Most Favored Nations - Part II

Add comment October 10th, 2006 David Bush - Iasta

I wrote a blog early in the year which took some time to analyze the benefit of Most Favored Nations clauses in e-RFx documents. Interestingly, that blog is one of the most heavily trafficked, even still today. Since so many people have interest in this issue and there appears to be many questions about the usage and value of MFN clauses, I asked Iasta corporate counsel - David Castor - to chime in with some thoughts from the legal perspective.

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Most Favoured Nations clauses derive from international trade law. There, an MFN clause states that one sovereign nation grants to another sovereign nation certain trade advantages where the MFN nation will always receive equal or greater trade benefits from the first nation than all other nations who trade with the first nation. The purpose of this type of MFN clause is to create a mutual relationship of trust among trading nations.

In the U.S., MFN clauses are also often found in class action settlement agreements. In the famous 2000 MP3.com case, MP3.com offered MFN clauses in settlement agreements with individual plaintiffs to guarantee that a particular settlement amount with each plaintiff would be at least equal to any settlement amount agreed to with any other plaintiff. The intention of this type of MFN clause is to encourage efficiency in dispute resolutions.

Today, MFN clauses have worked their way into general transactional agreements. As the original posting suggested, this has been noticed in certain supplier agreements. The purpose for this type of MFN clause mirrors the purpose in international law in that it builds a relationship of trust in commerce between two entities. However, the application of MFN clauses in an operational level contract causes some complications from a practical standpoint. Most key, these clauses may not practically be enforceable.

First, and most obvious, a supplier has no incentive to share with the MFN buyer that it has offered a lower price to another buyer. In certain circumstances, the pricing information may be publicly available, but that will generally not be the case. Second, there is a question of the MFN buyer’s ability to audit the supplier’s books. If the buyer has no audit rights (meaning it cannot check the supplier’s books) to verify that their price has remained the lowest on the market, the buyer must merely take the supplier at its word (thus, going back to the first point of trust). However, even if the buyer does have audit rights, most supplier contracts include confidentiality sections which prohibit the parties from sharing that contract information, including price, with any other entity. Thus, the supplier may not, by contract, be able to share that specific document or information with the MFN buyer. Again, the buyer is left with taking the supplier at their word. Finally, for general operational contracts, the supplier’s managers may not remember that they need to share this information with the buyer. It puts ongoing monitoring obligations on the parties that may be difficult to fulfill.

MFN clauses in supplier agreements may provide a foundation for a good faith working relationship, and in situations where the market pricing information is public knowledge, they may be a good tool for developing an ongoing supplier/buyer relationship. However, it is hard to recommend the use of an MFN clause where the market prices are not readily available. Further, in many cases the inclusion of an MFN clause will complicate contract negotiations when, in reality, the enforcement of these clauses by an MFN buyer may be extremely difficult.

Entry Filed under: General, Suppliers, Supply Management Best Practices, e-RFx

Outing the Spend Fool

Add comment October 9th, 2006 David Bush - Iasta

After a spirited debate on sourcing optimization, over on Spend Matters last week, I got even more curious to the real identity of the Spend Fool, much as others have already. Having built a reputation as the premier commenter on Jason’s blog with very creative responses that show up every few weeks, Spend Fool is a blogging Hall of Famer now (at least in our little part of the world).

While poking around and writing this fun post, I planned to announce that I was suspecting the Fool to start a blog of their own, or that it was only a matter of time. That is when I stumbled into the Lost Ark itself and discovered the identity of our masked friend!! Needless to say, it was a true “A-ha!” moment.

So, instead of my announcement as planned, I shall leave the outing to the Fool’s self. And to close, should the Spend Fool want to remain anonymous, they may feel free to email/call me to find the leak and fix it. You have my email address…

Entry Filed under: General

Sustained Sourcing Success

Add comment October 6th, 2006 Michael Lamoureux

In a recent edition of Supply & Demand Chain Executive, you can find the article Sustaining Strategic Sourcing Wins that indicates four enablers must be addressed to ensure a successful roll-out and savings over the lifetime of your company’s strategic sourcing project.

