Tendering - Pass the Parcel - Who's in charge of the contract?
Revamp your tendering process, mitigate risks, and secure winning deals by harnessing AI contract review technology.
June 22, 2023
Tendering is a way customers can run efficient processes for procurement of goods and services and maximise competitive tension.
They are a fact of life for suppliers in a variety of industries, none more so than logistics and freight forwarding.
Based on our work with logistics companies, this paper frames the challenge around the contract and risk in the tender process and explains what can go wrong. We see a few key solutions to these challenges, notably by:
getting aligned on key business goals and recording them in a brief playbook of contracting guidelines. This should align with a flexible risk management framework.
reviewing the contract terms early in the process so that performance standards and contract risks can be properly assessed
contract specialists giving their business colleagues basic training in contract review, thereby leveraging their expertise and allowing those business colleagues to uncover problems earlier in the process
effective use of technology - AI driven contract review software or collaboration tools being two good examples.
Tenders pose unique challenges
Tendering for business is a fact of life in many business areas, particularly in the service economy. Someone wants the services you provide but wishes to set out the scope, a process, their preferred conditions of contract and maximise the competitive pressure.
You are the service provider and need to navigate the process to land as the winner. Not only to win the tender but at a price that is profitable and with a scope and terms of contract that are deliverable.
All with time pressure.
In this paper we share some insights on how to get the contract right but still win the deal.
First, let's compare two approaches to tendering
Formal tenders are popular with high value and complex projects such as large engineering or construction projects. Also, with a lot of Government business. This is sometimes because laws require formal tendering (such as Government business) to avoid fraud, corruption or anti-competitive practices. Or because the value of the contract warrants a formal process.
A formal tender will preset the process, rules of tender and the way in which the bidders responses will be assessed. Usually, this involves the bidders providing a legally binding offer with a price and clear contractual terms. The tenderer will set out a proposed contract (sometimes called the terms and conditions or conditions of contract) in the bid documents and bidders must clearly show any deviations from these.
If the bidder does not state any deviations and their price is accepted, it may find itself obliged to work under the contract attached to the tender.
Informal tenders don’t have the same preset rules. Instead, the customer will invite bids from service providers in a more flexible manner.
A good example is the logistics and freight forwarding industry. Manufacturers who have to deliver finished goods or procure parts will often employ freight forwarders to arrange shipment and delivery of freight. These freight forwarders in turn deal with transporters by sea, air or land. Or they will engage a major integrated logistics company such as Fedex, UPS, TNT, DHL or DB Schenker.
The customer will often propose a form of contract, often based on an industry standard, but it is up to the bidders how they respond to this.
Whilst the insights below are relevant to all types of tenders, they specifically centre around the informal tender.
The contract is often left to the last moment
In a common process, the bidder understandably wants to focus on the commercial terms. The contract often gets put aside.
Partly, this reflects actual priorities but also that getting contract review from a lawyer or contract specialist costs money (at a time when the tender result is unknown) or will slow things down.
Often this means that the contract is left to the last minute.
If the bidder wishes to make changes, for example if the scope of the guaranteed performance is too strict, this can cause delays, unnecessary cost or potentially the loss of the business opportunity.
The lack of focus on the contract or the inability to get a contract specialist involved early in the process creates challenges and risks to the bidder.
Contract review is simple in theory and hard in practice
One commonly hears from tender managers that there are only a handful of issues in the contract that are business critical once the scope of service and price are agreed. Conceptually, these tender managers have negotiated these clauses on many occasions.
The problem is that the contracts come in many shapes and sizes. Each customer has their own form and so the manager is often presented with something like this.
Finding the issues of interest can seem like searching for a needle in the haystack. One sided clauses may override more balanced ones. Important clauses might be buried.
For example, the purchase order might override a limitation of liability in the terms and conditions or the other way round. Some of this is a result of convoluted contracts and some underhand practices.
War stories - what happens when things go wrong
When a medium size forwarder decided to set their sights on larger contracted business to complement their more transactional client base, they learned the hard way. The ambition is sound, but what happens in excitement around being invited to tender for millions in turnover? Critical details get overlooked, dismissed because they have not been understood in context.
The critical detail in this case was a penalty clause of £500,000 for non delivery of service. The clause was noted in the initial review of the contract and it was thought it could be adequately mitigated by additional insurance. A force majeure clause also seemed to give further protection.
Fast forward to the delivery of the service, the failure of another party in the chain triggered a delay in delivery of the equipment. The customer claimed the penalty. The service provider belatedly linked all of the tender documents with the contract terms. It was hopeful that the force majeure would nullify any ‘claim’; it was another party/sub contractor in the chain who failed.
However the penalty clause was in fact linked to the service metric, 97% and above on time requirement. Essentially making the 3% a per incident penalty exposure. A review of the volume of shipments forecast, highlighted the exposure on service failure to be in the millions. Far exceeding the return on margin from the contract. Insurance wasn’t in fact available
The failure to review the contract and put in place adequate risk management proved very costly.
Solution#1 - Align around common business goals and a risk management framework
Business managers, contract reviewers and everyone involved in the tender should align around some common goals. Some of these will be strategic (such as driving business growth in certain areas, focusing on revenue, margin or risk management) and some tactical (how to approach each tender).
Good collaboration comes from this alignment. It is helpful to write contracting guidelines or risk tolerances into a brief playbook. This playbook will save valuable time and improve outcomes as it is potentially deployed hundreds of times per year.
