of the portfolio of
relationships and contract types currently in use and you need some data related to the
importance of that term to the relevant market.
 You need to brainstorm each term for strategic opportunities, including how it is linked
with other terms in a contract.
 Undertaking A Terms Audit

 Finally, document the expected benefits – savings,

reduced negotiation, heightened competitiveness,
greater compliance and identify the means by
which you will measure and report on results.
 Contracts traceability matrix
 If, for example, the outcome of a Terms Audit is to
reduce the notice period from 45 days to 30 days,
the contracts traceability matrix can suggest the
different documents that will have to be altered or
considered ( Boilerplate – US, Boilerplate – UK
and Statement of Work), for this change to be truly
effective.
 Sample Audit

An audit revealed these shortcomings, but more importantly the background research
highlighted reasons behind customer concerns and broader market trends. It was evident
that:
 The company needed a method to evaluate the related risk behind different deals
 Risk term alternatives had to be introduced to reflect the differing levels of probability
 Discussion of risk terms should have occurred much earlier in each negotiation, rather
than being left to the end and the absence of real trade-off opportunities
 New bargaining chips would be introduced to discourage such strong focus on the
major risk terms
Thank You