risk mitigation in sourcing proactively managing risk july 14, 2005 presented by: john funk and...
TRANSCRIPT
Risk Mitigation in SourcingProactively Managing Risk
July 14, 2005
Presented By:John Funk and Shawn Helms
Institute for Supply Management - Dallas
About Jones Day
One of the world's leading law firms with more than 2,200 lawyers in 30 locations around the world
Represents more than half of the Fortune 500 companies
Jones Day was ranked No. 1 for client service in BTI Consulting Group's survey of Fortune 1000 corporate counsel in 2004
United StatesAtlanta Los AngelesChicago Menlo ParkCleveland New YorkColumbus PittsburghDallas San DiegoHouston San FranciscoIrvine Washington
Asia/AustraliaBeijing SingaporeHong Kong SydneyNew Delhi TaipeiShanghai Tokyo
EuropeBrussels MilanFrankfurt MoscowLondon MunichMadrid Paris
Global Reach: 2,200 Lawyers in 30 Offices Worldwide
BTI Consulting Group#1 Client Service Ranking
“BTI would like to congratulate the 2004 Client Service 30 for their superior client service and dedication to client satisfaction. This year’s top winner is:
Jones Day
For three years, Jones Day has held one of the top two positions, securing the top spot in both 2002 and 2004. Jones Day is raising the bar in client service. This year, Jones Day scores 34.7% higher than the number two firm . . . .”
John Funk– Partner at Jones Day
– Over 24 years of experience in licensing matters and complex information technology and business process outsourcing transactions
– Leads Jones Day's global Outsourcing Practice and the technology transactions practice in the Dallas office
Shawn Helms– Associate at Jones Day
– Focuses on complex technology, outsourcing, IP, strategic sourcing and data privacy issues
– Prior to joining Jones Day, was in-house counsel at Sprint Corporation providing legal support to SCM
Presenters
Role of Legal in the Sourcing Process
Manage legal and business risk
Solve problems
Assist in relationship management
The Contract
Purpose of the contract
Necessary evil? or an opportunity?
Most negotiated provisions
The Contract -- Purpose
Reflect the Business “Deal”
– First and foremost, the terms and conditions must accurately reflect the actual business deal between the parties
Allocate Risk
– The contract must anticipate the business and legal risks of the transaction and allocate those risks between the parties
Relationship Management
– A well-constructed contract is an important tool to a successful sourcing relationship
The Contract -- An Opportunity
Necessary Evil or an opportunity?
– The contract should not be seen as a "necessary evil," but rather as an opportunity for each party to set the appropriate expectations regarding the ongoing business arrangement
– Do not negotiate the contract under the assumption that the “relationship” will govern and no one will ever read the specific terms and conditions
The Contract -- Most Negotiated T&Cs
A 2004 study by the International Association of Contract and Commercial Managers (IACCM) identified the 10 most negotiated contract provisions
– Limitation of Liability – Payment Terms
– Warranties and Maintenance – Term and Termination
– Price / Charges – Delivery and Acceptance
– Indemnities – Liquidated Damages / Performance Credits
– Intellectual Property Rights – Confidentiality / Data Protection
What is Operational Risk?
“Operational Risk” is the potential exposure to unexpected financial, reputational or other damage arising from the way in which an organization pursues its business objectives, including its sourcing strategy
While shifting risk to the service provider has always been a goal of sourcing, operational risk always remains with the customer
One important goal of the strategic sourcing process - and of the contract - is to identify and mitigate operational risk
Impacts of Operational Risk
Financial (Direct)
– Revenue Volatility
– Expense Volatility
– Cost of Controls
Non-Financial (Indirect)
– Reputation
– Customer Satisfaction
– Employee Satisfaction
– Adverse Legal Consequences
– Adverse Political Consequences
– Investor Confidence
Major Operational Risks in Sourcing Transactions Defective or Inadequate Product or Service
Reduced Business Flexibility
Loss of Control of Key Business Functions or Technology
High Prices
Intellectual Property Risks
Risks - Defective or Inadequate Product or Service
Pre-Contract Mitigation Strategies
– Appropriate diligence in RFx process (inspection, references, etc.)
