There is no doubt that e-enabled supply is one of the growth areas in e-commerce. Eversheds has been helping a number of clients in their e-commerce projects, one client saving 47% of its procurement costs by purchasing online.
E-enabled supply takes a number of forms from the traditional closed EDI (Electronic Data Interchange) approach of ordering online, to an integrated supply chain which enables just in time delivery, to various forms of e-auction. This article looks at the reverse auction model.
In reverse auction e-enabled supply the customer usually works out the suppliers it wants to deal with. It then joins them up to an electronic market place and puts into that market place on a regular basis details of the goods or services it wishes to buy. The suppliers then bid against each other and usually the lowest price wins. It is this type of system that can lead to the biggest savings. Usually purchasers not only achieve a reduction in the cost of their raw materials but also increase the efficiency of their processing of the whole supply chain process. There are however, a number of specific legal considerations of which the following are just the top ten.
- Upward Reporting On Buyers
- Rogue Purchasing
- Umbrella Contract
- Security
- Patents
- Exclusions On Restricted Goods
- Specific Regulation
- Historical Bid Data
- Hosting
- Software
One of the real benefits of a system can be its ability to tell the business what its buyers are up to. For example, a system could be set up to allow buyers to buy only £100,000 worth of goods each day. If the buyer tries to purchase more the system could stop him or allow the transaction to proceed but tell the Finance Director. The system can also be used for a Finance Director for example to work out his exposure to new contracts on a daily basis.
There are a number of legal difficulties here as potentially such a system could fall foul of the Lawful Business Practice Regulations. When setting up a system you need to make sure that the Regulations are observed.
Sometimes the ability to eliminate rogue purchasing is the critical business factor in implementing a system. For example, using e-enabled supply a large organisation might be able to purchase a roll of sellotape for 10 pence. A rogue purchase of a roll of sellotape (that is one that doesn't use the system) will cost around about £80 in Central London given higher retail prices, the cost of processing the petty cash transaction to pay for the sellotape and the cost of time in going to purchase it. An Ernst & Young study in March last year found the true cost could be up to £1,200. As a result the system needs to be easy to use and the benefits of using the system and the penalties for not doing so need to be made clear.
Many of the issues with the e-enabled supply can be dealt with in umbrella contracts. Effectively what an umbrella contract does is regulate most of the arrangements between the parties in a particular system. The concept of umbrella contracts is not limited to e-enable supply and is not new. For example, in the world of boxing the British Boxing Board of Control Rules act as an umbrella contract in telling managers, promoters and fighters what is expected. Those rules regulate, for example, what needs to be present in the corner for trainers at a particular fight and as a result reduces the amount of contractual documentation passing between the parties.
The same concept holds true for e-enabled supply. It is possible to have an umbrella contract which the purchaser's employees also enter into to deal with issues like those which we have already discussed. There may still be a need for individual terms and conditions for particular transactions but the paperwork should be reduced.
Security is likely to be a major issue in e-enabled supply particularly, as sensitive data, and perhaps payment instructions will be passing on line. We have written separately on Mondaq on the legal framework behind e-security but as a minimum PKI and electronic signatures will need to be considered. For critical transactions systems tying an individual to a transaction such as biometrics may also be needed.
There are a number of patents around for various e-enabled supply models and their enforceability is yet to be determined. What is certain is that a number of UK organisations have been threatened with litigation and it is wise to take appropriate advice to see whether a patent already exists which you might infringe, and whether it is appropriate to take indemnities from third parties or insure against risk.
Some types of goods might be impossible to procure through electronic means. As well as the obvious suspects if your market place is available for anybody to enter anywhere in the world some types of goods should be prohibited from on-line trade. In America for example in some states it is illegal to offer pipe cleaners for sale over the internet.
Your industry might be regulated in its procurement. Additionally the European Commission is exercising its mind over whether some e-market places restrict trade and fall foul of competition laws as a result.
For some people the ability to hold historical bid data is very useful. For example, if it is a commodity that you buy on a regular basis you might want to know what you paid a year ago or two years ago and who supplied it then. Clearly there are data protection issues here in the UK as you can only hold personal data for so long as is reasonable. It is quite easy to hold personal data even in a commercial transaction so you will need to look at the types of data that you are holding, and how long you intend to hold it for. If it is your market place you might want to alter the umbrella contract to make it clear to all of the participants what you are going to hold, for how long and why, and you will need to look carefully at your Data Protection Act 1998 notification.
You need to look carefully at the hosting of the market place particularly if it will be business critical. Even in their conventional hosting arrangements many businesses fail to look at server down time. Virtually no commercial hosting organisation, including ISPs, will guarantee their servers will always run. Some contractual documentation will specify the average amount of server down time. This could be as high as 25%. You might need to re-negotiate hosting contracts or look at alternative sources of supply. It might also be a good idea to have a backup ready given the predicted shakeout in the ISP market and the problems that have already been experienced in the UK with some companies having their ISP go out of business.
You also need to make sure if you are buying in software that it does not rapidly go out of date. The whole e-market place arena changes rapidly and in some industries specific ways of doing business are being accepted as the norm. Specific standards are developing for some market sectors which will defeat different and perhaps better ones in just the same way that VHS removed its rivals in the home video sector. You need to make sure that you do not invest heavily in software only to have it immediately out of date.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
