The coronavirus pandemic has pushed many supplier relationships to the brink and back. As procurement teams have dealt with logistical delays, production stoppages and unmet demand due to the effects of lockdowns, shipping closures and the contagion itself, snags and fissures in the supply chain have underscored the importance of buyer-supplier relations.
As CPOs reached for their supplier agreements to review force majeure clauses, it quickly became clear that contract management was going to be of vital importance over the coming months—and maybe years. Without a strong understanding of the terms of your supplier relationships, it can be difficult to find a way forward when those relationships break down.
Contracts set out prices, terms, service levels, and other parts of the supplier relationship. They need to be reviewed on an ongoing basis and used as a living document rather than a legal archive. We’ve talked previously about how contract management systems have become an increasingly key component of procurement’s toolkit—having all your contracts accessible digitally lets you track the overall lifecycle of all your relationships. Yet like any other piece of technology, a good contract management system is only half the battle. Just as important is how you use it.
Tim Cummins, president of the International Association for Contract & Commercial Management, believes that by mid-March around 60% of businesses were reporting moderate to severe impact on their contracts.
“For some, customer demand is increasing and generating a need for both new and revised contracts—for example, food and drink, consumer packaged goods, health, transport and logistics,” Cummins wrote in a recent blog post. “For others, the story is almost entirely negative—airlines, hotels, travel and entertainment. Almost everywhere, this has resulted in a strong focus on force majeure, rights of increase or reduction, revisions to scope, deferral, or delay. And that is not to mention the need for extensive reporting as management seeks rapid information on risks and rights within existing agreement portfolios.”
Cummins says that it has been notable—but not surprising—that those with contract management technology have generally fared much better than those without.
“This not only allowed much faster identification and analysis, it also reduced the time spent searching and freed it up for more rapid and thorough interaction with the counterparty,” he writes.
Cummins says for many procurement teams, the pandemic was the first real test of the ability of their systems to cope with such peak demand—and most discovered areas for improvement. So, what have chief procurement officers needed to do with their contracts to cope with the impact of the pandemic on their supplier relationships?
In a note to clients, international law firm Stephenson Harwood highlighted the importance of good recordkeeping during the current business upheaval. The lawyers recommend keeping evidence of all your commercial actions and decisions—including project records and events giving rise to delays—as well as the justifications for your actions. All amendments, variations, suspensions, delays and terminations of relationships need to be recorded in writing and be made in line with the contract’s formal requirements because if disputes arise in the future it’ll be hard to rely on an amendment or variation if it was only agreed orally or via email.
Recently, I was interviewed by Supply Chain Drive about navigating supplier relationships in the COVID-19 era. I explained that although in this day and age your relationship with suppliers supersedes the written contract, there’s a caveat: The foundations built in the past work to support ongoing operations now.
At the end of the day, contracts are just pieces of paper and hard to enforce in the middle of a crisis. We must rely on the depth of our strategic relationships with suppliers and customers to get through this disruption when even the courts have been closed!
Yet this doesn’t mean ignoring your contracts. Buyers should immediately look at their key supplier contracts and analyze terms and conditions thoroughly, paying careful attention to their force majeure clauses so they’re not caught off guard. Force majeure is no longer just an ambiguous and meaningless term, often ignored or dropped from contracts and agreements. Some suppliers are now invoking the term as a reason for late or missed deliveries to the surprise of buyers who thought the sanctity of the contract would win out.
Remember, your contracts are vitally important documents to help you understand your rights and responsibilities. But contracts need to be viewed in the light of the relationships they represent. Proactively managing those relationships—using all information and insight you can glean from your contracts and contract management system—is what will set up procurement teams to navigate the current crisis and beyond.