Ethical contracting: 5 ways contracts and strategic sourcing can support your company’s ethics goals

The best businesses today consider ethics a core part of their way of doing business. While avoiding negative headlines is important, these companies know ethics is about more than that. They understand that a high ethical standard matters to their customers, partners and employees. One survey found that 74% of consumers across 24 countries consider a company’s ethical reputation in their purchasing decisions.

Procurement and ethics - a critical collaboration

For procurement organizations, ethics are always a priority when interacting with potential suppliers. Supply professionals are bound by rules of conduct established by their companies, by government regulations, and by industry standards. In fact, ethics is the basis for most procurement-related principles, such as fairness, integrity, and transparency.

According to the Procurement Academy, ethics are important for procurement professionals because:

• Purchasing leaders represent their organization as they award business to suppliers. Any unethical behavior can negatively impact their company’s image.
• With control over large sums of money, supply professionals can be pressured by internal and external forces to act in unethical ways. Even seemingly innocent gestures – such as an offer of a free lunch – can cross the line of ethics by influencing purchasing decisions.
• Ethical business behavior helps in establishing long-term relationships and goodwill with suppliers.
• While an ethical person is respected in the business community, an unethical decision or action can permanently damage a buyer’s professional reputation.

A procurement framework for all

The Institute for Supply Management has established an ethics framework revolving around these three principles for purchasing managers and employees:

1. Maintain integrity in your decisions and actions.
2. Always strive for the best value for your employer.
3. Remain loyal to your profession.

In a practical sense, procurement contracts and strategic sourcing technologies are critical assets for driving ethical behavior. Good contract practices can reinforce ethics by encoding and helping to enforce business rules. With a contract-oriented mindset, procurement can serve on the front lines of corporate ethics and pave the way for the business benefits of ethical behavior.

Here are five ways ethically sound contract practices contribute to business goals.

Prevent bribery, extortion and coercion

Strong contract language against bribery, and in enforcement of company gift policies, can prevent this behavior. In addition, strictly enforced purchasing processes using contract management and sourcing software can make it impossible for bad actors to coerce decision makers by other means.

Ensure ethical sourcing

Contract terms can ensure that suppliers follow the same code of conduct around sourcing as the company. Examples can include avoiding unethical labor practices such as slavery, child labor, and poor working conditions; ensuring environmental protection; and avoiding sourcing from illegal sources such as embargoed countries.

Eliminate favoritism

For many reasons, companies can be tempted to choose suppliers based on factors other than what’s in the best interest of the company. Executives may favor supply organizations run by friends or family, may wish to use an existing supplier that isn’t appropriate for the current need, or may react to marketing efforts. Whatever the reason, strong sourcing technologies can ensure that all suppliers are treated equally, measured objectively, and held to the same contract terms.

Create transparency

Sometimes the appearance of unethical behavior can be as damaging to a company as the conduct itself. To counter this reality, companies should seek to offer appropriate levels of transparency in their day-to-day sourcing practices and be able to provide additional detail should the need for it arise. With strong procurement contracts and sourcing technologies capturing every aspect of the supply decision, companies can quickly and accurately prove they have acted ethically and in good faith throughout their purchasing decision processes. They can even show how any of their corrective actions have impacted these processes.

Support company values

Many companies use sourcing as one means to support their values. For example, the U.S. government supports diversity of suppliers and requires 23% of its contracts to be awarded to small businesses, among other goals. Goals like this often can’t be enforced with a single contract, but require a company-wide supplier management system to ensure the company reaches its targets.

Learn more about how you can create good contract practices with CLM technology by downloading the Ultimate Guide to Contract Management.