9: Negotiate terms & sign contract

1. Applying the contracting mechanism

Based on step 6.5, the type of contract(s) that will govern the relationship with the LSP can be set, considering local & organizational procurement policies. Depending on the complexity and scope of the outsourced services, you may need one or more types of agreements. The most common contracts consist of:

• Master Service Agreement (MSA): This is the overarching contract that sets out the general terms and conditions of the relationship, covering items like confidentiality, liabilities, dispute resolution, and overall responsibilities.

• Service Level Agreement (SLA): This document outlines specific performance standards, delivery timelines, technical requirements, and the metrics that will be used to measure the LSP's performance. The SLA is typically integrated under the MSA and is vital for day-to-day management of logistics services.

• Additional Considerations: If the scope includes sensitive logistics services like cold chain management or emergency distribution, additional clauses may be required to address these specialized needs.

Bespoke contracts may also be necessary if the logistics services involve complex, multi-regional operations or if specific compliance regulations need to be addressed.

2. Initiate detailed negotiations

This stage involves negotiating the specific terms of the contract with the selected LSP(s). It is crucial to approach negotiations with a clear understanding of your organization's goals and constraints, and to ensure that the LSP is fully aligned with these objectives. Focus on key areas such as:

Scope of services: Define the full scope of logistics services to be provided, including service levels, delivery timelines, geographic coverage, and any additional responsibilities (e.g., value-added services such as packaging or inventory management).

Performance metrics: Ensure that all relevant performance KPIs, metrics and other data sources are outlined in the contract, even those not actively monitored as KPIs at any given time. This ensures that complete data is collected for overall logistics performance monitoring. Consider including customer satisfaction surveys as an additional metric for gauging service quality. These should be measurable and aligned with your organization's logistics goals (e.g., on-time delivery, order accuracy, inventory accuracy). Establish penalties and rewards based on performance outcomes. Please consider:

• Payment terms: Negotiate payment terms, including schedules, payment methods, and any performance-based incentives or penalties. Ensure that payment structures are clear, with contingency plans for disputes or late payments

• Risk management & flexibility: Discuss risk-sharing mechanisms, such as how risks related to delays, product damage, or unforeseen events (e.g., natural disasters, border closures) will be managed. The contract should include force majeure clauses and define responsibilities during emergencies or unplanned disruptions

• Contract duration & renewal options: Define the length of the contract and specify options for renewal or renegotiation. Consider including clauses that allow for flexibility in scaling services up or down depending on future needs

• Cancellation due to poor performance: Ensure that the contract includes clear language that allows for contract termination or renegotiation if the LSP fails to meet key performance standards or metrics. This provision ensures that the organization can exit the contract in cases of persistent underperformance or non-performance, safeguarding against being locked into a bad contract

• Exit strategies: Plan for potential contract termination or transition, whether due to underperformance, changing logistics needs, or strategic shifts. Define the conditions for early termination and outline the handover process to ensure continuity of service during transition phases

In more complex logistics contracts, multiple rounds of negotiations may be required to reach an agreement. Use these rounds to refine terms and ensure both parties are satisfied.

For a nationwide health supply chain, you might negotiate penalty clauses for delays in vaccine delivery or rewards for maintaining a zero-error cold chain management over a 12-month period.

Throughout negotiations, involve your legal, procurement, and logistics teams to ensure all terms align with internal policies and regulations.

3. Draft the contract

Once the terms and conditions have been agreed upon, draft the contract, incorporating all negotiated terms. Depending on the complexity of the negotiations, this step may involve several rounds of revisions to ensure that all details are correct and that both parties are satisfied with the terms. The contract should clearly articulate the following elements:

• SOW: Finalize the scope of work, outlining the logistics services, service levels, and any additional tasks the LSP will be responsible for. Make sure the SOW references the SLAs and any technical annexes appropriately

• Payment terms: Ensure that the agreed-upon payment terms are explicitly stated, including the schedule, currency, and any performance-based incentives or penalties

• Risk and liability provisions: Incorporate clauses that define risk-sharing mechanisms, liability limits, insurance requirements, and procedures for handling disputes

• Performance targets, rewards & penalties: Outline the KPIs and SLAs, detailing the exact metrics by which performance will be measured. Clearly define the rewards for exceeding expectations or consequences of underperformance (e.g., financial penalties)

• Contract language for non-performance: Ensure that the contract includes specific language detailing the process for addressing underperformance, including warnings, remediation periods, and the right to cancel the contract if performance does not improve. This gives your organization the tools needed to effectively manage the contract and avoid prolonged issues

• Confidentiality & compliance: Include any confidentiality clauses to protect sensitive information shared between parties. Ensure that the contract complies with any relevant national or international regulations (e.g., data protection laws, health regulations)

• New project implementations: Proactively include ‘change request’ procedures and prices for establishing new projects (e.g., implementing new technical solutions or process improvements) to manage future expansions or changes, ensuring both parties are aligned on (cost) expectations and operational processes at the start of the collaboration

Be prepared for a back-and-forth process in finalizing the contract, as the LSP may suggest revisions or clarifications to certain terms. Use this opportunity to ensure mutual understanding of all contract elements.

4. Review & sign contract

Before signing the contract, it should undergo a final review by the legal and compliance teams from both parties to ensure that it meets all regulatory requirements and organizational standards. Key considerations include:

• Legal review: Ensure that all contractual clauses are compliant with local and international laws, particularly those related to logistics operations (e.g., import/export regulations, transportation laws, and health product handling)

• Final negotiations: If there are any outstanding points of contention, use this stage to resolve them. Final negotiations might include minor adjustments to contract terms or the addition of clarifying clauses

• Digital or physical signatures: After the legal review, arrange for the contract to be signed. Depending on the circumstances, this can be done digitally or through a formal in-person signing ceremony. Both parties should retain signed copies for their records

• Documentation & archiving: Ensure that a final, signed version of the contract is stored in a secure location and accessible to all relevant parties within your organization

Once the contract is signed, communicate the finalized contract to key stakeholders, including procurement, logistics teams, and any other involved parties, to ensure everyone is aligned and ready for implementation.