The Law of Inverse Procurement Risk
Like Newton, Einstein, and others before me, I've discovered a new, universal law. I call it "The Law of Inverse Procurement Risk."
The Law of Inverse Procurement Risk states that "the risk of a procurement has a direct and inverse relationship to the size of the corresponding transaction and the associated vendor." In layman's terms, what the law means is that the smaller the deal, the bigger the risk.
It's counter-intuitive, isn't it? Well, that's probably the reason no one else has discovered the law before me.
All joking aside, there is some truth to the law...
Unfortunately, those of us who are more senior in procurement tend to delegate smaller deals to junior buyers, or, in some cases, we even abdicate those smaller deals to our internal customers. Not to disparage the important work that junior buyers do, but the fact is that the reason they're "junior" buyers is because they're still gaining expertise and experience. At the same time we have our junior buyers or customers working on the smaller deals, they're typically working with a "small" vendor—anywhere from an independent contractor to a mom-and-pop to a small-tier company. Not to disparage small vendors (because they're important, too), but they're "small" for a variety of reasons. And, a lot of those reasons aren't necessarily good ones either: new or struggling in the marketplace, wrong business model, just aren't sophisticated enough to grow themselves, etc. In almost every case, a small vendor doesn't have enough assets, capital, or credit. In the legal world, there's another term that is used to mean not enough assets, capital, or credit when it comes to vendors: "judgment proof."
We (as the more senior procurement pros) have paired a junior buyer or customer with a small vendor to work the deal. The parties likely have little experience with risk-mitigating contract provisions such as indemnification, limitation of liability, or insurance. If the deal is done on the vendor's paper, their contract template is almost guaranteed to be entirely one-sided (vendor favorable, as written by their outside counsel). The junior buyer or customer probably also has the perspective of, "hey, the deal-making was delegated to me so it probably is a low-risk deal." Thus, the junior buyer or customer is more worried about more obvious things, such as cost, and less worried about less obvious, yet really important things, like that unilateral limitation of liability provision that's lurking in the vendor's contract.
At the other end of the spectrum, meaning larger deals, "we" are usually involved, or our more senior procurement staff are, and we're dealing with large vendors. These large vendors tend to be more sophisticated, and, more often that not, are willing to enter into a moree balanced contract where the vendor shoulders some amount of risk. The large vendors are usually (if you've done your homework) well capitalized and positioned in the marketplace (they're not judgment proof). The large vendors want to perform because they have a reputation, so there's usually fewer contract headaches and disputes. You may have heard the phrase, "you'll never get fired for buying IBM." The implication is that you may pay more buying from IBM, but you usually don't have to worry about IBM being unable or unwilling to perform (like a small vendor might).
So, there you have it. What I've discovered in my career is that some of the smallest, low-value deals carry the highest legal and operational risk. I've gotten involved in $20,000 deals that would have had the effect of bankrupting my employer and I've been involved in $1,000,000 deals where even the first round of the deal negotiations reasonably protected both parties. My law doesn't hold for every situation, but it frequently applies.
What that means for us as procurement pros is that we do have to "sweat the small stuff" and we do have to equip our junior buyers—and even our customers—with tools (like contract templates) and training. Ignoring The Law of Inverse Procurement Risk could cost you or your employer, so don't make that mistake.
The Law of Inverse Procurement Risk states that "the risk of a procurement has a direct and inverse relationship to the size of the corresponding transaction and the associated vendor." In layman's terms, what the law means is that the smaller the deal, the bigger the risk.
It's counter-intuitive, isn't it? Well, that's probably the reason no one else has discovered the law before me.
All joking aside, there is some truth to the law...
Unfortunately, those of us who are more senior in procurement tend to delegate smaller deals to junior buyers, or, in some cases, we even abdicate those smaller deals to our internal customers. Not to disparage the important work that junior buyers do, but the fact is that the reason they're "junior" buyers is because they're still gaining expertise and experience. At the same time we have our junior buyers or customers working on the smaller deals, they're typically working with a "small" vendor—anywhere from an independent contractor to a mom-and-pop to a small-tier company. Not to disparage small vendors (because they're important, too), but they're "small" for a variety of reasons. And, a lot of those reasons aren't necessarily good ones either: new or struggling in the marketplace, wrong business model, just aren't sophisticated enough to grow themselves, etc. In almost every case, a small vendor doesn't have enough assets, capital, or credit. In the legal world, there's another term that is used to mean not enough assets, capital, or credit when it comes to vendors: "judgment proof."
We (as the more senior procurement pros) have paired a junior buyer or customer with a small vendor to work the deal. The parties likely have little experience with risk-mitigating contract provisions such as indemnification, limitation of liability, or insurance. If the deal is done on the vendor's paper, their contract template is almost guaranteed to be entirely one-sided (vendor favorable, as written by their outside counsel). The junior buyer or customer probably also has the perspective of, "hey, the deal-making was delegated to me so it probably is a low-risk deal." Thus, the junior buyer or customer is more worried about more obvious things, such as cost, and less worried about less obvious, yet really important things, like that unilateral limitation of liability provision that's lurking in the vendor's contract.
What happens if that independent contractor who comes onsite damages property, injures / kills someone, or publishes your confidential information to the world?If any of the above happen with a small vendor, good luck. By the way, Monster.com is a good place to start...
What happens if the vendor licenses your company software that turns out to be patented by someone else?
What happens if the vendor includes open source in their software license that, oops, gets intertwined with your in-house developed, proprietary code—that is now free to the world?
At the other end of the spectrum, meaning larger deals, "we" are usually involved, or our more senior procurement staff are, and we're dealing with large vendors. These large vendors tend to be more sophisticated, and, more often that not, are willing to enter into a moree balanced contract where the vendor shoulders some amount of risk. The large vendors are usually (if you've done your homework) well capitalized and positioned in the marketplace (they're not judgment proof). The large vendors want to perform because they have a reputation, so there's usually fewer contract headaches and disputes. You may have heard the phrase, "you'll never get fired for buying IBM." The implication is that you may pay more buying from IBM, but you usually don't have to worry about IBM being unable or unwilling to perform (like a small vendor might).
So, there you have it. What I've discovered in my career is that some of the smallest, low-value deals carry the highest legal and operational risk. I've gotten involved in $20,000 deals that would have had the effect of bankrupting my employer and I've been involved in $1,000,000 deals where even the first round of the deal negotiations reasonably protected both parties. My law doesn't hold for every situation, but it frequently applies.
What that means for us as procurement pros is that we do have to "sweat the small stuff" and we do have to equip our junior buyers—and even our customers—with tools (like contract templates) and training. Ignoring The Law of Inverse Procurement Risk could cost you or your employer, so don't make that mistake.
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