Why short-term contracts should be favoured
With Brexit less than 12 months away, businesses are keeping a watchful eye as the Government drip feeds the nation with the latest updates.
According to our latest research, UK businesses are less convinced than they were a year ago that Britain will be strong enough to operate independently after Brexit – a sign that the prolonged uncertainty surrounding Britain’s exit from the EU has eroded business confidence. The figures reveal that confidence in the UK’s ability operate independently post-March 2019 has dropped from 73 percent to 60 percent.
With a large amount of the changes caused by Brexit still unknown, businesses are preparing for a cost hike and one way to safeguard the business is to review supplier agreements. Our latest research shows that more than half of business owners (51 percent) have no plans to compare the costs of EU and non-EU suppliers. When it comes to supplier agreements, having lengthy and unfavourable contracts, particularly those with a fixed cost element, can be extremely difficult to negotiate out of if not handled with care. Where possible, short-term contracts should be favoured – here’s why:
In unstable economic times, there is the tendency for businesses to try and lock clients and suppliers into long-term contracts in an attempt to protect future revenue streams. However, long-term supply agreements with fixed cost elements can be a real headache for businesses, particularly if bearing the brunt of rising costs falls at their doorstep. Long contracts provide certainty on what the business landscape is like now, which could be very different in 12-18 months.
Additionally, businesses have the propensity to simply agree to the contractual terms posed by customers and suppliers in fear of losing the contract or ‘rocking the boat’. Businesses need the flexibility to renegotiate and shouldn’t shy away from potentially tricky conversations. In a commercial landscape that is continually changing, often short-term arrangements are the only way to ensure that agreements can continue to reflect the current trading environment.
It is simply good business practice to review agreements on a continual basis, but Brexit almost makes this a necessity. Here is what you should consider:
- The process should start internally – diving straight into renegotiation with suppliers can be a fruitless task if you haven’t reviewed the impacts of changes to costs internally. Before any activity is started externally, an internal cost management review must take place first.
- Map your client base – fully understanding your client base in terms of geographical location, growth opportunities and buying scope, will help you to understand where your most profitable customers are situated. In turn, this will help deal with a potential increase in tariffs up and down the supply chain.
- Protect your relationships – understanding which relationships yield the highest rewards, now and in the future, is essential to guarding against future changes. Protecting the supplier agreements for your priority markets should come first.
- Make supply arrangements shorter – being able to review supplier agreements more regularly will allow your business the opportunity to make changes and keep contracts flexible. As Brexit details are still yet to be disclosed, being able to amend agreements at regular intervals could be vital when dealing with a dynamic economic environment.
- Allow for market fluctuations – contracts can be drawn up to allow businesses to cater for fluctuations in costs without having to completely renegotiate each time the market changes. With the full impact of Brexit still largely unknown, forming agreements that cater for cost changes can save time, preserve relationships and ensure business continuity and security.
Having the confidence and conviction to renegotiate supplier arrangements, takes a bit of courage but shouldn’t be shied away from. During the negotiation process it is important that businesses maintain an emphasis on supplier performance, ensuring that partners are able to deliver on time and on budget, while still allowing the appropriate flexibility to mitigate against uncertain economic times. Get this right and the business and its supplier relationships are more likely to stand the test of time.