Managing Vendors – Articles by Jim Everett

Tips on managing vendors, skills and competencies required

Terminating Vendor Relationships

Posted on | July 20, 2009 | CLICK HERE TO COMMENT OR ASK QUESTION

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What are some key things that a vendor manager in the client organization needs to be aware of, when it is clear that a vendor is to be terminated. It is not always because of vendor fault, and it is not just as easy as unplugging one and plugging another in. So if you need to terminate a vendor, here are some perspectives and a background.

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Business can be full of changes, and often surprises. This is especially so when we have a global economic crisis, or a country in recession with an unpredictable or unstable economy. The US economy, as well as the world economy, is short on predictability right now. So, vendors and agreements that have been in place for some time may no longer be a good fit.

Even with the best planning and foresight, things change – acquisitions (both on client and vendor side), failed customers, new technologies that skyrocket and change how business is done, shifts in client business models, supply chain changes on the vendor side, economic changes in the vendor country, and so on.

So expect surprises in client-vendor relationships. If your business expands, contracts, adopts a new business model, is acquired, cuts back expenses, lays off staff, decides to outsource more (or less), makes a high-level decision to change countries for global outsourcing, deploys new technologies, or anything that has a major impact on vendor requirements, then it raises the issue of whether a current vendor can do a 90 degree shift. A vendor manager may have to terminate a vendor. Or the vendor may step up and say that they cannot commit or deliver on the new and changed requirements.

As a vendor manager for your company, it is not just whether you are caught by surprise, or had not planned for the termination, it is how you handle the wrap-up, new sourcing, and handover. And understanding the original agreement, additions and changes, and what is spelled out there on termination, is the starting point. In future posts and podcasts, I will talk more about contracts and agreements. Here I will focus on the termination process.

The starting point for termination is not at the end of the project, but at the beginning, in the original contract. A good agreement will anticipate the possibility of termination before the end of the contract period or completion of the project. While all the causes and contingencies may not be anticipated, a good agreement will set out the right balance of “what ifs”, as well as a process for how terminations will be managed. Termination does not have to be combative and litigious (this, after all, can be very costly and burn up a lot of time).

More than likely the termination will involve your company’s Sourcing Department and/or Legal. The original agreement will set the basis for how payment for partial work done by the vendor, if definitive milestones have not been met, or if programs are based on review periods. The vendor may have put in work and capital investment, in good faith, based on the agreed period and scope of work set out in the agreement. This is a key area of negotiation, driven by the wording of the contract.

There is also another legal concept involved here, called “quantum meruit”. This literally means, “what is deserved”. I am not an attorney, and your own Legal Department or experienced Sourcing professional will need to work through this. If the agreement was negotiated and drafted carefully, how a vendor is paid for partially completed work if a client terminates should be covered. And investments that the vendor chose to make during the course of the contract may also be a basis for negotiation.

Other factors that need to be managed, whether wrapping up a project early, or transitioning to another vendor, include: Intellectual Property for what was developed, created and shared; non-disclosure periods for both parties; non-compete clauses applying to the vendor; and expectations that the vendor will complete outstanding obligations. There may even be a handover to the new vendor. If the termination was harmonious and by mutual agreement, this step is much easier.

Remember also that you and your company have made investments of time and information with this vendor. They have knowledge of your company and your processes, how to do business and work with your systems, that will be lost when you transition. As a manager of the project, you will need to capture and transfer to the new vendor as much of this “institutional knowledge” as possible. Some of this may be documented and recorded, which makes it easier. But in my experience, working relationships grow and work out ways of doing things without documenting and tracking them.

So, whether you are simply wrapping up a project early and terminating a vendor relationship, or bringing on board a new vendor more suited to the changing scope of work or cost structures, there is planning and careful management that needs to be done, that involves all stakeholders and those at the affect of the change.

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