The finer points of creating, managing service contracts
William Atkinson -- Purchasing, 11/4/2004 2:00:00 AM
Managing contracts for services is often more complicated than managing materials contracts, according to Jim Haining, group manager of strategic sourcing for Sprint in Overland Park, Kan. "Service contracting is different from contracting for materials in that it is usually more complex and there are more intangibles, the most common of which is labor," he states.
To simplify the process, Sprint has implemented a series of steps for creating and managing a successful service contract. Perhaps the most important step for Sprint is creating a strong, clear, and comprehensive scope of work, which identifies all of the details of the contract. Success or failure here, according to Haining, will determine whether the company ends up with a good sourcing effort or not.
The first phase of creating the scope of work involves identifying the end users, then working with them to determine what they need and want from service providers. To identify end users, Haining creates a spend diagnostic, which determines who is in charge of the service being sourced. Once the spend diagnostic is set, Haining can classify the spend as strategic or nonstrategic by determining how much money is being spent on the service. While this information isn't always readily available through most enterprise resource planning (ERP) systems, Sprint leverages its spend diagnostic tools to mine the various information and databases to gather all of the spend information.
If the company classifies a spend as strategic, it usually requires a very comprehensive sourcing process. If, on the other hand, it is not a strategic spend, it may not need to go through such a detailed sourcing process.
"What is core to us would be a service that is core to the telecom industry," Haining explains. "For example, printing services would be nonstrategic for us but may be strategic to a company that sells office supplies and printing services."
The next step involves the creation of a cross-functional team including the major end-users. The initial purpose of the team meetings is to help the users make sure they have thought out exactly what they need and want in the first place.
"When end users originally approach you, it seems as though they want one thing," explains Haining. "However, as you talk with them and ask them questions to drill down further, you usually find that there are a number of areas they haven't completely addressed." This, he has found, is especially true for something that hasn't been sourced before.
Before finalizing the scope of work, Haining seeks input from one or two of the company's top-rated suppliers. "This doesn't mean that we want the suppliers to write the scope of work," he emphasizes. However, by allowing suppliers to have some input, the company may find some limitations or other considerations that need to be addressed in the scope of work. For example, a project may have grown to a "Cadillac" scope of work, but Haining may only have a "Chevrolet" budget and suppliers can help to make the necessary adjustments. In most cases, it makes sense to involve suppliers in the scope of work, since the supplier that is ultimately selected will probably end up working directly with the end users.
Bidding
Once the final scope of work is completed, Haining sits down with potential suppliers to make sure they understand all of the details before the work goes out for bid. One viable option for bidding is often a reverse auction. When using this tool, though, Haining makes sure that he is very detailed in terms of what the company wants when hosting a reverse auction for a services contract.
"We have been very successful overall in reverse auctions for services," he reports. The company has had a few disasters, though, he admits. These tended to occur when the suppliers didn't receive the detail they needed, when they didn't do their homework, or when Sprint didn't properly prequalify suppliers to make sure it had the right supplier base bidding.
While some companies run into problems with certain suppliers not being technologically capable of participating in reverse auctions, Sprint has rarely run into this problem, even with the more low-tech suppliers. "At first, we didn't expect suppliers to be ready to use these electronic tools, but many of them have been very successful in participating in reverse auctions and acting rationally during the process," Haining says.
Negotiations
The most challenging part of the process, according to Haining, is negotiating the terms and conditions of the final contract. He has found that this not only takes the most time, but often frustrates the end users because they are eager for the work to begin, despite the important details that still need to be negotiated. On occasion, Sprint ends up working with suppliers who don't want to agree to all of Sprint's terms and conditions. However, these terms and conditions are usually essential to having the contract. One area that is often contentious relates to limitations, liabilities, and indemnification clauses that are designed to protect the company. "A lot of suppliers just don't want to be liable for their mistakes, so we often have to really press this issue," Haining emphasizes.
Sprint has less negotiating leverage with sole source suppliers, but negotiations are still possible. To succeed, a buyer needs to be more diligent and do a bit more homework to find out what motivates them and how he can work this into the overall negotiation strategy.
For some companies, valuable negotiations and contract information can evaporate when key employees leave, such as those who created the original contract. Sprint avoids this by using tools that house and provide access to contract information and more. First, Sprint has an electronic contract database, which contains all of the information on all contracts in readily available form. Second, it utilizes an electronic RFP system. "We store all supplier information and responses in this system, so it will always be there," states Haining. "We don't risk losing this as people move on or change responsibilities."
Haining has found that, when the company goes through this process correctly and completely, it ends up getting more work done by its suppliers at less cost than it would cost them to have a smaller amount of work done. "In other words, we get more for our money," he concludes.
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