The Bottom Line

Two Tips On Vendor Contracts To Help You See in 2020 This Budget Season

Posted by Jim Kurtz on Sep 22, 2019 10:00:00 AM

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Staring down the barrel of budget planning for 2020? For many managers working with a calendar-based fiscal year, the dog days of summer also mean the advent of the annual planning cycle. Given all the uncertainties in the past few quarters, odds are that department heads are being asked to “do more with less,” or at least step up output at a faster rate than costs. Meanwhile, anyone with budget responsibility knows it’s no easy task to fund reasonable pay increases for valued employees, let alone accommodate growth in other expense areas.

Most manufacturers earmark an increasing share of their budget dollars for third-party providers, often as a way to tap into the latest technologies and product functionality, such as palletizing robots, automated transportation logistics, or 3D part modeling. The most critical of these relationships are the ones governed by long-term vendor contracts. At first glance, it may appear the costs to use these third parties are pre-set by the contracts already in place; however, this is not the case. Our evidence suggests that revisiting longer-term vendor contracts tied to critical services has the greatest potential for savings.  Of course, “one does not simply” find success in renegotiating multi-year supplier agreements, but we’ve found consistent success in helping manufacturers observe best practices in vendor contract management - knowing the right questions to ask, at just the right time.

Pay Less Now, or Pay Less Later

A good discipline to practice at the beginning of budgeting season is to look at any vendor contracts due to expire over the next 18-36 months. This should already be standard procedure, but budget season offers a great reason to get caught up. Many vendor contract agreements require 12-18 month’s notice to avoid auto-renewal, and most de-conversions/vendor replacements take even longer than that. Without appropriate lead time, any opportunity to consider alternate providers lacks the leverage to make it a credible negotiating tool.

In addition, it’s worth consulting third-party benchmark data and/or domain experts to determine how your organization’s vendor contract terms stack up to the prevailing rates. A favorable deal struck even 1-2 years ago may already be above market. Utilizing benchmarking data early enough in the life of a contract can provide the leverage needed to explore renegotiating above-market contracts. For example, by offering to extend the term of such a contract at a lower cost. This approach works particularly well with good vendor relationships where there is typically no intention to make a change in suppliers.

The promise of a long-term revenue arrangement is an attractive option for your third-party provider. Conversely, if presented with objective evidence showing that the rates in the contract are above market, most vendors realize a refusal to engage could put their relationship with the client at risk. The overall costs associated with switching technology vendors are notoriously high; both parties have strong motivation to maintain healthy, long-term relationships.

Trust, but Verify

It’s not unusual for vendor invoices to fall into a rote approval pattern. If the balance due is in line with the run rate, the general feeling for most is that it must be correct. However, periodic audits that reconcile the amounts on these invoices to the contract terms can provide multiple benefits. It doesn’t imply lack of trust or suggest that the vendor is “pulling a fast one.” It is instead a “best practice” any business professional should understand to be prudent.  If the organization didn’t notice a volume threshold or other discount kicking in, it’s easy to understand the vendor overlooking such contract terms as well. In such cases, the manufacturer may be entitled to cost reductions without renegotiation - and perhaps even receive a credit for past over-payments. As an added benefit, such auditing demonstrates an appropriate level of third-party diligence – an area of regulatory focus.

The Bottom Line: Whether by leveraging multi-year contracts or by conducting a supplier invoice audit, manufacturers can take action this budget season by applying these fundamental best practices in vendor management.  Given the relentless demands in output capacity and compliance initiatives, while staying ahead of market trends and preserving the bottom line, budget-setters cannot afford to overlook the possibility of uncovering hidden cost savings in their existing vendor contracts.  When budgeting for 2020, reviewing high-dollar, long-term vendor agreements is an excellent way not only to stay on target, but also to zero-in on hidden growth opportunities.

 

Topics: Manufacturing, Vendors & Contracts, Contract Management, Contracts