Procurement organisations have been accused of jeopardising long-term supplier relationships by reverting to short-term, tactical approaches when renegotiating contracts in the economic downturn.
A global survey of 221 buyers and sellers by the International Association for Contract and Commercial Management (IACCM) found that 35 per cent of organisations had already renegotiated several contracts and 31 per cent some arrangements, with a further 17 per cent intending to do so in the near future.
Forty-nine per cent of those involved in renegotiations said the primary driver was to reduce costs or achieve savings, with 28 per cent highlighting price or charge reductions.
Fifty-eight per cent said their organisation had no defined strategy for renegotiating contracts and were merely adapting to market conditions.
Tim Cummins, chief executive of the IACCM (pictured), told CPO Agenda there were two distinct types of procurement approach to renegotiations.
“Procurement organisations that only have responsibility up to the point of contract signature are being far more aggressive than those that have responsibility for longer-term relationships,” he said.
“If you have a procurement group that is also motivated by longer-term relationship outcomes, it tends to lead to a very different discussion that is focused more on the value and the total cost of ownership principles.”
As well as the risk of pushing suppliers into insolvency, procurement functions that take a very short-term approach could find suppliers unwilling to do business, Cummins warned.
“Suppliers are being more strategic than procurement,” he said. “For those that are stable and have cash, this is an opportunity for them to start being selective about who they want as their customers and they’re upping the quality of their portfolio.
“Buyers need to be cautious, because if they do take a very tactical approach they may get a bit of a shock,” he added.
A similar message was conveyed from the sales side last week by Bernard Quancard, CEO of the Strategic Account Management Association. Speaking during a panel discussion at the Conference Board’s SRM event in Atlanta, he said US suppliers were being hit with price reduction demands of 10-25 per cent.
This was unsustainable, could damage relations and would speed up sales organisations’ efforts to segment their customer bases into those that were profitable and those that were not, he argued.
The IACCM’s survey found that procurement was the driving force behind 41 per cent of renegotiations, while 27 per cent stemmed from the CEO and 26 per cent from the CFO.
When it came to reducing prices or charges, the most common models used were benchmarking (47 per cent of respondents), price indices (45 per cent) and changing specifications or service levels (39 per cent). Extending or shortening contract terms was used in 35 per cent of cases.
But rather than concentrating solely on price, procurement should use the current climate as an opportunity to reassess governance and relationship management procedures, said Cummins.
“The traditional mode of procurement taking things through to the point of contract signature and then passing this over to business units or separate relationship management groups is no longer right,” he said.
“With our strategic supply base, we need much greater continuity throughout the relationship lifecycle. That doesn’t necessarily mean that procurement should own all the performance resources, but at the very least it needs some insight and oversight into those performance characteristics.”
Beyond price, other reasons for renegotiating contracts included gaining a better understanding of the risks associated with the current climate, cited by 9 per cent of respondents, with 7 per cent pointing to the need to protect cash flow and 6 per cent a desire to reduce the level or volume of commitment.
Sixty per cent of contract renegotiations between long-standing customers and suppliers resulted in “relatively positive” outcomes, the survey found.
