Third party contracts

Win, lose or redraw?

Companies can better manage risks and improve contract performance through active review of the contracts they have with third parties. Ernst & Young forensic contract reviews can generate savings, identify process improvements and provide practical input to future contract negotiations. The increase in the importance of intellectual property, procurement optimisation, outsourcing of non-core processes and demand for stronger corporate governance, coupled with the challenging economic climate, has led to a growth in demand for contract risk services as companies look to mitigate risks and drive down costs.

Third party contracts Win, lose or redraw?

Third party contracts

Win, lose or redraw?
9k gj_YfakYlagfk ]e]j_] ^jge fYf[aYd mf[]jlYaflq 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_fa[Yfl nYdm] ak through active management of third party relationships.
in a typical Fortune 1000 company, integrated contract management capabilities can deliver a 3-5% reduction in procurement expenses ...
9[[]flmj]$ EYfY_af_ ;gfljY[lk lg Af[j]Yk] J]n]fm] Yf\ Hjglk

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, Z][Ymk] l`]q Yj] ]al`]j fgl j][]anaf_ l`] Z]f]lk klYl]\ af l`] gja_afYd [gfljY[l gj fgl reappraising contracts when the environment in which they operate changes.
ineffective control and management of supplier contracts cost businesses $153 billion per year in missed savings opportunities.
Aberdeen Group, The Contract Management Benchmark Report

Without a proper understanding of the risks in the contract portfolio, companies risk non-compliance, missed opportunities and potentially expose themselves to costly future litigation. 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.

Third party contracts Win, lose or redraw?

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.
Pre-signing
O] a\]fla^q fYf[aYd Yf\ j]dYl]\ drafting that is either ambiguous or contrary to our clients aims.

Re-negotiation
We identify ways in which our clients objectives might be better achieved Yf\ hjgna\] fYf[aYd afka_`lk lg support re-negotiations.

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, a review of the deferred consideration clauses was undertaken. We reviewed the drafting, modelled the impact on consideration to be paid given various scenarios and advised our client on whether the mechanism was suitable and robust. The seller was then able to use the insights from our analysis as a key tool in its negotiations with prospective purchasers.

Third party contracts Win, lose or redraw?

Pre-signing
9[`a]n] [dYjalq af fYf[aYd \jY^laf_ =fkmj] YhhjghjaYl] hjgnakagf ^gj Y[[]kk Yf\ \akhml] j]kgdmlagf

Execution
We use specialist forensic techniques, including powerful data analytics tools, 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][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 fYf[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.

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, a settlement agreement was put in place to safeguard both parties interests in the interim. We provided audits to review the current suppliers compliance with the Y_j]]e]fl Yf\ a\]fla]\ Y fmeZ]j g^ areas of non-compliance, largely as a result of differing interpretations of contract terms. Gmj f\af_k j]kmdl]\ af l`] [da]fl j][]anaf_ Y ka_fa[Yfl d]n]d g^ compensation.

Contract re-negotiation UK airport operator

A UK airport operator was concerned that the way in o`a[` Yf Yajdaf] j]hgjl]\ alk ljY^[ Yf\ revenues was resulting in a shortfall in income to the airport. We used data analytical tools to audit the airlines submissions and quantify the potential shortfall. The airport operator was able to use gmj f\af_k lg kmhhgjl alk hgkalagf in a successful round of contract re-negotiations. Our fee was under 5% of the shortfall in j]n]fm]k a\]fla]\&

Contract exit Waste company

Our client entered into a 15 year agreement with a company to purchase electricity ^jge gmj [da]flk dYf\dd kal] mhlg l`] contracted capacity. 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. 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.

Third party contracts Win, lose or redraw?

Common misconceptions
In our experience the majority of companies are not actively monitoring their contracts, yet there continues to be resistance to active contract management. Why do organisations respond in this way? Common responses and the evidence against these are shown below.

I Al ak fgl h]j[]an]\ Yk Y Zmkaf]kk aeh]jYlan] ]n]jql`af_ ak f] o`q look for problems?

A In the technology, media and telecoms sectors, contract reviews are the norm as [gehYfa]k `Yn] j][g_fak]\ l`] Z]f]lk l`Yl [gfljY[l j]na]ok [Yf Zjaf_ af[dm\af_ optimised revenues, cost management, enhanced relationships, and maintenance of quality control and brand. Businesses in all sectors have something to gain from adopting this approach.

I J]kgmj[] [gfkljYaflk Yf\ h]j[]an]\ Z]f]lk \gfl bmkla^q l`] investment...

A In our experience over three quarters of contract reviews identify errors and contract non compliance. Such contract reviews can deliver a 3-5% reduction in contract spend and some substantially more.

Q Why risk damaging relationships?

A Contract risk reviews frequently build a better relationship with the third party. 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. 9f ]^^][lan] [gfljY[l j]na]o hjg_jYee] [Yf \]dan]j aehgjlYfl Z]f]lk af[dm\af_ extracting enhanced value from existing contracts, strengthening and preserving relationships with partners, customers and suppliers and giving assurance that appropriate value is being achieved.

Questions to ask yourself

Do you really understand the risk in your contract portfolio? For example, 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? Once entered into, whose responsibility is it to look at contract performance? Are the rights to verify performance and enforce terms exercised? How is performance monitored, and non-compliance addressed? What are the income/costs associated with contracts? How many contracts would you [gfka\]j fYf[aYddq eYl]jaYd7 <g qgmj [gfljY[lk [d]Yjdq Yf\ mfYeZa_mgmkdq \]f] Ydd [gfljY[lmYd l]jek kg l`Yl both parties have the same understanding of how licence fees, commission, royalties, revenues, costs, etc., are calculated? If you acquire a company, do you know what contracts you will be taking on and have you properly assessed this risk?

Third party contracts Win, lose or redraw?

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. 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. We can offer help by providing insight on the performance of your contracts. Our approach in forensic contract review is to prioritise those contracts which, whatever their stage in the contract lifecycle, have the highest prospects of delivering extra nYdm] Zq [Yl]_gjakaf_ [gfljY[lk Zq l`]aj jakc hjgd] Yf\ [jala[Ydalq g^ j]dYlagfk`ah& By leveraging our knowledge and industry experience, we assist in increasing value from third party contracts, applying a risk based approach that focuses on identifying real revenue and cost recovery opportunities.

Key contacts
Sara Fowler Partner Tel: +44 (0)121 535 2311 email: sfowler@uk.ey.com Terry Seagreaves Senior Manager Tel: +44 (0)161 333 2636 email: tseagreaves @uk.ey.com

Leo Brown Senior Manager Tel: +44 (0)113 298 2491 email: lbrown3 @uk.ey.com

Louise Barlow Senior Manager Tel: +44 (0)207 951 6449 email: lbarlow@uk.ey.com

Third party contracts Win, lose or redraw?

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The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited. Ernst & Young LLP, 1 More London Place, London, SE1 2AF. Ernst & Young LLP 2012. Published in the UK. All Rights Reserved. In line with Ernst & Youngs commitment to minimise its impact on the environment, this document has been printed on paper with a high recycled content.

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