One of the most difficult things to work out if you’re a customer or a supplier in relation to a sourcing arrangement is whether what you’re agreeing to is market-standard.
What’s market standard in a sourcing contract is particularly an issue in relation to the liability limits and exclusions each party is prepared to adopt and what indemnities should be given for particular risks.
We wanted to provide a solution to help customers and suppliers benchmark their existing sourcing arrangements as well as new ones against what is currently market standard. Reaching agreement on the types and amounts of liability for which parties are prepared to accept responsibility is ultimately a commercial decision. Nevertheless, important decisions like these should not take place in a vacuum.
To help you come to grips with current market trends, Norton Rose Fulbright’s global sourcing team has drawn on data available to it across its global network in undertaking research into the area. We reviewed the liability positions across 150 recently negotiated sourcing contracts from the Financial Institutions, CMT and Transport and Energy sectors.
There will always be factors which have a bearing on the agreed liability position, such as the deal value, the bargaining position of the parties, their appetite for risk, and the key risks that relate to each deal. Yet our research highlights a number of key trends across industry sectors and geographies. Here’s a snapshot of the some of the results:
- Capping liability to 100 per cent of annual fees remains the most popular percentage.
- Where liability is capped by reference to deal value, it generally results in a lower cap than if it is capped by reference to annual fees.
- A significant proportion of suppliers cap their liability at more than the deal value. Which typically occurs where suppliers exclude liability for losses most likely to arise.
- A significant proportion of contracts exclude indirect/consequential losses, but not other losses that might typically arise (such as loss of profit, loss of data, or loss of anticipated savings). This points to a common misconception in the supplier community across all sectors our research covered: that these other losses will be excluded by virtue of the indirect/consequential losses exclusion.
- Some indemnities are much more widespread than others, yet increasingly suppliers are resisting giving them, or where they do give them, they cap their liability in relation to them.
- Suppliers demonstrate a marked sensitivity in relation to liability for losses relating to data (that is, loss or corruption of data, breach of data privacy/protection laws, breach of confidentiality, and breach of security), in particular where they cannot quantify their likely losses. This is especially so in regulated sectors.
It’s important to know where your sourcing contracts sit in relation to others in the market. It helps with renegotiations as well as with new procurements. Getting the right balance of risk is key and can make or break commercial deals.
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