In brief - Good relationships with suppliers are as important as good contracts

By focusing on creating a balance in relationships with suppliers, having clarity on expectations, maintaining good governance and actively managing change, not-for-profit organisations can put their procurement on a rational footing and maximise the effectiveness of their spending.

Not-for-profits need to demonstrate that they spend their money wisely

Today more than ever there is an increased focus on transparency, accountability and effectiveness of spending by not-for-profit (NFP) organisations. Governments which provide funding and benefactors who support charitable causes are increasingly keen to ensure that the funds which they provide are not being wasted or mismanaged.

There is ever more scrutiny of the proportion of funds which a NFP spends on providing services to those whom it supports, compared to the proportion it spends on running its own organisation.

Having effective contractual arrangements and cooperative relationships with suppliers and service providers is also crucial in avoiding disputes. No donor or benefactor wants to give money to an organisation which is often being sued and spending its funds on litigation. This means that spending money wisely and avoiding disputes is even more important for NFPs than for commercial organisations.

Creating a balance in the relationship with suppliers and service providers

Do not drive your terms and conditions or set up your contract in a way which creates a huge imbalance between you as the customer and the provider of services. Previously, the classic client/supplier relationship used to be a kind of master/slave arrangement, where the customer dictated horrible one-sided terms to the service providers who were whipped all the way to the finish line.

This does not engender a relationship that is even remotely close to a partnership. What you want is for the supplier to invest in the outcome themselves. This always results in a better provision of services.

This outcome is all the more crucial in the NFP space where the client organisation's objectives are philanthropic. It is overwhelmingly consistent with such objectives to treat suppliers in a way that engages them in these socially beneficial objectives.

One of the key ways that balance in a relationship is addressed is in the way you reward your service provider. You want to ensure that you reward them in a way which motivates them to want to do a good job for you.

Unnecessary penalties and liquidated damages are examples of an adversarial approach to service providers. A much better way is to have a baseline payment and then have reward bonuses for performing to a higher level. It's far better to have an encouragement payment than a penalty for not performing.

What do you and your supplier expect of one another?

Clarity on expectations is crucial. You need to work inclusively with the service provider to set realistic and achievable milestones for service levels and overall project expectations.

This is all about having an open and honest dialogue with the service provider about what you want to achieve and the service provider's capability to do that. This dialogue should encompass your expectations in terms of performance and timing. It should also cover liability and who is responsible for what. This includes simple questions like who is responsible or ensuring safety on the site and who is responsible for signing off on stages and milestones in the process.

This dialogue should also establish clarity on the chain of command on both sides, so that both sides know who the supplier's representative is and who the key contact for the customer is.

Procurement best practice case study: Australian Diabetes Council

We worked with procurement consultants Epago Group to identify ways in which we could decrease the cost of running our organisation and therefore increase the amount we spend on providing services.

We're very proud of the fact that as a result, we have moved to a situation where we now spend only 25% on running our organisation and 75% on providing services.

We started by identifying what was core to our business and then what elements such as warehousing and transport were not core and required expertise and then put them out to tender.

One of our prerequisites was that any suppliers we selected had to be prepared to be educated about diabetes, to have their staff learn about what diabetes is and what the ADC does, as well as identifying which suppliers were the best cultural fit with the Australian Diabetes Council.

On the basis of our own experience and the resulting organisational transformation, I would suggest a few guidelines to any not-for-profit which wants to put its procurement on a more professional footing and maximise the effectiveness of its spend.

  • Run a spend analytics across your general ledger to identify highest categories of spend

  • Engage a consultant who can help you analyse your needs and create optimal solutions

  • Partner with organisations which can demonstrate an understanding of not-for-profits

  • Make sure you educate your suppliers about what's important to you and why

  • Make sure you make it possible for your suppliers to make a profit

  • Hold quarterly reviews on operational performance and relationship effectiveness

  • Remember that if you want to get the best out of your suppliers, you need to be a good customer  

Nicola A Stokes, Chief Executive Officer, Australian Diabetes Council 

Good governance can help you avoid many problems

The question of governance is closely tied to balance in the client/supplier relationship and clarity on expectations. Governance is king when it comes to avoiding problems in procurement, but unfortunately it is often ignored.

The whole procurement process is about achieving an end, whether it's building something or setting something up or supplying something. Governance involves having an open, ongoing and consistent dialogue between the two parties who are working together to achieve that end.

It doesn't have to be complicated. It could be as simple as the supplier rep and the customer key rep meeting every Wednesday afternoon for two hours to have an update on what's happening and working through a basic agenda.

Naturally, if it's an expensive and large scale project like a big IT outsource, you may have daily governance meetings which would have very specific agenda items and particular people who have to report on those items, so the governance meetings will reflect the complexity of the deal.

But the important thing is agreeing to a particular governance structure upfront because you can then require the other side to turn up to weekly meetings and keep you updated and you're creating a forum in which that's achievable.

Managing change in project requirements

One of the problems that clients can have is that they define their requirements for whatever it is they need early on and then these requirements can change some way into the project. What you need to do is to build into the contract process (and indeed, into the culture of the relationship that you have with the supplier) an embracement of flexibility and change. Otherwise you can find yourself ending up with something that you asked for, but realising that it is actually not what you want or need.

All of the points mentioned in this article are interlinked, so for example, change management should be a regular agenda item in governance meetings. This gives both sides the ongoing opportunity to ask if there is there any need for a change of scope or direction. An arrangement of this type allows for flexibility in outcome.

Drafting contracts to facilitate an alliance approach to service provision

The contract defines the rules of engagement between a customer and a supplier. It sets out expectations and obligations. It also sets out the scope of the work that needs to be performed, by when and for how much, so it should be a document that is linked to the governance process and reviewed as a part of the governance process.

The contract should be a living document - it's not something that is just shoved into the bottom drawer and only dusted off when there's an argument, when everyone suddenly wants to check what it says.

The contract should also not be like a stick that you use to beat your service provider. The last thing you want is to be at loggerheads with your supplier, with everyone retreating to their corner and bickering about the wording of the contract.

The contract really should be a document that is proactive and positive. It should help everyone understand what they are meant to do, rather than being the thing that everyone relies on when there's a problem.

The aim is to have a supplier relationship which embodies cooperation, goodwill and an agile approach to service provision. It is this positive relationship which underpins the contract's effectiveness. The contract itself needs to be drafted in a way which enhances and facilitates an alliance approach to service provision.

This article is a condensed version of a seminar presented in July 2012.



This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2024.

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