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Win, lose or redraw?
has led to a growth in demand for contract risk services as companies look to mitigate risks and drive down costs. outsourcing of non-core processes and demand for stronger corporate governance.Companies can better manage risks and improve contract performance through active review of the contracts they have with third parties. lose or redraw? . procurement optimisation. Ernst & Young forensic contract reviews can generate savings. Third party contracts Win. coupled with the challenging economic climate. The increase in the importance of intellectual property. identify process improvements and provide practical input to future contract negotiations.
Third party contracts Win.” Aberdeen Group.gfljY[lk lg Af[j]Yk] J]n]fm] Yf\ HjgÕlk Value gap analysis Value Contract deployment Contracted value ‘Value gap’ from value leakage at time of contract renewal Contract renewal Time Too many companies fail to maximise the value from their third party relationships. “… in a typical Fortune 1000 company. Z][Ymk] l`]q Yj] ]al`]j fgl j]anaf_ l`] Z]f]Õlk klYl]\ af l`] gja_afYd [gfljY[l gj fgl reappraising contracts when the environment in which they operate changes. companies risk non-compliance. “… ineffective control and management of supplier contracts cost businesses $153 billion per year in missed savings opportunities..” 9[flmj]$ EYfY_af_ . The Contract Management Benchmark Report Without a proper understanding of the risks in the contract portfolio. lose or redraw? 1 . Third party contracts Win. Those companies that actively seek to manage these risks are the ones best placed to emerge from challenging economic conditions in a position of strength relative to their competitors.. missed opportunities and potentially expose themselves to costly future litigation. lose or redraw? 9k gj_YfakYlagfk ]e]j_] ^jge ÕfYf[aYd mfjlYaflq Yf\ hj]hYj] ^gj l`] f]o ][gfgea[ environment. one of the key performance goals they should consider is to revitalise the oYq l`]q eYfY_] jakc& 9f Yj]Y o`]j] eYfY_af_ jakc [Yf _]f]jYl] ka_faÕ[Yfl nYdm] ak through active management of third party relationships. integrated contract management capabilities can deliver a 3-5% reduction in procurement expenses .
Re-negotiation We identify ways in which our clients’ objectives might be better achieved Yf\ hjgna\] ÕfYf[aYd afka_`lk lg support re-negotiations. The seller was then able to use the insights from our analysis as a key tool in its negotiations with prospective purchasers. We reviewed the drafting. a review of the deferred consideration clauses was undertaken. Pre-signing O] a\]fla^q ÕfYf[aYd Yf\ j]dYl]\ drafting that is either ambiguous or contrary to our clients’ aims. lose or redraw? . Contract pre-signing Utility company As part of the pre-signing process for a contract to cover the sale of a wind farm by a major utilities company. 2 Third party contracts Win.Forensic contract review: the contract lifecycle Our experience of assisting companies when contractual relationships deteriorate enables us to offer insights and advice throughout the contract lifecycle. modelled the impact on consideration to be paid given various scenarios and advised our client on whether the mechanism was suitable and robust.
Third party contracts Win. a settlement agreement was put in place to safeguard both parties’ interests in the interim. Contract re-negotiation UK airport operator A UK airport operator was concerned that the way in o`a[` Yf Yajdaf] j]hgjl]\ alk ljY^Õ[ Yf\ revenues was resulting in a shortfall in income to the airport. Gmj Õf\af_k j]kmdl]\ af l`] [da]fl j]anaf_ Y ka_faÕ[Yfl d]n]d g^ compensation. We used data analytical tools to audit the airline’s submissions and quantify the potential shortfall. including powerful data analytics tools. largely as a result of differing interpretations of contract terms. lose or redraw? 3 . Exit Mf\]jklYf\ klj]f_l`k Yf\ o]Ycf]kk]k g^ \akhml] A\]fla^q [gkl Yf\ lae] aehda[Ylagfk =fkmj] jgZmkl imYflme Ykk]kke]fl Contract execution Major bank Following the transfer of their credit card business to a new supplier.Pre-signing 9[`a]n] [dYjalq af ÕfYf[aYd \jY^laf_ =fkmj] YhhjghjaYl] hjgnakagf ^gj Y[kk Yf\ \akhml] j]kgdmlagf Execution We use specialist forensic techniques. The airport operator was able to use gmj Õf\af_k lg kmhhgjl alk hgkalagf in a successful round of contract re-negotiations. to analyse the reasons for divergence between expected and actual performance. Re-negotiation Hjgna\] kmhhgjl af contract re-negotiations 9[`a]n] egj] Z]f]Õ[aYd [gfljY[l l]jek @]dh ]f`Yf kmhhda]j j]dYlagfk`ahk Forensic contract review Execution H]j^gje jakc Ykk]kke]fl g^ [gfljY[l hgjl^gdag Mf\]jklYf\ j]Ykgfk ^gj h]j^gjeYf _Yhk A\]fla^q Yj]Yk ^gj hgl]flaYd ÕfYf[aYd j][gn]jq Exit We apply our experience in helping our clients through contractual disputes to advise on how to achieve optimal results on contract exit. Our client sought to terminate the contract on the grounds that it was not economically viable due to the fact that the level of electricity generated would be less than was anticipated. Our fee was under 5% of the shortfall in j]n]fm]k a\]flaÕ]\& Contract exit Waste company Our client entered into a 15 year agreement with a company to purchase electricity ^jge gmj [da]flÌk dYf\Õdd kal] mhlg l`] contracted capacity. We assisted our client in securing the termination of the contract by providing a model setting out the economic viability of the contract and challenging the documentation provided by the opposing party. We provided audits to review the current supplier’s compliance with the Y_j]]e]fl Yf\ a\]flaÕ]\ Y fmeZ]j g^ areas of non-compliance.
