What you are actually committed to with a vendor

The four questions behind every agreement

Leaders are usually asked what a vendor costs. That is the least useful question, because an annual figure tells you nothing about whether you can stop paying it. The questions that actually matter are these four, in this order.

Answer them for every agreement you own and you have a portfolio you can make decisions from. Leave any of them blank and you have a list of names and numbers, which is what most vendor spreadsheets are.

• •What kind of term is this? Fixed length, continues until someone stops it, or renews itself in periods.
• •By when do I have to act? Almost never the end date. Usually a notice deadline some weeks or months before it.
• •What does leaving cost? Notice served correctly is often free. Leaving early frequently is not.
• •What will it cost over its whole life? Not this year's invoice. Every year that is committed, including any scheduled increase.

Term shape decides everything else

Agreements come in a small number of term shapes, and the shape determines whether an end date even exists. Recording a blank end date for an agreement that continues until someone terminates it is not a data gap, it is the wrong field: the correct answer is that it continues until terminated.

This distinction is worth getting right because the two mistakes it causes are opposite. Treating an evergreen agreement as fixed makes you expect a decision point that never arrives. Treating a fixed-term agreement as evergreen makes you miss the one that does.

The notice period is the real deadline

A renewal date is not an action date. If an agreement renews automatically unless you give notice a set number of days beforehand, then your deadline is that earlier date, and after it passes the renewal is no longer a decision you get to make.

This is the single most expensive detail to lose track of, and it is lost in a predictable way: someone records the end date in a calendar, the reminder fires on the end date, and by then the next term has already started. Work backwards from the end date to the notice deadline and put the reminder there instead, with enough time in front of it to actually decide.

Notice requirements often carry a form as well as a timing. Some agreements require written notice, some require it to a named address or contact, some require a specific method. Notice given the wrong way can be as ineffective as notice given late.

Exit terms: can I get out, by when, and what does it cost

Three separate things travel under the heading of getting out, and confusing them is common. The first is whether you can terminate at all without the other side being in breach, sometimes called termination for convenience. The second is how much notice that requires. The third is what you owe if you do it.

An agreement can permit early termination and still make it expensive. A cancellation charge, a requirement to pay out the remaining term, or the loss of a discount that was granted in exchange for the term length are all normal, and they are all knowable from the document before you sign.

Where a document is silent on exit, that is worth recording as silence rather than as absence. A commitment you cannot exit early is a real commitment, and treating it as flexible because nobody wrote down a penalty is how a forecast becomes wrong.

A multi-year deal rarely costs the same each year

Multi-year agreements are frequently structured with a lower first year and step-ups after it, or with a discount that tapers, or with volume that is committed to grow. One annual figure cannot express that, and a budget built from one annual figure is wrong in precisely the years being budgeted.

Record the agreement as a schedule of periods, each with its own committed amount, rather than as a single number with a multiplier. Then the increase you agreed to is visible before it arrives on an invoice, which is the entire point of writing it down.

• •Note the committed amount for each period separately, with its currency.
• •Note whether the increase is a fixed schedule or an uplift tied to a formula or an index.
• •Note whether any discount is contingent on something you must keep doing, such as a term length or a volume.

Unknown pricing must stay unknown

Some agreements are charged in ways that cannot be forecast from the document alone. Usage-based and consumption pricing are the clearest cases: the rate is knowable, the bill is not, because it depends on what you do next year.

The temptation is to fill the gap with last year's figure and treat it as fixed. That produces a total that looks authoritative and is not, and the person reading it has no way to tell which parts are which. Keep forecastable and variable spend in separate columns and let the total say what it is.

The same applies to an agreement whose pricing model you simply have not established yet. Unknown is a legitimate value. A confident wrong number is not.

The money is often not in the document you were sent

Larger agreements are usually built from more than one document. A master agreement sets the terms and commits nothing. The statements of work, order forms, or purchase orders beneath it carry the money and the dates. If you sum every document you hold, you count the same spend twice.

Roll up only the documents that carry a commercial commitment, and keep the framework linked to them as context rather than as a line of spend. This also tells you when something is missing: a master agreement with nothing beneath it means either the spend has not been recorded or the relationship is dormant, and both are worth knowing.

What to record for every agreement

A vendor register earns its keep when every row answers the four questions above without opening a PDF. That is a short list of fields, and most of them come straight off the first two pages of the document.

• •Who the counterparty actually is, which is not always the company whose product you use.
• •Which document this is, and what it sits under if anything.
• •Term shape, start date, and end date where one exists.
• •Whether it renews automatically, and the notice deadline if it does.
• •Whether you can terminate early, with how much notice, and at what cost.
• •Committed amount per period, each with its currency, plus how it is charged.
• •Who inside your organization owns the relationship.

The guides, by subject

29 guides covering the structures above in detail. Each one explains what the thing is, how it usually works, and what to look for in your own agreement.

Common questions