Ardent Partners research consistently illustrates the value and necessity of leveraging effective people, processes, and technologies to drive the modern procurement organization. One such process, Contract Management, resides at the intersection of procurement officers leveraging supply management solutions to purchase the optimal mix of goods and services for the enterprise while driving greater value throughout the process.
Contracts are the glue that binds transactions between buyers and suppliers, ensuring that buyers maximize the value that procurement negotiated during the sourcing process and that suppliers deliver on the value that they promised to provide. Without the visibility and control that contract management provides, procurement departments expose themselves to greater internal and external risk in the form of savings leakage and contract non-compliance. For the modern enterprise trying to cut costs and increase savings wherever and whenever it can, contract management is a veritable linchpin to success.
Contract management is perhaps one of the more valuable business processes within the greater organization, such that a robust series of capabilities in this area will provide critical insights at both the tactical, line-of-business level and the strategic, executive level. At the tactical level, buyers need to be aware of existing contracts and have access to central contract repositories to facilitate greater on-contract spend and limit maverick spend. Furthermore, a strategic viewpoint of this series of processes will guard against the constant risk of savings leakage.
Drip, Drip, Drip: Curing the Leakage Problem
Savings leakage is defined 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. While the average company loses 22% of its cost savings to savings leakage every year, closing the process gap by connecting sourcing and contracts can reduce leakage by almost 40%. Thus, executives (particularly those from Best-in-Class procurement organizations) value contract management for its ability to link the source-to-settle process, guard against savings leakage, and realize the savings that procurement identified and negotiated at the time of contract award.
The Visibility Factor
Best-in-Class procurement teams differentiate themselves from their peers, in part, by having greater visibility into contract negotiation and execution metrics, like identified savings and compliance rates. At the front end, these top-performing organizations understand that visibility into only specific areas does not make for an effective procurement program; thus, it is important to note that Best-in-Class enterprises, in the pursuit of contract compliance and the avoidance of savings leakage, are more apt to hold the necessary visibility into the critical areas “that matter” when it comes to the source-to-settle process.
Best-in-Class organizations appear to be generally more accountable to their core goals and objectives. While savings leakage plagues even the most effective procurement operations, those organizations in the Best-in-Class group strive for greater accountability than the competition, as they are more likely than other enterprises to hold the necessary visibility into the myriad phases of savings (identified, negotiated, booked, and realized / implemented) that they can be proactive and pinpoint the gaps that may cause leakage.
Final Thoughts
Contract compliance is one level of foundation in regards to combating the savings leakage problem. That is, Best-in-Class procurement departments hold a higher level of visibility into current contract compliance rates than other groups, holding the ability to understand the true impact of supplier agreements and how the execution (no matter how correct or poor) currently supports savings targets and other objectives. In other words, if you don’t have visibility into contracts, spend, and compliance rates, you’re not going to be able to plug the leaking holes strewn across the source-to-settle process. Leverage contracts to gain visibility into purchasing, spend, and savings rates, and you ought to plug most of these holes.
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