Contract Mitigation Strategies
– Clearly specified acceptance process and criteria
– Appropriate warranties and performance metrics
– Visibility (early warning signs)
– Requirement of process or technology improvement
– Robust dispute resolution process
– Accountable Supplier representative
– Ability to terminate
Risks - Reduced Business Flexibility Supplier Lock-In
– Long term contract with no practical ability to terminate
– Exclusive or “requirements” contracts
– Minimum purchase commitments
– High transition costs
Technology and Business Process Lock-In
– Tight integration of related systems
– High costs of replacement system • inability to rip and replace
– High training costs
Risks - Reduced Business Flexibility Mitigation Strategies
– Shorter term with no auto-renewal
– No, or low, minimum commitments
– Ability to use third parties, where practicable
– Ability to terminate early without significant financial penalties
– Require suppliers to provide transition services
– Obtain perpetual licenses on software and data formats
– Avoid right to use (RTU) licenses
– Utilize “off-the-shelf” systems that do not require significant Supplier-specific customization
– Negotiate “pay-by-the-drink” maintenance instead of annual maintenance contracts and pre-payments
– Software escrow (mixed results)
Risks - Loss of Control of Key Business Functions and Technology Where is the “Throat to Choke”
Mitigation Strategies
– Relationship Managers
– Robust Governance Mechanisms
– Robust Escalation Procedures
Risks - High Prices
Mitigation Strategies
– Price Caps
– Indexed Price Adjustments
– Most Favored Customer
– Market Testing Provisions
– Benchmarking
Risks - Intellectual Property Loss of (or failure to capture the value of)
intellectual property
Ownership of developed works
Supplier's access to Customer's confidential and proprietary information and technology
Third party IP claims against Customer
Risks - Intellectual Property Mitigation Strategies
– Obtain appropriate IP indemnity• worldwide, all IP, defense and damages, unlimited
– Obtain appropriate confidentiality restrictions• all confidential information should be marked confidential
– Carefully negotiate IP ownership rights
Risks - Intellectual Property When negotiating IP ownership rights, consider the
following factors:– What is customer's current IP portfolio?
– Is customer relinquishing or disclosing IP as part of the transaction?
– Is customer paying for the development?
– Are customer and the supplier working collaboratively?
– Could the development be used by a competitor to customer's detriment?
– What is the "value" of potential developments?
– What are the potential trade-offs for allowing supplier to own the development?
Strategies for SCM Utilization of Legal
Timing of contract presentation
– During RFx process?
– Requirement and format of Supplier's response
When to bring in lawyers and outside counsel
Separate exhibits for operational and pricing terms
– Specifications, pricing, performance metrics, etc.
Utilize lawyers to help ensure establishment of most advantageous contractual structure
– Don't try to fit a "square supplier" into a standard "round contract" just because it is the "form"
Contract interpretation and relationship management
Relationship Management
Dedicate sufficient resources to enable effective contract management, tracking and reporting
Manage to the contract -- not despite the contract
Promote effective communication between accountable parties
Establish trust by fulfilling your contractual obligations
– e.g. pay on time, communicate appropriately
Establish a relationship that will allow flexibility when business needs change
Negotiate appropriate change management provisions
Trends in Sourcing
More emphasis on services and bundling of commodities with ”value-added" services
Globalization of supply chain
Focus on best supplier vs. lowest price
Automation of commodity purchases
Complex strategic sourcing transactions
– information technology outsourcing
– business process outsourcing
– offshoring
Questions?
John Funk
214-969-2981
Bio at:http://www.jonesday.com/jafunk
Shawn Helms
214-969-2943
Bio at:http://www.jonesday.com/shelms