Contract Management

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Contract Management
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Outline

• practices
• Bethlehem Steel Corp.
• clincial service
• elements in a contract
• examples

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Contract

• the document defines terms and specify
  relationship, conditions, obligations and rights
  to be discussed and eventually approved by
  relevant parties
• the understanding of the parties

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Bethlehem Steel Corp.
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Willing to Accept the Contract?

• Bethlehem Steel Corp. at 1999
• generally annual contract in industry
• a four-year contract proposed by GM, with price
  3 to 5 lower than before
• what factors for Bethlehem Steel Corp. to
  consider?

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Willing to Accept the Contract?

• factors to consider
• overcapacity in steel production
• keen competition from the emerging markets,
  Russia, Brazil, Korea, etc.
• financial strength from the stable source of
  income to upgrade technology
• better quality cold-rolled steel
• JIT service from local company
• bargain chip from lower price to negotiation with
  labor union

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When Outsourcing Goes Awry
Richard Pesisch (1995) When Outsourcing Goes
Awry, Harvard Business Review, May-June, 24-26.
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Case Context

• organizations
• Regional Medical Center (RMC)
• Physicians Development Services (PDS)
• characters
• Mr. Grant Newman, CEO of Regional Medical Center
  (RMC)
• Dr. Barry Doane
• cofounder of PDS, a former reputable employee of
  RMC
• attracted business to PDS
• Dr. George Jacques, the chief of the 5
  anesthesiologists from PDS

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Case Context

• Regional Medical Center
• a hospital with surgical and obstetric services
• large turn around of anesthesia group
• desire of surgeons and obstetricians a stable
  group of anesthesiologists
• costly lifetime-care malpractice lawsuits
• business of RMC
• downturn, reduction of in-patient days due to
  losing a large contract
• competition in market

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Case Context

• Physicians Development Services (PDS)
• a subcontractor providing contracted anesthesia
  services to more than 15 medical facilities
• a reputation for providing high-quality doctors
• management lacking business skills, and company
  undercapitalized
• rumors losing several big accounts, possibly
  bankruptcy

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Case Context

• relationship between RMC and PDS
• contracted anesthesia services to RMC by PDS
  starting 18 months ago
• responsibility of PDS on the anesthesiologists
  everything
• the management, recruiting, staffing,
  credentialing, and scheduling of the anesthesia
  group, as well as its financial management
• anesthesiologists employed by PDS

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Case Context

• the rights and obligations of RMC
• rights to reject choices of PDS, at the expenses
  of PDS
• obligations penalty cost of 120,000 on RMC for
  each PDS contractor turned by RMC into its
  employee
• law sue by PDS to RMC if RMC interfering in any
  resolvable dispute between PDS and its employees

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Case Context

• relationship between PDS and its employees
• smooth first year, trouble started the second
  year
• in three months, several times, late and bounced
  paychecks from PDS
• failure to renew contracts for 3 months for
  Jacques's group
• late and then bounced paychecks this month
• a fruitless conversation between Jacques and Doane

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Case Context

• reasons for the failure of renewal of contract
• failure of PDS to pay the 300K year end bonus
• suspicion of the group on PDS for falsifying the
  financial statement to cheat I50K bonus this
  year
• refusal by PDS to provide the group the financial
  statement for no contract renewal
• theoretically not even providing the salary

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Case Context

• demands of Jacques to Newman
• help from RMC
• break the contract with PDS
• hired the anesthesia group either as contractors
  or employees
• otherwise the group leaving next week, with no
  surgical services in RMC
• meeting the anesthesia group in 45 minutes
• Jacques in contact with local news media

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Case Context

• situation faced by Newman
• walk out of anesthesiologists
• losing reputation of RMC
• closing of surgical and obstetric services
• no right to interfere
• PDS still holding the contract
• issues between PDS and its employees
• any interfere affecting future negotiation with
  similar service providers

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When Outsourcing Goes Awry

• What should Newman do now?
• What kind of tasks can be outsourced?
• What should the relationship with a critical
  supplier be?
• What mistakes were committed by Newman?
• Should there be any changes in the clauses of the
  contract?
• Were there any problems in RMC in the first
  place?

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Elements in a Contract
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Elements of a Purchase Contract

• introduction of the contracting parties
• definitions
• scope of agreement
• purchase orders
• supply and delivery
• specifications, quality, and health, safety, and
  environment

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Elements of a Purchase Contract

• payment
• liability
• force majeure
• effective date and termination
• intellectual property
• assignment and contracting
• technology improvements

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Elements of a Purchase Contract

• most favored customer
• confidentiality
• statistics
• key performance indicators and compensation
• notices
• severability

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Elements of a Purchase Contract

• third-party rights
• free trade areas
• minority- or women-owned business enterprises
• general
• governing law
• signatures
• appendices (schedules)

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Information in Purchase Contracts

• items bought, and their costs
• shipment method and schedule of items
• installation of items
• warranties
• remedies and penalties, for quality, damages,
  tardiness
• standard terms and conditions

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Information in Purchase Contracts

• dispute resolution mechanisms
• choice of laws and place for arbitration
• currency
• language
• force majeure

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How to Write a Contract

• modified from earlier agreements
• started with a general form and/or sample
  contracts
• advised from corporate counsel

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Samples of Purchase Agreement

• Airbus A350 Purchase Agreement AVSA SARL, US
  Airways Inc, America West Airlines Inc. and US
  Airways Group Inc. (SEP 27, 2005)
• Semiconductor Purchase Agreement - Motorola Inc.
  and Freescale Semiconductor Inc. (2004)
• Manufacturing and Purchase Agreement - Flash
  Electronics Inc. and 3PARdata Inc. (Sep 5, 2003)

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