The article, which states that making strategic sourcing work in the long-run is still a challenge for many organizations indicates that to sustain hard-dollar savings and continue to deliver results, companies must treat strategic sourcing as more than a one-time effort and that four enablers must be properly addressed to ensure a successful roll-out and prevent savings from being short-lived. Specifically:

1. A center-led organization
   A sustainable, long-term procurement organization sponsored at the executive level, where authority, roles, responsibilities and individual performance metrics are clearly defined is required. Stakeholders must buy into the organization and align with common objectives.
2. Continuous improvement of skills
   Sourcing professionals must develop and maintain proficiency in all aspects of the sourcing cycle and organizations need to identify the knowledge and the skill sets of their procurement staff and develop training plans to address any knowledge gaps.
3. Processes and Technology
   Appropriate processes and technology must be in place to sustain long-term savings.
4. Specific Performance Measures
   Only realized savings impact the bottom line and a formal set of measurement processes must be in place to track usage, pricing, user compliance to established contracts and supplier performance.

This is all sound advice, and all of the above are critical to long term success, (after all, over the summer I advocated center led models, a focus on talent, eSourcing Technology, and solid metrics) but I found the article lacking, because it skipped over a critical point - underneath it all you need a sound corporate wide supply chain strategy aligned with an underlying Total Value Management philosophy.

When you get right down to it, the fundamental reason I am working with Iasta is that I am convinced they understand the importance of building a sourcing suite on a solid premise, they get that Total Cost of Ownership alone is not always enough, and they understand that true decision optimization must be built on a Total Value Management philosophy in order for their clients to get the biggest bang for their buck. They see the next evolution of eSourcing and are working hard to get there. Are they the only vendor in the space that sees what the next evolution will be? No - but I’m pretty sure I’m right in my belief that most vendors do not have a good idea what comes next. After all, only a handful of companies can be leaders, and I’m excited to have another opportunity to assist one of the companies that I am predicting will be a future leader.

Entry Filed under: Functionality, General, Optimization, Technology, e-Sourcing Marketplace

eWorld Day 2 - London

Add comment October 5th, 2006 Sean Delaney - Iasta UK

Day 2 of eWorld and I am coming to the end of this years’ exhibition. From the past 2 days there are 3 observations which I feel are worthy to highlight:

Firstly, although willing the Public sector have yet to grasp the eProcurement nettle with one notable exception, the Scottish executive. They are extensive users of market places and esourcing, which in some cases puts them way ahead of their private sector colleagues – I would like to see a seminar on this in Feb 07!

Secondly throughout my time in the eSourcing marketplace purchasing professionals hunger for “thought leadership”. However this is truly a scarce commodity. So often at these events vendors use their seminars as thinly veiled sales pitches but those vendors who avoid this always achieve the greatest impact.

Finally another observation is the new found enthusiasm of retailers to tackle indirect purchasing through eSourcing. Some 5 years ago retailers were the earliest adopters of eSourcing technology (mainly e-auctions) in Europe however they often focused on directs. Whilst directs have been relatively simple commodities to auction, indirects are proving far more difficult. The common barriers stopping greater activity seem to be the lack of spend data, Senior management buy in and poor esourcing technology. From experience indirect esourcing projects achieve higher returns……I think the saying “no pain no gain” definitely applies here!

Well that’s it for this year and I look forward to eWorld Feb 2007 with some trepidation as I realise I have now thrown down the “thought leadership” gauntlet!

Entry Filed under: General, Global Supply Issues/Risk, e-Sourcing Marketplace

Defining Collaboration

2 comments October 4th, 2006 David Bush - Iasta

The article ‘True’ Collaboration: It’s in the Eye of the Beholder in a recent issue of Global Logistics & Supply Chain Strategies, even though directed at the supply chain in general, is quite true of sourcing efforts as well.

