Our short series of articles on the concept of visibility and what it means for Chief Procurement Officers continues this month. The response to this series has been so strong that we thought we’d continue with it to include other key parts of the source-to-settle process. Thus, today’s article highlights the top areas in which procurement leaders and contract managers need to have visibility…and what they can do to gain a better view into the process.
The contract process is critical for the enterprise as a whole and procurement teams and contract managers, in particular. It follows a negotiation period in which procurement worked hard to source the optimal mix of goods and services for the enterprise and over the life of the contract, deliver as much value to the enterprise as possible. Without visibility into the contract creation and execution phases, procurement teams and contract managers risk eroding the value of the agreements it worked so hard to negotiate and secure earlier in the process. So what facets of the contract management process do they need to have visibility into for the enterprise?
- Sourcing Terms and Conditions: these detail what goods or services the supplier will provide to the buyer, including pricing. If contract managers do not have visibility into sourcing terms and conditions when creating contracts, they risk allowing significant value and savings to be eroded from the deal. Occasionally, suppliers will attempt to renegotiate facets of the contract at the last minute, or pitch “extra” goods or services to the organization that were already negotiated by procurement as part of the deal. Without having access to and familiarity with the previously agreed-upon terms and conditions, contract managers can unwittingly grant suppliers more favorable terms or simply sell them things that they organization’s already getting.
- Existing Contracts: contract managers are the links to the enterprise’s agreements with suppliers – current and future. Contract managers as well as procurement leaders need to ensure that they have full visibility into current contracts with suppliers to ensure internal and external compliance and mitigate risks if either becomes non-compliant. Contract managers also need to be aware of when contracts are expiring so that they can either renew favorable contracts or renegotiate/ terminate unfavorable contracts. Failure to do so – in either case – could cost the enterprise significant dollars over the short and long haul.
- Maverick Spend: regarding internal compliance, procurement needs to have visibility into who is purchasing against existing contracts versus who is purchasing outside of established and negotiated contracts with suppliers (maverick spend). Although there are times when it makes sense for buyers and line-of-business users to purchase goods or services outside of the procurement system, doing so repeatedly or for pricy goods or services can also cost the enterprise a lot of money in the form of savings leakage. Procurement works hard to source and negotiate top value from its suppliers; contract managers need to ensure that internal stakeholders are leveraging these agreements, and to have eyes on those who are not.
Fortunately, for contract managers and procurement teams, contract management tools can capture and present these variables and manage their associated risks before they impact the organization’s bottom line. Contract repositories centralize existing contracts and other documents, like SLAs, into a single location, allowing all internal stakeholders – from buyers, to contract managers, to CPOs, to auditors – to understand contract terms and remain compliant. Contract management solutions can also alert users when given contracts are up for renegotiation, allowing contract managers to take the desired action based on the nature of the contract. Also, some contract management solutions feature spend analytics tools that allow users to understand their identified savings and realized savings, and gain a holistic view of their spend. Are they leveraging existing contracts with preferred vendors, or are buyers and users engaging in maverick spend and eroding the value of these contracts? Robust contract management tools can provide that level of analysis.
Contracting processes can be murky to the uninitiated procurement professional. Fortunately, modern contract management solutions can provide visibility into this process and allow all parties to stay clear of dangerous contractual waters.
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Visibility: What Does it Mean for Category Managers?
Visibility: What Does It Mean for CPOs? (Part III)
Visibility: What Does It Mean for CPOs? (Part II)
Visibility: What Does It Mean for CPOs? (Part I)
