A Method to the Madness: Addressing Supplier Exceptions to Your Terms and Conditions
I recently received this question from a coaching client of mine:
“How do I intelligently respond to the supplier’s pushback to my company’s audit rights? It is not something that I am empowered to say ‘yes’ to. And this supplier is not backing down. I tried that already.”
Let me outline the background to this scenario as it might be familiar to you. My client’s company issued a new exhibit to their master agreement outlining my client’s company’s audit rights. The audit rights were contained in the master agreement and were generally accepted by most suppliers.
After some publicized incidents involving my client’s company and its vendors, the auditing department issued new guidelines, which the legal department documented in an exhibit after removing the older audit language from the master agreement.
The audit rights were all-encompassing and my client’s supplier made some notable exceptions to the language in the exhibit, in effect substantially altering my client’s company’s rights. To make matters more complicated, my client’s company needed the supplier more than the supplier needed my client’s company. In fact, the supplier could easily do without the work. That meant my client had to find a resolution or risk angering the Line of Business that was expecting the supplier to show up and perform some much needed services.
We Needed a Stakeholder Analysis
As my client explained the path to the new audit rights contained in the exhibit, it became clear to me that my client did not know to whom to escalate the supplier’s exceptions. She had talked to her supervisor and he said he was not empowered to agree to the changes, and that legal was simply passing the terms down from accounting.
We did a modified Stakeholder Analysis which clarified the team that initiated the new audit rights protocol. She followed up with an email to this team and learned that this team had the power to make changes to the protocol outlined in the exhibit. If this team agreed, legal would follow along.
What are the Supplier’s Concerns?
Next we read the supplier’s exceptions and reasoning. This is a critical point. We cannot do anything when evaluating any exceptions to terms and conditions if the supplier fails to provide its reasoning. This supplier did provide its reasoning, so my client and I discussed the extent to which the supplier wanted to deviate from the newly established policy.
Can the Supplier Deviate? To What Extent?
The supplier’s comments to the exhibit noted that the rights were “over broad, far reaching and placed too big a burden on us (the supplier).” In order to evaluate the supplier’s comment, my client and I talked more about the mechanics of the audit rights as outlined in the agreement.
Evaluating the Exceptions
We needed to determine if the supplier’s exceptions maintained the same level of intent. In other words, did the supplier limit my client’s company’s rights or were they simply clarifying language in the agreement. Then we answered two key questions:
1) Were the supplier’s exceptions simply clarifying the limits of the audits?
Yes, some of the supplier’s exceptions simply clarified things, such as the hours of operation or the names of documents to be retained. For example, the supplier clarified that any potential audit that would be conducted at their site would happen during normal business hours from Monday through Friday. That exception maintained the intent while clarifying the hours of operation. For that category of exception, my client felt comfortable and empowered to advocate for the supplier’s changes.
The next question was more critical.
2) Were the supplier’s exceptions limiting the buying company’s audit rights?
The next exception in the exhibit altered the broad scope of the audit rights, thus altering the intent of the audit. The supplier limited the keeping of financial records to: number of hours worked, their employees’ time sheets, and related documents for their Time and Materials work only. That was a much more substantial exception.
Determining the Contract Specialists course of action
We identified three courses of actions.
#1 Reject All
My client could reject all the supplier’s redlines and not involve the audit team at all. In order to do that my client had to be able to support this decision. But, to make matters more complicated, and as already explained, my client’s company needed the supplier more than the supplier needed my client’s company. In fact, the supplier could easily do without the work. That meant my client had to find a resolution or risk angering the Line of Business that was expecting the supplier to show up and perform some much needed services.
#2 Accept All
In this decision my client would roll the dice and hope that her company would not be at risk if her company initiated an audit and found their rights limited. This was clearly not an option.
#3 Set a Meeting with Audit
My client decided that this was her only option. So we worked together to create a proposal. All supplier exceptions that were deemed clarifications should be accepted. Audit would have to evaluate the exceptions that altered the intent of the audit rights. But to do that and not get a boomerang, the proposal to evaluate the supplier’s exceptions needed clarification and support.
This method worked well as the audit team agreed to all clarifying exceptions and took the rest of the exceptions under advisement. After some back and forth with the supplier, both companies came to an agreement.