Across the world, countries have isolated their populations as the only viable way to keep people safe from the effects of COVID-19, not only to save lives but also helping to place less stress on health services.
The downside is that this has had a devastating effect on economies, along with widespread unemployment. Nevertheless, most governments have stepped in by offering financial support to both businesses and employees affected.
Another worry is the risk of a recession and the impact this could have. As a contract manager, would you know what to do?
With Recession Comes Changes to Our Existing Contracts
It tends to be the case that at some point leading up to or during a recession, companies will adopt new buying habits. They might change their supplier to save money or cancel their orders altogether. They may also request discounts, ask for longer payment terms or even free goods.
Equally, some employment contracts may be terminated, or payment terms are adjusted. It may even be cheaper to outsource certain functions rather than keep them in house.
While we are on the subject of contracts themselves, the scrutinisation of these will increase, compliance will become tighter, more flexibility for change will be required, as well as termination rights if necessary.
How to Recession-Proof Your Contracts
The key to minimise damage as a result of the recession is to be fully prepared.
- Implement the right measures so that problems can be dealt with quickly and cost-effectively. Have alternative options available.
- Have a plan B in case your original one doesn't work out. Also, have another plan as a backup if plan B doesn't work.
- Please don't limit your organisation on what it should do to deal with the recession. Instead, do what is needed for long term outlook. A healthy plan will get you through the recession.
In short, if you don't plan sufficiently, you may not make it out the other end. The best recession plans are organisation-wide and draw on all levels of expertise. As a contract manager, there are many things you can do to contribute positively to your organisation's recession plan.
Be sure to focus on the most critical contracts first and ensure that all units have effective contract terms based on whether they provide or source services for themselves or customers. A contract management system should be used to manage all company inventory.
Inform Functional Unit Heads
Keep all units up to date with planning and preparation for the recession and brief them on the part they need to play. Specifically, emphasise the importance of tight cooperation and required interaction between all units. To help with this work, you could produce a timetable to make all groups aware of what they need to do and the associated deadlines.
Explain Problem Areas
Areas that you may need to think about include:
- Poorer choice of suppliers which can have knock-on effects
- Overcapacity in workplace requirements as a result of staff working from home
- Having the right level of insurance cover based on contract risk
- Maintaining good relationships with 3rd parties for a more positive recession response
- Reducing surprise for suppliers by using local or trustworthy sources of knowledge
- Categories which will require more attention when spending is more tightly controlled
Not including these in your contract can add risk
- Downturn rights which outline when you may not be needed
- Information about late payments, allowing contractors to pay you on their terms
- Dispute resolution process and the use of mediation rather than litigation
- Early termination, if a client isn't able to continue with the project
- Force Majeure clause for when things happen that are outside the control of the manager
- Price reviews if spend decreases or increases
- Benchmarking, which checks competitiveness amongst suppliers
- Service level agreement which sets performance targets
Including these in your contract can create 'latent' risk
- Termination or auto-renew which can cause problems with lack of notice
- Complicated processes, commitments or obligations that could cause problems
- Old assumptions which are no longer relevant to the current situation
- Supplier exclusivity, meaning that other more affordable suppliers can't be approached
- Volume drivers which can be troublesome if based on the number of employees or revenue
With this in mind, you should make sure the right mitigation options are in place. It's useful to prioritise these into the categories of essential, things that can be improved or done differently, and finally, things that aren't required.
Review Your Contracts and Either Amend or Terminate as Necessary
Within the organisation, provide all units with a list of current contracts along with problem areas and the potential mitigation methods that could be used.
Once this has been done, it's then necessary to work out which contracts are either important, feature areas for concern or need to be dealt with quickly before the cutoff date for auto-renew. Don't also forget to review the less important contracts which could also cause problems if a recession occurred.
You and your team can then work out the best mitigation options possible. Ultimately, once all this information has been collated, it should be provided to the contract manager, and appropriate advice or guidance should also be provided if necessary.
If the contract manager concludes that the contract should be terminated, this can be confirmed with a notice sent to the other party on behalf of the contract owner. Otherwise, if changes need to be made, a contract amendment can be submitted.
Make a Start on Recession Proofing Your Contracts Today
Considering the risk of recession, contract managers must act now to ensure that contracts continue to work as efficiently as possible. Of course, we are unsure of what level of recession we could be dealing with.
However, we can prepare well so that the effects of COVID-19 cause as little trouble as possible with our most important contracts.
Indeed, companies lucky enough to survive recession will improve their contracting knowledge for the better.
In short, if you haven't started recession planning, you'll need to act fast. We hope this guide provides you with a good starting point.