Proceed with Caution on Vendor Contract Changes – A Real World Example

Posted by Jim Kurtz on Dec 13, 2017 11:00:00 AM

Short TermLong Term.jpgIn recent posts, we have offered words of caution concerning the perils of free money when considering a proposal, contract or addendum from a vendor. As part of our work, we are continuously monitoring the market to remain current on the trends that impact our clients. Lately, we have seen a real-time case study playing out in the market that reinforces why every proposed vendor contract amendment should be reviewed carefully.

Traditionally, companies have had limited options when it comes to various types of vendor products and services. Today, more vendors are creating incentive packages that can be attractive to manufacturers and distributors. On the one hand, this is good news as it allows these manufacturers to have more control over their own destiny through a combination of rebates, prebates, and discounts. On the other hand, often these packages contain trade-offs that may not fit with the strategy these companies want to pursue in a particular product or service area. Typically, to determine whether the offer is a home run or a foul ball, it helps to have the perspective that comes with evaluating these types of deals day in and day out.

Recently, we have learned of vendors approaching manufacturers with unsolicited offers designed to establish a direct relationship between the two parties. On the surface, these offers are quite appealing, verging on “no-brainers.” The manufacturer receives an unexpected windfall in the form of an upfront signing bonus and often a nominal reduction in ongoing fees as well. In most cases, the change can be achieved without altering established workflows.

What’s Not to Love?

To be fair, these offers are indeed an improvement over the status quo. However, the question is how much money is being left on the table and how much future flexibility is being sacrificed. The most important point to be realized by a manufacturer receiving such a proposal is that the vendor sees sufficient value in its business to have made the offer. This fact raises another question: how much would that business be worth on the open market?

This is where the value of a skilled strategic sourcing partner enters the equation. Such firms understand the value of these portfolios in a truly competitive setting. Without such input, a company might negotiate the initial proposal and feel good about extracting a few more upfront dollars, yet still have money left on the table.

Know the Rules of the Game and the Value of Your Hand

In any situation of this type, it is important to consider what the vendor’s motivations might be. As we have noted before in The Bottom Line, we do not believe the vendors are doing anything unprofessional. Vendor’s have an obligation to their stakeholders to run their businesses profitably. Clearly, for vendors there is a value in establishing a long-term relationship with a manufacturer or distributor that provides a predictable revenue stream. On the manufacturing side, it may be perfectly logical to trade a few years of flexibility on the back end for expense reductions and cost certainty. However, such commitments should not be made without thoughtful analysis.

Given the pressures many manufacturers face, short term upside is attractive. However, no proposal should be seen as a “slam dunk” because as the saying goes, “If it is too good to be true, it probably is.” The main takeaway is that any unsolicited proposal, whether in the form of an amendment or a new agreement, should trigger an analysis of the attributes in play on the manufacturing side of the table. Be sure that analysis is done against current data and benchmarks.

Topics: Strategic Sourcing, Vendors & Contracts