There is no question that technology has improved almost every aspect of the business process.
In theory, this is particularly true within the procurement and supply chain sphere: online e-sourcing tools make conducting sourcing events more effective and less costly than ever; online ordering portals and spend management software cut down on the time necessary to complete the entire procurement cycle.
However, the theory is only true to a point, often overlooking the important detail that procurement is indeed a cycle.
The procurement process does not end once the pricing has been implemented or the service has begun.
Working as a consultant at Source One Management Services, one of the first steps I typically undergo in understanding a client’s supply chain is the contract review process.
In 2018, one would think that this would entail an electronic transfer of all sharable agreements that are complete, organized and, most importantly, up-to-date. More often than not I am met with cryptically named PDFs that are scanned sideways, not executed by both parties, faded, expired, or at worst — all of the above.
According to a recent report by Aberdeen Research Group, best-in-class organizations achieve up to 80 percent more savings than others through a clearly defined contract compliance process. Despite this impressive metric, only 48 percent of organizations have a centralized contract management process. Executing the upfront effort to adopt best practices within your organization will reduce the time and costs associated with auditing supplier compliance, monitoring value metrics, and continuing strong supplier relationships.
"Best-in-class orgs save 80% more than others through a clearly defined contract compliance process."
Establish A Template
The first set of standards that should be put into place is a template library that reduces the costs and time associated with the contracting process. Each business division should have a standard set of language that is easily located and adapted to the terms of the agreement. All stakeholders involved in the process should have a defined workflow of the contract execution process that can be easily tracked through approval notifications in contract management software. This sets the standard digitally stored contracts with easily reviewable redlines. Finally, the adoption of the electronic signature will reduce paper costs, ensure security with digital encryption, and be transported instantly.
The second standard that is vital in any contract management process is establishing a centralized location for storing these documents and ensuring they are digitally searchable. This will drastically diminish the time and effort needed to locate, review, and monitor contracts throughout their lifecycle. This is particularly important in monitoring supplier compliance and performance. Frequently monitoring invoices and service levels against the terms of the agreement will ensure that you are receiving the full value resulting from your negotiations. Price non-compliance that goes undetected undoubtedly effects your bottom line. According to the same Aberdeen Group report, best-in-class contract management organizations have over 3 times more transactions that are compliant with contract language than others.
Equally as important as measuring a supplier’s performance with ease, the performance of your company should be closely monitored as well to protect from breaches and ensure full value is achieved. For example, if an exclusivity clause is in place with a particular supplier, and this is not known within a particular purchasing department, rogue spend could not only hurt overall spend efficiency, it may breach the contract. Diametrically, if volume-based rebate structures or tiered pricing agreements are stated within the contract and your company is approaching those measures, it is important to be aware so that the benefits will be realized.
Finally, set up alerts or reminders of important milestones to help you further analyze the relationship before an auto-renewal or termination occurs. Auto-renewal clauses can benefit both the supplier and customer if properly handled. For the supplier, it allows their sales and business development teams to focus resources elsewhere rather than trying to win the business back after expiration. For your organization, it eliminates the need to restart the contracting process from scratch. Undergoing a review period to evaluate both your supplier’s performance and the evolution of your needs will allow you to decide if continuing the relationship will add value and give you time to renegotiate any terms that do not align with the direction of the business. At absolute best, contract review should be conducted annually to ensure the terms have not become irrelevant or value has become stagnant.
I firmly believe that a properly organized and managed contract system should be at the forefront of any procurement department and organization’s technological and human resource investment pipeline. Agreements are only useful if they are audited, tracked, and strengthened over the long term. The software to manage contracts will only improve, and there is no time like the present to begin to move your agreements into the digital age, increase your spend under management, and reap the benefits of compliant, mutually beneficial relationships.
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