What is an Agreement with Multiple Sources?
Multi-source agreements ("MSA"), sometimes referred to as master service agreements, are contracts that usually cover repeating small contracts based on a specific form. MSAs are popular with companies that frequently enter into multiple contracts with the same parties, where those parties perform services repetitively.
An MSA includes the essential terms and conditions of the agreement, but does not include the specific details, or "scope of work," of the individual project. Instead, an MSA typically incorporates a schedule, or list, of various projects. This allows parties to execute the MSA before they know the specifics of each agreement. A schedule will commonly be updated as new projects are added or others are completed.
Typically MSTs include the basic terms and conditions for the transactional agreement. They may also include "attachments," which consist of the detailed agreements that are similar in each transaction. Some examples of attachments are: forms that specify purchase price , quantity, warranty, delivery terms, confidentiality, etc.
Multiple contracts may also be consolidated into one contract. Other situations that may result in both parties benefitting from using an MSA is when the parties provide services of the same type repetitively, or the parties have engaged in a course of conduct that includes similar contracts.
Another example of a situation that might be suited for use of an MSA is where one party supplies goods to another party that are similar in nature, such as an automobile manufacturer supplying parts for their automobiles and is using contract repair shops across the United States to perform services on those parts. Replies to RFPs or RFIs are also best suited for using an MSA, because this pooling of agreements allows the parties to retain some flexibility while still generalizing the main terms of the agreement.
Elements of Multi-Source Agreements
In most instances, the contracts governing a multi-source strategy contain many of the same elements one would encounter in a standard supply agreement. As a result, the factors that directly impact the commercialization plan stand as the keys to understanding how to leverage a multi-source strategy. The overall objectives in approaching a multi-source strategy are to fully understand the supply market for the given product, ensure that there are appropriate safeguards to manage the relevant commercial risks and employ commercial terms and structures that facilitate the realization of the overall objectives. The following is a list of some of the elements that are typically addressed in a comprehensive multi-source strategy:
Parties
Name, address, and contact for each of the parties.
Manufacturing Site
This defines the applicable site through which both parties will manufacture the product. This may be a geographic territory or defined plant.
Commercial Terms
Minimum requirements, forecast levels, maximum annual volume, commercial terms for pricing including components, allocations and rebates.
Primary Manufacturing
This is a primary source of the product or material, which is impactful to the overall approach to the agreement.
Secondary Manufacturing
This is the secondary source of the product or material, which is of lower commodity value to the product deliverable.
Duration
Term of the contract. Extension options should be addressed.
Advantages of Multi-Source Agreements
By enabling the responsible use of multiple suppliers, multi-source agreements can be an effective tool for corporations to reduce risk and manage the supply chain diversification process. Multi-source agreements provide companies with a number of advantages.
The most obvious benefits to entering into multi-source agreements are: Companies are often better positioned to choose suppliers based on intellectual property considerations, product design capabilities, speed or volume of production, unique technical expertise, and overall performance. There is also the benefit of price diversification. Price tends to fluctuate among suppliers just as it does in all portions of the global marketplace. Having multiple suppliers may allow a company to take advantage of price reductions at one supplier and remove some of the negotiating leverage from vendors as demand increases.
For large, mature markets, such as pharmaceuticals, multi-source agreements can avoid injecting single source risk into the overall industry. In the case of pharmaceutical manufacturers, as a general practice, drugs require the explicit approval of multiple manufacturers to appropriately account for the global need for each product. Keeping a consistent and rigorous schedule is crucial for fulfilling obligations and preventing drug shortages especially for life-saving drugs like antibiotics.
By diversifying sources of supply a company can avoid companies loss in revenue and market share that result when a key supplier fails to deliver, or fully adhere to quality requirements. Alternate sources can also provide a company with flexibility to respond to customer demand by having alternate manufacturers available for the same product regardless its location. In addition, multi-source agreements can provide a company access to a larger pool of manufacturers thereby increasing efficiencies and reducing costs.
Issues and Considerations
Multi-source agreements also bring with them challenges and considerations that must be addressed. For example, these agreements introduce a level of complexity in administration. Different source offerings may or may not include overlapping services so it is important that the policyholder has a plan and understands the rules governing the specific agreements they are entering into.
A good example is in the context of excess liability insurance. It is not uncommon for an umbrella insurer to be contractually prohibited from contributing to the payment of indemnity and defense costs until the "underlying" insurance was completely exhausted. Some indemnity clauses require that, once the underlying layer is exhausted, the excess layer drops down which would otherwise be excluded where there was available underlying coverage.
