Contract Standardization Eases Transaction Accuracy

The impulse might be to get the most advantageous contract terms on a vendor by vendor creditor by creditor basis, or any like contractual relationship, but it actually could end up costing you more than may think.

Every business today is looking for ways to improve the bottom line; to make the best deals possible.  Many companies think that negotiating each vendor contract separately will get them that best deal, but that is not necessarily true. Companies need to understand the value of properly negotiating contracts; they need to realize that what they want may not be commercially viable. What may make the most sense, in fact, is to have a more standardized contract that works well over each of the company’s programs.

To bring it down to a personal level, imagine your family’s phone plans. You could negotiate each family member’s plan separately. Some get more data per month, some get less. Then, at the end of the month, you receive a separate bill for each family member and you need to sort out if you’re paying the appropriate amount per bill per person. Or, you do what most people do and buy a family plan that standardizes the amount of text and data that can occur across the entire family. At the end, you have a simplified bill that’s easy to ascertain as to accuracy and requires a single payment.

How to streamline the P2P cycle, reduce exceptions, and ensure greater compliance.

Bringing this back to the business level, suppose you have the same program with different vendors. Perhaps it is a tires programs for your fleet and you have different contracts with unique parameters for Hankook, different ones for Michelin, and different ones for Bridgestone. For a mid-size to large company, this may put extra burdens on operators when it comes to ordering and accounts payable when it comes to compliance and accurate payments especially if your P2P processes still rely on paper and manual intervention. Automating the entire P2P process with more standard contracts will allow the purchase to pay cycle to proceed easily, reduce exceptions, and ensure greater compliance.

This becomes even more of an issue when acquisitions occur and the parent company finds itself inheriting existing contracts that conflict with its own strategically negotiated contract programs. This can create conflicts, damage the customer/vendor relationship, and increase the amount of disputes that need to be handled on a one-by-one basis vs enabling most invoices to be matched to contract prices and then be sent straight through to the company’s ERP system for payment.

Contract standardization can alleviate multiple issues.

It’s important to realize that we’re talking about standardization within specific programs, so your tire contracts (regardless of vendor) will likely have some differences from your office supply contracts. But within the programs themselves, standardization will alleviate multiple issues.

In summary, whether it be a Purchase Agreement, Master Lease Agreement, Credit Agreement, Master Assignment Agreement, Non-Disclosure Agreement, etc., standardized documentation and related processes, should  be collaboratively negotiated (each interested party) to adequately govern, properly align and effectively promote sustainable operational scalability and mutually beneficial business partner success.


Ray Ellingsen

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