Long before an issue ever turns into a dispute or leads to hard feelings, the seeds of discontent are planted in a customer-supplier relationship, not by what is spoken – but by what is unspoken. As products are developed, projects are implemented, and services are launched, the speed of execution often overshadows the detailed discussions on important issues early in the relationship. Most often, expectations between customers and suppliers are captured in a Statement-of-Work (SOW), in which both sides attempt to outline important business and technical parameters associated with a specific product, project, or program. Despite this attempt, however, many aspects that are critical to the success of both parties are often omitted, ignored, or delayed, leading to unpleasant surprises.
While an SOW can be a legal contract in and of itself, it is often tied to a master agreement that covers the boilerplate legal terms such as indemnities, limitations of liability, warranty, confidentiality, as well as key operational terms such as liabilities, pricing, and forecasting. Since SOWs are more specific than standard contracts and generally apply to critical, time-bound project activity, it is even more important to have clarity to avoid misunderstandings. Based on our experience, here are five basic areas you should address:
Clearly define activity, deliverables, and roles. As a customer, the main purpose of this document is to clarify the actions to be performed and the tangible deliverables you will get for the fees that you pay. What is to be done and in what time-frame? Will you receive process documents, schematics, test programs, or a bill-of-materials? How will you qualify or “accept” the deliverables? What are the supplier’s roles and responsibilities throughout the various phases of the project and who are the people that they have allocated to your project? What type of support do they expect from you in order to be successful and who will deliver that support on your side? In defining deliverables, it’s also critical to define ownership, which should be covered by the intellectual property provisions of your main agreement.
Tie your payments to milestones achieved where possible. If your SOW spans a few months or even a few weeks, it is important to set milestones to monitor progress and address potential deficiencies early in the process. Unless the SOW is tied to an on-going service where fees are paid according to a regular schedule, provide a direct link between payments and milestones. If a milestone is missed, your language should cover how you determine root cause, assign responsibilities, and resolve disputes. What is important is that you tie payments to the value you receive.
Insist on price transparency. It is common for suppliers to “throw a blanket” over a price structure and quote a fixed bid. While fixed bids are often desirable for customers as well as suppliers, you should know what is behind the fixed bid so that you can validate the assumptions behind the pricing and ensure that you’re paying reasonable rates. For example, if your supplier’s pricing is based on a bill-of-materials (BOM) used in building your product or based on the number of engineering hours used in designing a product, you should know what BOM was used to price your product and how many engineering hours were assumed in designing your product. Without this transparency, you will have a hard time doing a side by side comparison of various supplier proposals or controlling costs.
Define change management procedures and cost structure. Due to uncertainties and risks associated with most projects, most SOWs undergo changes before the project is completed. The most common language proposed by suppliers is that those changes will be evaluated, priced, and quoted at the time they arise. This is an open-ended exposure, and a blank check if you do not define the cost structure that will be used in quoting your changes. The problem is that you are in a very weak negotiating position when a change occurs. You are already invested in the project and the supplier is already integrated. You do not have any realistic options to search the market like you did before you picked a supplier and drafted the original SOW. While it is understandable that your supplier cannot predict the impact of every change that may be required down the road, they should give you a price structure showing how such changes will be quoted.
Strive for flexibility because business conditions change. While an SOW may be ideal based on current conditions, keep in mind that things change. Events like the Great Recession of 2008 can change the outlook quickly and drastically. That is why your SOW should be as flexible as possible, most notably in two areas. First, should the scope of your work change dramatically, you need to be able to scale the pricing accordingly. For example, if volume plays a role in your pricing structure, be sure that your wording allows for volume changes in a scalable fashion. Second, always include appropriate termination language that allows you to exit the agreement if there is no longer a need to continue. Keep in mind that in doing this, it is important to be fair-minded and make your supplier whole.
Of course, there are many other aspects of an SOW that you must consider and we cannot capture all of them in a brief newsletter. However, being cognizant of the points above allows you to begin addressing the seeds of discontent that we mentioned earlier.
If you feel that we can help assess your supply chain risks and help you with mitigation plans, please let us know. We can provide the extra bandwidth and expertise your organization might need. Please feel free to contact us at info@symphonyconsult.com.