do you have a process for assessing the risk associated with entering into third party contracts and are you clear on how to mitigate these risks? Ź Once entered into.Common misconceptions In our experience the majority of companies are not actively monitoring their contracts. and non-compliance addressed? Ź What are the income/costs associated with contracts? How many contracts would you [gfka\]j ÕfYf[aYddq eYl]jaYd7 Ź <g qgmj [gfljY[lk [d]Yjdq Yf\ mfYeZa_mgmkdq \]Õf] Ydd [gfljY[lmYd l]jek kg l`Yl both parties have the same understanding of how licence fees.. do you know what contracts you will be taking on and have you properly assessed this risk? 4 Third party contracts Win. It is important to recognise that most contracts are generally causing some pain to both parties and it is often a lack of communication over the concerns of both parties that leads to under performance. I Al ak fgl h]jan]\ Yk Y Zmkaf]kk aeh]jYlan] Ç ]n]jql`af_ ak Ôf] Ç o`q look for problems? A In the technology.. Why do organisations respond in this way? Common responses and the evidence against these are shown below. 9f ]^^][lan] [gfljY[l j]na]o hjg_jYee] [Yf \]dan]j aehgjlYfl Z]f]Õlk af[dm\af_ extracting enhanced value from existing contracts. strengthening and preserving relationships with partners. yet there continues to be resistance to active contract management. Businesses in all sectors have something to gain from adopting this approach. are calculated? Ź If you acquire a company. commission. cost management. contract reviews are the norm as [gehYfa]k `Yn] j][g_fak]\ l`] Z]f]Õlk l`Yl [gfljY[l j]na]ok [Yf Zjaf_ af[dm\af_ optimised revenues. and maintenance of quality control and brand. I J]kgmj [gfkljYaflk Yf\ h]jan]\ Z]f]Ôlk \gfËl bmkla^q l`] investment. royalties. customers and suppliers and giving assurance that appropriate value is being achieved.. revenues. Q Why risk damaging relationships? A Contract risk reviews frequently build a better relationship with the third party. etc. enhanced relationships. lose or redraw? . A In our experience over three quarters of contract reviews identify errors and contract non compliance. media and telecoms sectors. Such contract reviews can deliver a 3-5% reduction in contract spend and some substantially more. Questions to ask yourself Ź Do you really understand the risk in your contract portfolio? For example. costs. whose responsibility is it to look at contract performance? Are the rights to verify performance and enforce terms exercised? How is performance monitored.
Key contacts Sara Fowler Partner Tel: +44 (0)121 535 2311 email: sfowler@uk. whatever their stage in the contract lifecycle.ey.ey. we assist in increasing value from third party contracts. The question of whether or not the contract is achieving its expected outcome is often over-looked and might only be considered when something has gone wrong.com Louise Barlow Senior Manager Tel: +44 (0)207 951 6449 email: lbarlow@uk. applying a risk based approach that focuses on identifying real revenue and cost recovery opportunities.com Terry Seagreaves Senior Manager Tel: +44 (0)161 333 2636 email: tseagreaves @uk.ey. Our approach in forensic contract review is to prioritise those contracts which. have the highest prospects of delivering extra nYdm] Zq [Yl]_gjakaf_ [gfljY[lk Zq l`]aj jakc hjgÕd] Yf\ [jala[Ydalq g^ j]dYlagfk`ah& By leveraging our knowledge and industry experience.com Third party contracts Win.How do you move forward? Once a company has entered into a contract with a third party the focus often shifts to other commercial issues or the next ‘deal’. lose or redraw? 5 .com Leo Brown Senior Manager Tel: +44 (0)113 298 2491 email: lbrown3 @uk.ey. We can offer help by providing insight on the performance of your contracts.
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