Chief Procurement Officers (CPOs), who for many years have been on the front-lines defending against profit margin erosion, quality deterioration, and supply risk, have also been firsthand witnesses to the dramatic impact that globalization and open trade have had on their operations. While many large and significant business benefits have been realized as a result of these two trends, they have also created an environment of increasing business volatility and supply management complexity as well as heightened competition and shorter business cycles.
To compete in a global market, many suppliers have been forced to differentiate their products and services across all aspects of their business (i.e., price, quality, delivery, services levels, payment terms, etc.), making business relationships significantly more diverse and nuanced and as a by-product, significantly riskier. Contracts sit at the intersection of these relationships, capturing their terms and nuances and helping buyers manage compliance and risk. With more moving parts and higher stakes, managing supplier contracts well has never been more important.
In this context, it is no surprise that Ardent Partners research finds that Best-in-Class procurement departments leverage automated Contract Lifecycle Management (“CLM”) systems to a greater degree and to superior results, reporting contract compliance rates that are more than 25% greater than those reported by their peers. They also report higher annual savings figures.
Linking Systems for Value
While a seamless and fully-automated Source-to-Settle process remains the exception, and not the rule, for the average procurement organization in today’s marketplace, Best-in-Class procurement departments differentiate themselves and their performance by linking their Contract Lifecycle Management systems to their eSourcing and eProcurement systems more frequently than their peers.
Organizations that lack any semblance of continuity and follow-through across their systems and processes miss large opportunities and consistently, and in some cases, quite dramatically, erode the value of their work. For example, by linking eSourcing to Contracts, procurement organizations are able to streamline the supplier bidding process and drive efficiencies and effectiveness during the contracting process. More importantly, the linkage of eSourcing and CLM systems reduces the potential for leakage between the savings identified at the time of final contract award and the savings that are actually implemented by ensuring that the winning suppliers’ bids/terms move seamlessly from the eSourcing system into the CLM system contract.
By linking Contracts to eProcurement systems, the Best-in-Class improve their requisitioners’ visibility into the existence of specific supplier contracts, which helps deter maverick spending by promoting the procurement of goods and services from preferred or contracted suppliers and offering auditors a clear view into non-compliant purchases. And, by providing visibility into the detailed contractual terms and service levels, CLM systems help buying organizations ensure that negotiated pricing is what is actually paid.
The linkage of CLM systems to other systems used to automate parts of the Source-to-Settle process by Best-in-Class procurement departments contributes to the 36% higher average annual savings percentages (8.7% compared to 6.4%) that these departments report achieving. Finally, the Best-in-Class are not only much more frequent users of CLM systems than their competitors, they are also more sophisticated users, having an automated contract creation process in place three times more frequently than all other procurement departments.
[Publisher’s note: If you are enjoying today’s article, you will want to read Ardent’s latest report focused on CLM and the benefits of linking it to Supplier Management. Get it now, while it is still available.]
Recommendations
While contracts literally define the business relationship between trading partners, they should also represent the crowning achievement of a successful negotiation. And yet, once executed, contracts can often become a burden to the supplier and an afterthought to the buyer. Here are a few strategies and approaches for procurement leaders seeking to improve their contracting processes, increase contract compliance, and reduce savings leakage:
- Invest in Contract Lifecycle Management solutions that automate the contract creation process and promote visibility via a centralized contract repository
- To streamline and simplify complex negotiations, work to develop standardized terms, conditions and approaches for all of the different aspects of a contract including: pricing structures, payment terms, service-levels, liability, etc.
- Link CLM systems to other supply management solutions, such as eSourcing as a way to maximize the results from the sourcing process and plug potential savings leakage; and eProcurement as a way to promote contract compliant purchasing and price compliant payments.
Are you Best-in-Class? Find out by taking Ardent’s new State of Procurement 2018 survey (and get the report for free).
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