The Source-to-Pay process can be divided into two sub-process areas, what happens before and after a supplier contract is executed. Procurement departments can use contract management solutions to provide significant value in each area.

Efficiency & Effectiveness

The inefficiencies, opportunity costs, and risks associated with manually generating, editing, mailing, signing, storing, and reviewing paper contracts across the globe to codify business relationships have become too great. Resource-strapped CPOs and other supply management leaders remain pressed to drive greater value, faster and more effectively, through the contracting and procurement processes – pressured to constantly do better with less. The ability to standardize and scale contracting processes has a direct impact on team efficiency, operating budgets, and the ability to manage a more streamlined process.

Ardent Partners’ research shows that after the deployment of a contract management solution, procurement and/or contract teams collapse the average contract execution cycle time by roughly one-third (34%). This means that fewer resources can carry a greater workload. These contract solutions also pay an efficiency dividend to suppliers adding a nice win-win element to the sometimes adversarial negotiation process.

Modern, automated contract management tools can save enterprises time, effort, and money during the supplier negotiation all while helping teams avoid costly mistakes. Procurement teams looking for cost effective ways to increase efficiencies, performance, and value, have used automated contract management solutions to deliver results. Smarter, more effective contract management includes smart template and clause selection and usage that can be AI-driven to guide system users down a prescribed contract development and authoring process.

Plugging Savings Leakage

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 21% of its cost savings via leakage every year, closing the process gap by connecting sourcing and contracts can reduce that number by almost half. Thus, many executives 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.

One major challenge for a generation of procurement executives was the establishment of a clear and unambiguous definition of savings. This was caused, in part, by many CPOs who wanted to highlight and report on the savings that were identified/negotiated at the time of contract award and then move onto the next savings opportunity. But, the reality then, as it is today, is that simply identifying the highest value supplier and high-level pricing is one step in a much longer process that has to be managed if savings are to be maximized. What is most important is the savings that are actually realized by the enterprise.

Savings leakage tends to range between 14% and 26% on the typical sourcing contract. The main reasons behind this leakage are usually poor visibility and communication which create (1) an inability to capture what was negotiated during the sourcing process, (2) challenges during the implementation process in gaining stakeholder awareness, and (3) P2P process and data gaps between contracts, orders, invoices, and payments. In each case, automated contract management solutions can enable greater visibility into, and therefore, usage of contracts while also enabling better accuracy across the full P2P process.

RELATED RESEARCH

The “Innovative” Impact of Contract Solutions – Part 1

The “Innovative” Impact of Contract Solutions – Part 2

Tagged in: Chief Procurement Officer, contract management, Innovation, Process, Procurement, Technology