The Path Forward: The Role of Contracts in Responding to Crisis

While the onset of the COVID-19 pandemic took the entire business world by surprise, it has also brought to surface the value of properly managing the most important assets of your business.

In response to the crisis, companies must prepare themselves not just to be more resilient and robust internally but also account for the changes that will take place as everyone re-defines their operating models and supply chains.

As they plan for the new realities of a post-COVID world, companies must first and foremost account for the obligations, commitments, waivers and the conditions of those waivers as enshrined in signed contracts. There is nothing more and nothing less that a business is responsible for, and while designing a response to this extraordinary situation, we must draw the baseline from this ultimate source of truth.

The response should be designed at three levels:

1. Immediate Term
2. Medium Term
3. Long Term

Immediate Term: Tackle and Manage Physical Disruption of Flow of Goods and Services

The immediate term response should be aimed at assessing the impact to top customer deliverables dependent upon supplier contracts, as this set of deliverables will surface the true supply chain disruption impact.

It is prudent and advisable to start with the top contracts on both the buy-side and the sell-side based on Total Contract Value. This will quickly help you take control of your commitments to customers and dependencies on suppliers. This is relatively easy for those who already have contract management software deployed and more difficult for those whose contracts are still managed manually.

In order to handle and demonstrate true relationship value, it is important to let your customers know the deliverables that you anticipate an immediate impact on in view of your commitments and contractual obligations. Once again, it may be easier for companies with solutions like the Icertis Contract Management (ICM) Obligations Management app to do this; for others, it may be a bit of hard work but not an impossible task, if prioritized by contract value.

As you do that, you allow customers to factor in the disruptions from your side and be better prepared. It is also an opportunity to find out from customers what their recalibrated plans are. Remember that every single company is facing a disruption, and hence there are production roll-backs, reprioritizations of available capacities, etc. all around. Therefore, some of the earlier commitments may not hold true anymore.

The last step then is to aggregate such revisions in requirements from customers and align your suppliers with revised requirements. Of course, this will be an iterative process as lower-tier availability determines what can ultimately be produced in a multi-tier supply chain.

Medium Term: Manage and Minimize Economic Impact of the Disruption

Having achieved the immediate term objective of putting in place a semblance of business continuity, it is important to start assessing and working toward minimizing the financial and economic impact of this disruption. The medium-term action plan will require a three-pronged approach to minimize the economic impact:

1. Check on contractual commitments and formalize alternate arrangements agreed to while managing the aftermath of the unprecedented lock-down. Focus especially on clauses like the minimum guarantee and back-stop volume payments.
2. Assess supplier risk (risk of bankruptcy, business continuity, etc.) for your major suppliers and identify alternate sources where needed. This should also result in the recalibration of category/commodity strategies that exist on the supply side.
3. Identify terms and obligations that may require re-negotiating in view of the recalibrated business plans. The focus in this renegotiation should be on optimizing the design of SLAs and deliverables as opposed to maximizing what you can get from the other party. Also, build renegotiation triggers into your clauses to allow room for a pivot in delivery models as you battle the crisis.

Long Term: Build a Resilient Supply Chain and Technology Backbone to Handle Future Emergencies

The crisis has forced us to explore and face facets of business that were hitherto not paid attention to. Some of the long-term measures, after due analysis of contract portfolios, include:

1. De-risking of supply sources by spreading them geographically.
2. Building renegotiation triggers into your contract language.
3. Building technology infrastructure that lets you be in control of all your business obligations and compliance requirements. For example, companies working with SaaS products and digitized contracts were able to respond better to their customers and suppliers as lock-downs were progressively announced.
4. Evaluating the shift of services in-house or nearshore as opposed to completely offshore.
5. Assessing and de-risking exposure to market segments.

As per several surveys carried out by industry forums like IACCM, contracts have emerged as a critically important business information asset that was required by executives to be able to respond coherently and comprehensively to the disruption caused by the pandemic. Companies with good contract management, contract governance and supplier management systems and processes have reported relatively lower impact than others regardless of their size. This underscores the status of contracts as the ultimate source of commercial truth and hence the need to manage them with the best technology available.

If you are interested in learning more about leveraging contracts to compete and survive in this new business climate, please register for our webinar with IACCM, “Contracts and COVID-19: Managing Contracts in Times of Uncertainty.”