One problem that might arise is that the policyholder misunderstands, or is misled by its broker regarding, the nature of the excess excess policy it is setting up – often because it is combined with other insurance. As such, policyholders are advised to set up separate layers of excess coverage with each carrier rather than relying on a "combined" excess policy.
The other consideration is that multi-source agreements may lead to conflicts over directions and claims management. Multi-source agreements, especially where the main policyholder is part of a larger corporate group structure , can result in tensions between a claimant and the main policyholder’s insurance representatives and the main policyholder’s insurance representative and the carrier representative. Particularly, where the main policyholder’s strategy is to push the claim down to the primary carrier on the basis that coverage is broader and indemnification more certain to occur.
To minimize this tension, it is important that the actual claim notice be made against the "claim trigger" under the appropriate agreement. It is equally important that the claims submission is correctly directed to the right carrier, often within the correct claims department. If the claim is directed to the wrong carrier or the wrong claims department, it may cause problems – in some circumstances leading to a gap in or no coverage at all.
A carrier may deny a claim based on its wrong claims submission requirements. For example, if a carrier’s submission requirement is to submit claims with HIPPA compliant policies, and the claims submission is sent to another department that does not have this requirement, the second carrier may be able to deny coverage is the first carrier denies coverage on the basis that it was not submitted in accordance with its requirements.
To minimize the risk of aggravation and challenge, proper coordination through and with claims counsel is imperative. Ideally, this should also be set up when establishing the multi-source agreement.
Legal Requirements and Recommended Practices
Multi-source agreements must comply with applicable local laws at all levels, including areas like antitrust, tax and public policy. If one customer has a branch with local purchasing power, the difference in that branch’s economic impact must be accounted for in the award calculation. The value of an agreement that awards the most favoured customer protections must be capped based on the extra obligations placed on the supplier.
States should adopt best practices for implementing multi-source sourcing, such as determining whether the process will be the same once a state entity becomes large enough to trigger the multi-source requirement. The following are best practice recommendations when drafting multi-source purchase agreements:
• The multi-source agreement should state that the state reserves the right to audit the supplier’s compliance with their obligations.
• The supplier should provide a procurement plan detailing their performance.
• Specify how a vendor will give notice to the customer that the vendor is able to respond to a request.
• The list should allow the primary contractor to receive favourable prime pricing if the contractor actually fills an order and meets whatever conditions were required to trigger the procurer’s right to use the secondary source.
• Also, the list should include secondary sources that have an adequate supply.
• The list should meet needs, including if part of an ongoing project to establish a statewide ordering process.
• The state should consider adding provisions for electronic procurement options.
Illustrations and Examples
It is helpful to look at examples and case studies of multi-source programs in an effort to better understand how they work, their success, lessons learned and how they have been used.
Media companies, especially in today’s climate, have to find creative ways to cut costs, and with consolidation they need to find new sources for services. Their biggest costs are news, distribution and marketing. Media companies have opted for the multi-source approach for news and distribution.
The idea is a simple one. Find a competitor who is willing to split expenses, and create a joint venture or exchange the services. This can take many forms.
Last year Herb Scannell, President of Next New Networks, put together a deal between Time Warner and Comcast to use each other’s distribution. Disney is going to use its ABC feed for the January 8 debate, freeing up ten NBC HD trucks for NBC news.
Another example is Spotrunner, a start-up that uses the internet to make advertising for small and medium-sized clients affordable. It uses age, gender, marital status, and other information to place ads targeting specific audiences across regional and national platforms. Advertising Age recently reported on Spotrunner’s deal with Cox Broadcasting in Atlanta, Georgia . Spotrunner will supply commercials and their technology platform to allow Cox stations to produce local versions of spots for national advertisers. This program addresses local concerns, while providing national advertisers with a consistent voice.
There are many more examples. In the music world, multi-source licensing deals have become commonplace. The BBC created a multi-source business unit called BBC Worldwide. As part of the unit’s strategy it decided to offer multi-source licensing deals that allow companies to use the BBC’s catalogue of programming. BBC Worldwide’s deal with IFC during its launch was the start. The company offered IFC single-source licensing of some of its content. The deal worked so well IFC has asked for multi-source rights two years in a row.
In addition to offering clients rights for a specific territory, use of certain mediums, and time periods, a multi-source approach also allows clients to self-qualify for PPA tax exemptions. Most taxing jurisdictions require proof on how the closing entity will use the property (airline tickets, copies of TV shows, etc.). Using multiple sources, taxpayers can demonstrate similar, yet different uses of the property in question, allowing divisions to qualify for PPA tax breaks.
The bottom line is that there are many creative and not-so-creative uses of multi-source approaches in the media industry.