As procurement and sourcing departments have been stretched increasingly thin, effective management of lower-flying indirect expenses has become more and more difficult.
In many departments, effective sourcing alone is impossible for expenses in the lower third of their monetary priorities, and any semblance of post-sourcing management is a pipedream.
Given this reality, it is worth noting a troubling recent trend within the service contract realm of the indirect arena. The trend involves the injection of some particularly onerous and anti-competitive language into the suppliers’ standard service agreements, designed to limit customers’ ability to utilize outsourced sourcing and management strategies and to limit their ability to rectify historical overcharging and non-adherence when it’s uncovered.
In other words,
· Just when department resources are stretched to the limit.
· Just when these resources have been handed a whole new set of urgent priorities.
· Just when it’s most difficult to engage in lower-tier categories to make sure you have good deals in place and are getting what you’ve signed up for.
· Just when more and more targeted category solutions are emerging in the indirect expense management arena.
· Just when customers are most likely to be contemplating turning to one of these firms for expertise and technological efficiencies.
· And, just at this moment, the industry’s suppliers are attempting to tell their resource-strapped customers that anything other than in-house management of their programs is not allowed, and that if the suppliers are caught overcharging, they’ll only have to pay back a fraction of the damages.
Here are some examples of threatening language used in these service agreements:
1. A leading uniform rental supplier is now limiting the customer’s ability to recover past overcharges to the trailing six months. So, if your supplier has not been adhering to the agreement signed four years ago and has overcharged you, say, $100,000 per year over the last four years for a total of $400,000, this clause would limit you to recovering a mere $50,000 of these overcharges.
Audit rights are a fundamental element of buyer-seller relationships, and while these provisions do typically entail some agreed-upon time limitation, these horizons tend to be 3-5 years or at least for the term of the current agreement, not mere months.
In an industry where contract adherence tends to be a problem, this language allows the vendor to overcharge customers while limiting their exposure, making egregious overcharging even more likely to occur as the risks to the vendor are dramatically reduced.
2. Another clause within the uniform rental industry—and perhaps even more threatening to industry customers—is one that strips customers of their basic right to utilize outside experts, consultants or auditors in the management of this burdensome expense without the permission of the supplier (the same supplier which—in Clause 1 above—has arbitrarily attempted to limit your ability to recover overcharged monies).
3. National waste and recycling haulers have followed suit in making it extremely prohibitive for a customer to retain a consultant or agent for the purposes of assisting with auditing and/or managing the program. Specifically, in the event the customer does retain such third-party assistance, the language gives the hauler the right to terminate the customer’s agreement with a mere 15-days’ notice.
Imagine the scenario where you bring in an expert consulting partner to assist with the category. The partner advises you that 20-30% savings could be achieved through an open-market process, and with only six months remaining on your waste services agreement, you green-light an RFP. Upon learning of the RFP, your incumbent waste hauler serves a notice that they’ll be terminating the current agreement in 15 days.
You’re trapped. There’s literally no way to run your process in two weeks. Your incumbent is leveraging you into extending an unfavorable agreement or else face the prospect of leaving your locations without waste services while you get your ducks in a row.
It’s easy to understand why these suppliers would prefer to restrict their customers’ management and auditing strategies. They know that procurement departments are lean and overburdened. They know that when this is the case, ongoing “management” of their services is largely left to commissioned field service representatives. They know that when left to their own devices, they will be able to drive more profitability from their customers’ accounts.
They also know that the niche expense management solutions available to their customers are, in many cases, highly effective. Bringing to bear industry experts armed with industry-specific technology, these firms have been advancing the interests of a host of Fortune 500 accounts, and the suppliers want to stop this, plain and simple.
None of this is controversial. There’s a natural state of “joust” in all buyer-seller relationships, at least to some extent, and this is fine and healthy. But, in 2020, procurement departments realize that they can’t truly engage in the joust in many indirect categories, and as a result, are losing. And, the industry suppliers in these arenas would like to keep it that way.
This would be less of a threat if talking about categories where sourcing alone tended to produce lasting results, but that’s not the case. The industries in question have well-earned reputations for not adhering to their agreements, for changing the rules with myriad strategies ranging from adding new charges, introducing new products and services not contemplated in agreement, and charging for inventory that doesn’t exist and services that weren’t performed. These are the suppliers wanting to remain unmanaged—which, again, makes perfect sense.
At a time where corporate procurement resources are lean and the street offers a host of innovative alternatives for augmenting in-house resources by deploying targeted experts armed with powerful technology, it is absolutely imperative that customers reject these clauses in any contract negotiation.
Don’t let your indirect suppliers dictate the strategies you can and cannot use to manage these burdensome categories, and don’t limit your ability to remedy overcharging in your account when it is discovered.
After all—you’re the customer. You’re the one spending the money.