Some describe automated communication between partners as collaboration, even if the information being exchanged is purely transactional. Others believe that true collaboration should include such elements as mutually agreed upon business objectives and performance metrics as well as enterprise-spanning processes. A few say the word “collaboration” doesn’t reflect what is happening in the marketplace and ought to be thrown out altogether.

A recent survey by Capgemini, Georgia Southern University and the University of Tennessee defined ‘true collaboration’ as comprising real-time data sharing with key customers and suppliers, alignment of people and organizations, and alignment of processes and practices and found that less than 10% of 2,300 respondents were capable thereof.

I think they’ve all missed the point. Simply put, collaboration occurs when two or more parties collaborate. According to the American Heritage dictionary, the definition of collaborate is to work together, especially in a joint intellectual effort. Everyone seems to be focused on the technology, but technology is not the problem. Technology can be an enabler, but collaboration begins with a willingness to work together on shared issues and happens when both parties use whatever means necessary. You don’t need a system configured for real time worldwide data synchronization with push-based alerts whenever a deviation is detected - a homemade batch script that extracts and pushes summary reports through email on a daily basis will often do the job nicely if the fundamental desire is there to collaborate or work together. Moreover, the presence of a real-time system, even though it can greatly facilitate the process, doesn’t amount to a hill of beans if both parties are fundamentally unwilling to work together.

The real issues is trust and mutual respect for shared goals and continuous improvement. Then, any decent on-demand web-based solution accessible by all parties will provide the basis for your collaboration efforts.

Entry Filed under: General, Suppliers, Technology

The Customer is #1

1 comment October 3rd, 2006 David Bush - Iasta

Over the summer, Supply Chain Manufacturing Review ran a lengthy article entitled The Intimate Supply Chain that indicates that the next stage of supply chain advancement, after all of the excess inventory and nonproductive processes have been removed, will be the creation of “intimate supply chains” that create value for customers at every touch point.

The article states that the intimacy will be gained through the following integrated actions:

1. developing a portfolio of customer segments
2. understanding the needs and opportunities of each segment
3. fashioning customized value propositions that deliver a complete buying solution, and
4. using technology, tools, and metrics to build and maintain a supply network focused on the customer

which will lead to a customer-centered supply chain.

What I don’t get, after reading it again, is why this is the “next stage” of supply chain advancement, considering this is nothing more than sound business processes which have been around for a while. After all, it’s mostly just common sense. If you want to do well, you have to attract customers and keep them. You attract them by offering them a valuable service. You do that by listening to them and understanding their needs. You keep them by providing them good service. You continue to do so by measuring yourself and improving at every opportunity. And hasn’t the maxim “the customer’s always right” been around for a long time?

After all, when I listen to my customers and build the solutions they want, everyone wins. You dont need to be a Harvard MBA to figure out that aligned goals equal success for all.

Entry Filed under: General

e-World Conference Update (London)

Add comment October 2nd, 2006 Sean Delaney - Iasta UK

I’m here again at eWorld in the Heart of London. This is our 4th year of exhibiting at this bi-annual event and this time I have noticed a significant change in the understanding of the esourcing market place. Delegates that I have met have a far better knowledge of esourcing and how to use sourcing tools for categories other than just auctions. So we are definitely over the eauction hump!

However optimisation is still misunderstood and once explained delegates see the benefits but I feel they have some way to go before fully utilising the software. So in this area as well as contract management there is huge scope for growth.

With regard to highlights from the presentations The Hackett Group yet again mesmerised the audience with interesting facts and figures. In particular best in class statistics which often have a sobering effect on the audience!

Low Cost Country Sourcing presentation from Prof Richard Lamming of the University of Southampton discussed the interesting observation that no organisation is truly sourcing Globally as there is a lack of emphasis on encouraging innovation within the supply chain. One further point is the lack of commitment of eSourcing vendors who were here in February which is of some surprise considering the level of interest this time.

Entry Filed under: General, e-Sourcing Marketplace