The decision to terminate a major supplier contract early should never be underestimated. What are the most important things you should consider before doing so?
Earlier this month, Australia announced plans to scrap its $90 billion submarine project deal with France. Instead of going ahead with the purchase of 12 French-designed conventional submarines, Australia will leverage American and British nuclear-powered technology for its future fleet as part of a new trilateral security pact known as AUKUS. This increased alignment with the UK and the U.S on security issues suggests that the three countries have similar viewpoints regarding China.
It is presumed the decision was also made due to continued disagreements with French shipbuilder Naval Group. Indeed, the French submarine deal has been described as the country’s worst-ever defence procurement disaster, while the Sydney Morning Herald argued that the country has “dodged a bullet by sinking the French submarines deal.”
As the latter points out, AUKUS will provide access to nuclear-propulsion technology, enabling Australia to build nuclear subs without the need of its own nuclear industry, and allow for an 18-month consultations process to select submarines.
Nonetheless, the decision to terminate any major supplier contract early is not without its complications and should not be taken lightly.
Here are five important things to consider before doing so in your organisation.
1. Is there an early exit fee?
Assuming that your supplier is not in breach of contract, which would give you reasonable cause to terminate an agreement early, you may be subject to an early exit fee.
Make sure you carefully review your contract before notifying your supplier of your intentions so you fully understand your responsibilities and any penalties you might incur.
2. What kind of relationship do you have with the supplier?
How long have you been working with this supplier and what kind of relationship do you have?
If, for example, they are part of your organisation’s preferred supplier program, you may well have fostered a meaningful, trusting, and collaborative relationship. While you should never stick around in an unproductive or toxic supplier relationship simply because of past successes, some long-term relationships are worth saving. This is particularly true when it comes to risk mitigation. The suppliers you’ve built trust and established complete transparency with are the ones who will have your back in a crisis.
In addition, it’s worth contemplating how other buyers within your organisation will feel about you terminating this contract.
3. How will this impact your reputation?
The way you treat your suppliers can have a direct impact on your brand’s reputation. It’s been proven that employees and customers value an organisation’s commitment to building a sustainable, ethical supply chain that supports diverse and minority-owned businesses, but they’ll also condemn you for abandoning reliable, loyal suppliers in favour of short-term cost savings.
More importantly, gaining a reputation for breaking contracts may cause other suppliers to hesitate to partner with you, increase their fees, or strengthen their negotiating stance.
4. How much money have you already spent?
If you choose to cut a major supplier contract short, you won’t be able to recover the funds you’ve already invested. You’ll need to weigh up whether it’s worth cutting your losses and starting again, or persevering until the end of this project before moving on.
In the case of Australia’s submarine procurement, $2.4 billion has already been spent.
5. Do you have an alternate supplier lined up?
Perhaps the reason you’re contemplating terminating an existing supplier contract is because you’ve found a more appealing alternative.
However, if you’re making a snap decision based on frustrations you have with your current vendor (e.g. poor quality products or a failure to deliver on time) think carefully before you proceed. Replacing a critical supplier can be difficult, time-consuming, and costly, which means it could actually be less painful to address and resolve your existing supplier issues.