August 25, 2014
Although I’m new to the Shelby team, I bring more than a decade of procurement leadership experience from mid to large-sized companies. Over the course of my career, I have found that the Contracts Management function—and the software used to support it—is often underutilized, resulting in duplication of effort, poor visibility and measurement of supplier performance, missed savings opportunities, and increased risk to the enterprise. Unfortunately, many companies don’t recognize the procurement discipline of Contracts Management as an area of concern until there is a legal dispute or regulatory compliance problem. Companies that are struggling to improve compliance and increase spend under management often have Contracts Management functions that suffer from the Rodney Dangerfield syndrome – not getting the respect that it deserves.
I believe that it is possible to gauge the maturity of a procurement organization by evaluating the current state of their Contracts Management processes and practices. If your company doesn’t view Contracts Management as a core enabler of its procurement strategy, then your organization may not be effectively utilizing an important resource for creating value.
In this post, I’ll cover three areas of Contracts Management underutilization: Contracts Repository, Negotiated Pricing and Payment Terms, and Contract Alerts and Automation. I’ll discuss each area without regard to specific procurement platforms because many platforms today support the policies and practices that are essential to optimizing the Contracts Management function.
Contracts Repository: In many organizations, the Contract Management lifecycle—from authoring through to review, revision and execution—is manually intensive and can take several weeks or even months. Such delays severely restrict a company’s agility in responding to business opportunities and changing market conditions. Today’s procurement management platforms, when properly utilized, greatly simplify the process of building and maintaining a library of contract clauses, thus reducing one-off reinvention and the review inefficiencies this entails. You can quickly create new contracts using pre-approved templates and legal clauses to help build consistency, compliance and visibility across the enterprise. If your organization underutilizes its contracts repository, chances are the problem exists within the procurement realm of your enterprise.
Pricing and Payment Terms: Few procurement policies have a more direct impact on cash flow and profitability than negotiated pricing and payment terms. But often, the results of such vital supplier management functions are not tracked and managed through the Contracts Management capabilities of the procurement platform. Surprisingly, examples of missed opportunities abound across direct as well as indirect categories of spend. In the absence of clearly defined enterprise strategies and policies and the appropriate hand-offs between Sourcing and Contracts, basic information is either not entered or not kept up to date, disabling any proactive role for the Contracts Management function.
Contract Alerts and Automation: Whereas the first two categories of underutilization can often be attributed to a lack of mature procurement processes, the third is a byproduct. Today’s platforms create transparency and deliver automated alerts for managing opportunities and risks. However, absent consistent management of approved contract clauses and negotiated pricing and payment terms, the ability to proactively monitor and manage the supply chain is disabled. In such environments, the Contracts Management function becomes embroiled in exception management. Savvy vendors often use such circumstances to their advantage.
So what’s the remedy? Why don’t more companies take advantage of the capabilities of their procurement platforms to manage enterprise contracts, policies and compliance?
As with all problems, the answer depends on how you define the challenge. Contracts Management, like all procurement functions, is only as effective as the enterprise strategy and enabling policies and practices that support it. Furthermore, stakeholder alignment among Legal, Sourcing, and Procurement teams will either foster or hinder the environment for success.
If your organization takes too long to on-board new vendors, doesn’t view Contracts Management as an essential tool for instigating change management and can’t take advantage of automated alerts to proactively manage exceptions, risks and renegotiation opportunities, don’t despair. Think of this as an opportunity to educate senior management about the role that procurement can play in producing bottom-line results. Contracts Management may not be the most exciting area of procurement, but this vital function informs and enables all other procurement optimization functions, including Spend Analytics, Strategic Sourcing, Procurement Processes, Invoice & Payment and Supplier Management.
For more information about transforming Contracts Management operations at your company, contact us at firstname.lastname@example.org.
Manager, Procurement Optimization
The Shelby Group