25 November 2010 | Adviser Q&A
I’ve been asked to write a process for creating synergy benefits via contract novation. I have never done this before. Can you give me a guide of the steps this should involve?
Contracts manager, London
Richard Beale, director, Brightsourcing
In the past, I have applied the following process:
- First, collect contracts, commercial documentation and relevant information from both organisations. l Compare terms and conditions, prices, specifications, and service level agreements from both parties.
- Understand your legal position with regards to current contracts.
- Identify strengths and weaknesses in each of those contracts, determine future business needs and ideal future contractual terms and conditions.
- Determine whether your contract should be ‘novated’ or ‘assigned’. For novation, all parties must consent to the change, so prepare for negotiation. For assignment, the obligee is simply given notice of the change.
- Prepare well for commercial discussions with suppliers.
- Engage with your legal department to ensure compliance.
- Develop a contract tracking tool, to ensure contracts are agreed and signed in a timely fashion.
The above process assumes you are with the right suppliers to satisfy your future state.
Paul Carter Hemlin, founder, Contract Management Direct
Novation is the substitution of a new contract for an existing one. When organisations merge often it is one-way traffic, with the dominant one rolling-out its processes across the entire new company, which wastes the opportunity to take synergy benefits from the best practice of the other.
Changing existing contracts in-flight should be avoided for obvious reasons. A small group of informed managers from each party could quickly discuss their common approach and the problems they encounter, supply chain matters can be reviewed with best practice being identified and harnessed. A target should be set for six or 12 months hence when a common approach would be taken for all new ventures.
A consultant could be brought in to advise but companies need to identify what they already bring to the table.
Alison Ford-Langstaff, director, Rightsource Solutions
Novation alone does not lead to synergy benefits. The terms of the agreement do not change, just the contracting parties. Synergies would suggest a change in these terms and conditions and that would require a contract amendment.
Your timescale will determine how best to obtain synergy benefits. If time is of the essence, it may be sensible to simply novate first, to continue security of supply. As for benefits, this will take detailed analysis. Each category should be analysed – start with the major ones first – comparing the novated agreements with your current agreements for pricing discrepancies and most beneficial terms. Coupled with your knowledge of market levers, the potential benefits will emerge and your implementation priorities will become clear.
If you have an immediate synergy target and tight timescales, consider targeting the top 10 to 20 suppliers (or top 80 per cent) and compare with your own same or similar supplier arrangements. This could help you identify at least some theoretical benefits quickly while getting on with the novation exercise, before you embark on the full assessment of categories.
Key points
- Collect relevant information from both organisations
and suppliers
- Take synergy benefits from the best practice of both parties
- If you have tight timescales, target the top 10 to 20 suppliers
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Send you questions to adviser@supplymanagement.com
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Please note: responses can only be given on this page, represent
writers’ personal views and should be regarded as general guidance only.
