Over the past couple of weeks, Ardent Partners has been featuring analysis from The State of Strategic Sourcing 2014: Connecting the Dots, which is now out and available. Interested readers can find the report here and here.
This research report analyzes the strategic sourcing programs of almost 250 distinct procurement departments and presents the Best-in-Class competencies for improving the sourcing function and its results while also highlighting the market trends that shape strategic sourcing today. This report also utilizes market statistics to quantify and examine what leading sourcing organizations are doing to outperform their peers.
In the report, we introduce the concept that there are four primary “pillars” that mark the foundation of the modern strategic sourcing program – spend analysis, sourcing, contract management, and supplier performance management. All four are valuable business processes that, when automated, can elevate a sourcing team’s performance and that, when connected, can transform an entire operation. Today’s article will focus on the third pillar, contract management – as both a business process and an automation tool.
The Contract Management Process
Contract management is a subset of the larger strategic sourcing process, and like the rest, it is foundational for ultimate sourcing success. Contract management is a strategic sourcing pillar because much of the value that procurement delivers to the greater enterprise rests upon its foundation. Unless procurement teams follow contract management best practices and “connect the dots” from sourcing negotiation to contract execution, they risk savings leakage, which is the gap between identified (or negotiated) and realized (or implemented) savings due to poor contract management, supplier on-boarding, and a few other issues. At the end of the day, poor contract management can erode the value that procurement won for the enterprise during the strategic sourcing process; but effective contract management can preserve this value. That is why it is such a critical, foundational part of procurement and the entire strategic sourcing process.
Contract management involves a number of sub-processes for procurement, including:
- Proposal development
- Creation / authoring
- Risk assessment
- Negotiations
- Approval / review (including final signatures)
- Analysis and reporting
- Auditing
All of these sub-processes are essential to effective contract management – from contract authoring to auditing. As a result, best practices in contract management include:
- Centralizing existing contracts, service level agreements (SLAs), and terms and conditions into online repositories
- Leveraging existing contracts and standard contract language whenever possible
- Leveraging electronic signatures and automated workflows to further reduce approval times
- Gaining greater visibility into the entire contract management process via monitoring and reporting functions
Although it can be quite a relief to finally sign a contract after a long negotiation process, procurement’s work isn’t done when it has negotiated deals and inked contracts with its suppliers. It needs to remain on task and on guard against savings leakage and non-compliance.
To put a finer point on it, even when contracts are well executed, there is the potential risk that suppliers do not stay compliant with their contracts (and then invoice incorrectly and/or provide goods and services that are not covered under the contractual agreement). But this risk can be mitigated by centralizing access to contract SLAs, which dictate contract terms and conditions, and by remaining engaged throughout contract execution to hold suppliers accountable. Trust, but verify that all parties are adhering to contract terms, and both parties can continue doing business with each other.
Conversely, disengaging from the contract execution process before completion risks internal value erosion, as well. For example, if buyers engage in maverick spend (i.e., spend outside of negotiated contracts), they risk eroding the value of the contract that procurement worked so hard to negotiate. At the same time, if Finance or Treasury departments are over-paying or double-paying invoices for goods and services rendered, and they don’t catch their errors, the value that procurement negotiated literally goes out the door.
Despite its clear advantages, automated contract management adoption hasn’t widely caught on with many procurement teams. Two findings from the State of Strategic Sourcing 2014 report show that just 25% of procurement teams currently automate their contract management processes, with another 47% planning to automate in the future. Not surprisingly, Best-in-Class procurement teams automate their contract management processes 40% more than other teams, resulting in higher price/contract/transaction compliance rates.
Failing to nip contract compliance issues in the bud earlier in the execution phase increases the risk to sourcing teams as well as suppliers in terms of financial, operational, reputational, and even legal risk. Indeed, the earlier that procurement gets engaged in the contract management and execution processes, and the longer it remains engaged, should significantly reduce risks and preserve more of the value that was brought to the negotiation table in the first place.
RELATED ARTICLES
Spend Analysis: The First Strategic Sourcing Pillar
The State of Strategic Sourcing – Connecting the Dots
Research Preview: The State of Strategic Sourcing in 2014
The Four Pillars of the Modern Strategic Sourcing Program
