Global Contracting: 3 Factors to Understand Before Involving Developed and Developing Geographies

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Spend Matters welcomes this guest post from Iyappan C., senior research analyst, FM/CRE Services at Beroe.

Procurement organizations have come a long way. From being simple purchasing teams in the past to holding an important seat on the board, procurement organizations have transformed themselves like never before. One of the major drivers for this revolution has been the continuous need for value generation, and the result is global supplier consolidation.

One of the clear trends in the current business world is that global organizations are increasing their operational presence in developing geographies and, as a consequence, procurement teams are forced to seek and attain benefits from integrated supply contracts including these geographies. If they can attain such integration, it will consolidate the organization's’ overall supply bases more efficiently.

But what most buyers find a struggle is to understand the steps they have to consider before opting for a global supply contract. As a procurement analyst myself, I was in a dilemma as to how can we mix both mature and developing geographies in a single contract? What will be the optimum contract model?

I discussed this with Andrew Porter, who is an expert in multinational procurement and the managing director of Spingate Consulting, and I managed to get few key aspects of global contracting which will benefit the buyers who are ready to realize the benefits of global contracting.

Buyer Readiness 

What seems obvious is that the global supply model will be easier to implement if the buyer’s procurement team has the experience in handling and governing large contracts. When a global supply contract is implemented, buying organizations need to be developed in such a way that they can manage the contract on both a local and global basis.

So what is the checklist for the procurement team to know that they are ready to handle the big game?

  • A strong central contract management team needs to be in place. The team should have overall responsibility for the contract, including the role of ultimate arbiter in the event of dispute between service providers and an individual site or region.
  • A local team with the knowledge to manage an outsourced contract is required. They should focus not only on operational delivery at a local level but also consider the overall benefits to the organization that they might receive through the contract and the knowledge they can share.
  • A clear and unequivocal mandate from senior management is necessary so that the outsource will go ahead and the vision will not be diluted even if there is local resistance.
  • One of the most effective ways of delegating roles within the organization would be by conducting a RACI workshop where the roles are assigned through the development of process flow charts.
  • A responsibility matrix will inform each member of their role and their relationship with one another both locally and globally.

Service Provider Maturity

It is impossible for any global service provider to have an equal percentage of maturity in all of their locations. Though the global players are constantly working on developing their capabilities and geographical presence through M&A and other means, they are likely to have maturity differences for different locations. It is therefore necessary that the buyer considers the difference and analyze the impact that it may create beforehand.

  • Finding a service provider with the strong global/regional management function in place, dedicated to managing multi-country contracts, is a key parameter while choosing the vendor.
  • Buyers must accept that even the best service provider will be stronger in some geographies than others. This is due to a number of factors, including heritage, client base and general business focus. It is essential to check with the service provider about the difference beforehand, so appropriate arrangements can be made.
  • Service providers are likely to sub-contract (possibly the delivery of the entire service) in some countries. This is not necessarily a problem, but it is necessary for the buyer to be certain that the lead contractor has the resources to manage these sub-contractors so that service levels and management information are not compromised.

Contract Model 

The most common, and effective, contract model is the use of a master services agreement (MSA) supported by country-specific local services agreements (LSAs).

  • The MSA should be executed in the country where the client is based or is legally mature.
  • The LSAs will be executed locally but should be in the same language as the MSA with any translations being for information purposes only.
  • LSAs should be concise documents with detail variations to the MSA for genuine and specific business reasons. The LSA should not repeat the MSA or its clauses or attempt to vary the main clauses of the MSA and deliver non-operational inconsistency. It should therefore be supplementary to the MSA and should not be seen as separate to it.

Conclusion

Integrating different geographies represents a big change, culturally and operationally, so it is essential to have a solid business case (financial or non-financial depending on core business imperatives) before leaping into the process. Also, the contract and service must be able to evolve to meet the needs of the business.

Choosing the best service provider to achieve the desired number from the cost reduction is more like the beginning of the journey. The buyer needs to remember that this is a change management project as well as a procurement/operational project, so internally, stakeholders will be going through the emotional cycle during the project, and therefore the human aspect of such a change should never be forgotten. Thus choosing the right pace of change regardless of the size of the organization is very important and a gradual approach, rather than a radical approach, is often the most effective with clearly defined goals being achieved as the journey progresses.

Evidence and experience shows that opting for an integrated contract with a service provider that can deliver to multiple locations can provide a substantial cost reduction. However, evidence shows that going forward with a global contract without proper preparation will only burn your fingers and not allow you to realize the benefits that could be achieved.

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