Contracts are the lifeblood of an enterprise, as they cement the relationships it has with its suppliers that provide it with the optimal mix of goods and services that the enterprise needs to operate. Unfortunately for many enterprises, poor contract management practices can present a couple of significant risks that can cause them financial and legal peril – savings leakage and contract non-compliance. However, as the following article will illustrate, Best-in-Class procurement departments approach contract management more effectively than less-mature procurement organizations and, as a result, report better performance at both the procurement level and enterprise level.
Contract Management – Mitigating Risks
The two principal risks associated with poor contract management practices are contract non-compliance and savings leakage; each can cost the enterprise dearly if not managed effectively. For starters, contract non-compliance can result when either the enterprise or the supplier fails to adhere to the contract – buyers not purchasing against existing contracts, suppliers not adhering to pricing or delivery schedules, either party failing to ensure proper contract auditing, etc. These can result in higher enterprise expense, lost profit for suppliers, legal fees and/or regulatory fines.
For the enterprise, poor contract management can also result in savings leakage, which Ardent Partners defines as the gap between identified (or negotiated) savings and realized (or implemented) savings due to poor contract management, flawed supplier on-boarding, and other sourcing weaknesses. The average company loses approximately 22% of its identified savings annually to savings leakage.
How the Best-in-Class Approach Contract Management
Luckily, enterprise procurement teams can reduce this number by nearly 40% simply by linking the source-to-settle process and closing the gaps between the sourcing and contracting processes. In a survey of nearly 300 Chief Procurement Officers (CPOs) and other supply management leaders, Ardent Partners identified the processes and technologies that leading procurement organizations leverage to outperform their peers. As a result, here are five Best-in-Class capabilities that enterprises can employ to link these processes and close these gaps to ensure greater contract compliance and stem savings leakage.
- Standardize and Automate the Sourcing Process: The Best-in-Class are 30% more likely than lower maturity classes to standardize the sourcing process by instituting common sourcing language, templates, forms, and terms and conditions that can be easily reused during the contracting phase. Reinventing the sourcing wheel can be a wasteful, risky, and costly endeavor for enterprise procurement teams; but standardizing is the right way to go. Best-in-Class procurement teams are also 43% more likely than their peers to automate the sourcing process, which allows them to digitize, centralize, and synergize supplier information (bids, negotiated prices, terms and conditions, etc.) between the sourcing-negotiation phase and the contract creation-execution phase.
- Standardize and Automate the Contracting Process: As a corollary, Best-in-Class procurement organizations are 21% more likely than their peers to standardize the contracting process to make it complementary to the sourcing process. Thus, supplier bids, prices, schedules, and terms can easily be converted into contractual documents, reducing the likelihood of costly errors for both parties. Best-in-Class procurement teams are also 40% more likely to automate the contract management process than their peers. Doing so allows them to digitize many manual, time-intensive, and error-prone processes, like contract creation, approval, execution, auditing, storing, etc., and close the loop between the sourcing and contract phases of every sourcing event.
- Tightly Link the Sourcing and Contract Processes: Lastly, Best-in-Class are 45% more likely than rival groups to tightly link the two processes. They understand the value of automating sourcing (eSourcing) and contract management, standardizing these processes, and then linking the two to fill costly, inefficient gaps between them. Tightly linking these processes allows them to ensure greater compliance and prevent savings leaks, and elevate the enterprise to the next level of performance.
Conclusion
As a result of their efforts to standardize, automate, and link sourcing and contracting, Best-in-Class procurement teams can close significant process gaps between the two and prevent upwards of 40% of savings leakage from occurring during the execution phase. Specifically, the Best-in-Class report 35% greater on-contract spend and 15% more transactions that are compliant with contracts than their peers. What’s not to like about these numbers?
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Tagged in: Adoption, Ardent Partners Research, Ardent Team, Chief Procurement Officer, Contract Lifecycle Management, CPO, Process, Strategy, Technology
