PurchTips edition #337

Procurement risk management is one of the challenges a professional in this industry will have to develop.

Intangible services – work whose quality you can’t experience before the performance – are among the most difficult things to procure. If you’re not careful when contracting for intangible services, you can get stuck with an incompatible supplier for an unprofitably long period of time.

Here are some tips for service procurement risk management:

Steer Away From High Up-Front Fees.

Any time you procure intangible services, there’s a risk that things won’t go as hoped. To prepare for the possible need to undo a decision, beware of supplier proposals with high, non-refundable, up-front fees, like setting up fees.

Sometimes, it is better to choose a services supplier whose set up costs are “baked in” to their monthly fees rather than a supplier whose lifetime contract value is lower but charges high up-front fees. That latter arrangement will only benefit you if the deal works perfectly, which – for intangible services – is far from certain.

Incorporate Metrics/Service Levels in Your Contract.

When you contract for an intangible service, you are buying a result, like a reduction in security compromises, an increase in sales, etc. Incorporating metrics or service levels in your contract ensures that the supplier understands the goal it is working towards and is not just “doing its own thing.”

Use a Mutual Termination for Convenience Clause.

Often, when you incorporate service levels into a contract, you specify the conditions under which you have the right to terminate the contract if the supplier fails to perform to an agreed-upon standard.

Suppliers will tend to fight this, making service levels a difficult term to negotiate. A clause that may be easier to negotiate while serving the same purpose is a mutual termination for convenience clause. This allows either party to terminate the contract for any reason (not just for default). Clauses like this that give an identical right to both parties are easier to negotiate.

One thing that differentiates a termination for convenience clause from a ‘termination for default’ clause is the number of days notice required. It is customarily longer for a ‘termination for convenience’ clause, so make sure you can live with the period during which you’ll still be tied to the supplier before you agree to the number.

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Recommended Reading

• Appetite for Taking Risk in Your Supply Chain
• Supply Risk
• Supply Risk and Sustainability Management
• Appetite for Taking Risk in Your Supply Chain
• Risk Checklist
• Examples of “Intangible Services” & Their Degree of Procurement Risk

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