Keys to third party relationship management – Contracting

By - September 8, 2016

As we discussed in the previous blog post, due diligence determines how we evaluate the bids, the vendors’ qualifications and ultimately select the vendor. Most importantly, it is how we measure and control vendor related risk.

Contracts are the formalization of the relationship, it determines how your organization will interact with the third party vendor. Often times the contracts are somewhat daunting to review and seem to include many more pages then necessary.

Below highlights some of the key items in contract reviews:

  1. Review the agreement paragraph by paragraph
    • Verify accuracy of services described
    • Review for clarity, if both parties don’t understand the language it’s difficult to defend
  2. Identify whether the terms are acceptable
    • If not, rewrite them in an acceptable form and present them to the vendor for review
    • Determine the importance of the change to the organization, is this a must-have, or a nice-to-have?
    • Determine the likelihood the third party will agree, why are we asking?
  3. Identify any deal breakers? Are there issues in the contract that you simply won’t accept?
  4. Present all items at one time, don’t continually come back with multiple changes
  5. Engage legal counsel early in the process, many types of contracts require specialized skills
  6. Confirm the length of the agreement is acceptable
  7. Service Level Agreements (SLAs) should be measurable, reportable and enforceable

Common ‘gotchas’:

  • One-sided clauses, if it’s too good to be true it probably is
  • Inadequately address service levels (with penalties)
  • Silent about regulatory requirement maintenance
  • Multi-year auto renewal
  • Excessive notification lead time for opt out
  • Termination penalties
  • Does not address DE conversion, or excessive fees
  • May require payment for disputed items
  • May ask for payments before delivery

Contracts protect your organization, set a common understanding and confirm your needs will be met for the life of the agreement. In the next segment we will discuss ongoing monitoring of vendor relationships. To learn more about how RSM can assist you with your other business needs, contact RSM’s management consulting professionals at 800.274.3978 or email us.

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