The playbook can address:
the process of tender review
specifically responsibility and process for contract review
a list of watch points on key risks and and possible mitigants
some basic contracting rules and policies and how to deal with potential red flags, including escalations and senior approvals
Playbooks should be simple - no more than 3 pages is a good guide. Remember also that the concept of a ‘red flag’ is flexible. Whilst there is always a line in a contract beyond which one has to be prepared to walk away, often sub-optimal’ contract terms can be accepted with a combination of minor adjustments and putting in place clear mitigants and processes to manage those risks in the delivery phase.
Risk and reward goes hand in hand within business. Risks cannot be eliminated in contracts. Sometimes, the price of business (particularly with a customer who has more commercial heft) involves taking on onerous responsibilities. The contract finalisation process should involve a rigorous process of assessing risk against the reward, identifying practical mitigants and setting redlines (beyond which the enterprise is prepared to lose the business opportunity).
Risks could be categorised as follows:
‘Ordinary risks’ commonly managed applying normal business practices - examples would be standard quality control or other procedures and taking out standard insurance policies;
‘Extraordinary risks’ requiring special management - for example increasing the level of resourcing, implementing new technology or taking out specific hedging or insurance policies.
‘Redline risks’ - risks which cannot adequately be mitigated or managed. These require changes to the contract or to walk from the deal.
Solution#2 - Process - Look at the contract early in the process
A clear process for reviewing and finalising the contract should be adopted by the bidder in the tender process.
The old adage of a ‘stitch in time saves nine’ can be applied to the contract. REVIEW IT EARLY IN THE PROCESS.
This doesn’t need to be time consuming or costly. Some tender managers will be trained to do the review. Others may need a contract specialist. A quick review and production of a list of key issues may be enough. That list can be shared with the customer at the earliest appropriate time in the process. The solutions below around training and technology may mean this review doesn’t require a contract specialist.
Solution#3 - Training
Contracts should be for everyone - not just lawyers.
Contracts can appear daunting for those without legal training, but one of the greatest gifts lawyers can give their business managers is the training and tools to do a high level review. Many businesses and their lawyers invest the time to give this training and guidance. This transforms the process from the old way (‘send to legal for review and join the queue’) to a quicker more agile way (‘Hi Janet - I’ve reviewed the draft contract and produced a list of key issues - can you have a look at this and add anything - particularly on the data protection clause’).
The old way means friction and delay. The new way is quicker, more collaborative and empowering.
Solution#4 - Technology
Advances in AI offer a solution in the form of AI contract review technologies.
AI contract review technologies come in many shapes and sizes and use different types of artificial intelligence (normally some combination of natural language processing, machine learning and deep learning algorithms and often a combination of supervised and unsupervised learning). Some, including Tiro from Lexical Labs also use rules and logic based algorithms to perform deeper analysis beyond mere data extraction.
Contrary to common misconceptions, AI contract review technologies are:
Cheap to set-up and run and don’t require much contract data and example agreements from their customers.
Easy to use by both business teams and lawyers
Complementary to the work of lawyers and contract specialists. AI contract review will handle the dense, repetitive but nonetheless important boilerplate and the specialists are freed-up to concentrate on the bespoke aspects of a contract
Equal or superior accuracy as compared to human reviewers on the ability to extract data and analyse key issues. According to Syke, a Legal Technology Consultancy, studies have shown direct comparisons and benchmarking where AI has achieved 94% accuracy (in seconds) where lawyers achieved 85% (in 90 minutes).
Tiro from Lexical Labs is an example of an advanced AI contract review technology, combining two key components:
An AI engine - combining Natural Language Processing and Machine Learning - built to understand different formats and texts in documents. This is largely pretrained and can be improved as the project progresses; and
Logic and rule based algorithms - undertaking further analysis so that data in the contract can be properly summarised, grouped and compared to the user’s own policies.
The technology means that in a matter of seconds, Tiro automatically produces a digital issues list in two parts:
Key contract data extracted and summarised.
Problem areas - being clauses that deviate from our customer’s contract policies, provisions carrying higher risks or just clauses that need to be reviewed further.
The concept of the ‘digital issues list’ above allows risks to be visualised and better decisions taken early in the tender process. Furthermore, the risks and suggested mitigants are retained and are accessible after contract signature.
Technologies such as Tiro can transform the tendering process.
Particularly the contract can be uploaded and reviewed early in the process.
The technology produces a digital issues list:
presented on a dashboard viewed by all team members
Risks are easily visualised and effectively scored
Team members can review it without having to read the contract, yet the relevant clauses of the contract are directly accessible from the issues list
It is easily compiled into a report or manual issues list
Instead of leaving the contract to the final moment, the contract review becomes an important part of the tender response.
For example, a manufacturing customer who adopts a ‘just in time’ approach to inventory management, may try to impose harsh penalties on its logistics supplier for delays in delivering supplies. These penalties can appear in different guises. Liquidated damages and specific references to these so called consequential or indirect losses are two examples. The lack of an exclusion of such losses is another example. This can be a minefield to manage. A well trained AI system can highlight these provisions in a few seconds.
As technology advances, contracts become more accessible and understandable to business managers. Technology will feature increasingly in the creation and review of contracts and extracting and visualising the key contract terms. Technology will transform business managers into basic contract specialists and contract specialists in business and risk advisers. Its an exciting world.
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