A couple of weeks back, IACCM released their ranking of negotiated terms for 2007 (which also included a useful chart showing the trending of specific terms over the years). Over on Supply Excellence, Tim Minahan beat me to the punch by listing the top terms and sharing the news with his readers, so in this post, I thought it might be more useful to dig beyond the numbers. But first, I thought it might be useful to share a bit of analysis from the authors of the report. The top two negotiated terms from 2006, limitation of liability and indemnification, remained the same in this year's survey. But price increased a notch to the third most negotiated term. What's the net of this year's result? According to Tim Cummins and his colleagues at IACCM, "There are temporary 'blips' as major events drive sudden interest in particular clauses or approaches -- for example, Force Majeure in the aftermath of 9/11 or Payment Terms at the time of new revenue recognition legislation. But overall, the results indicate a continuing 'status quo', with the battle-lines firmly drawn and almost unchanging -- despite the pace of change in other parts of the business."
One of the reasons IACCM's research is quite useful is that it is global in scale. Compared with ISM, IACCM has significantly more global participation from members. This should dictate that many companies participating in the survey are engaged in global trade or cross border transactions. But why, in this case, especially given that 2007 really was a pinnacle year for global sourcing, are such areas as freight / shipping, security, product substitution and import/export regulations -- all areas that should be of significant interest to procurement organizations working with global suppliers -- at the bottom of the list (and are trending down, in some cases, based on a historical analysis of their rank)?
In my view, this finding suggests that many companies involved in global sourcing have been far too focused on the wrong set of issues from a negotiation and transaction perspective. And this is, in most cases, unit cost. But all of the negotiable areas I listed -- in addition to others such as performance bonds, jurisdiction, and assignment/transfer -- which are lower down on the list as well -- have just as important an impact on the total cost factoring in quality and risk of importing (or exporting) goods and services as do unit price and the other terms that come out on top of the rankings. This disconnect suggests to me that most companies would do well to think through the actual costs of global sourcing without over-romanticizing the short-term unit cost savings possibilities.
Am I off base here? I'm curious to get other perspectives on the subject. And thanks, Mr. Cummins, for providing us with some solid primary research on a subject which is clearly wanting for additional investigation.
- Jason Busch