Supplier Contracting – The Real Value of Managing Contracts

The following guest blog is written by one of the Procurement Industry’s top 3 influencers, Dana Small, aka, Ms Category Management.

Supplier Contracting – The Real Value of Managing Contracts

Most strategic Sourcing, Procurement and Category Managers, don’t start off as Lawyers. The irony is that a major part of their job revolves around not only the writing and implementing of business terms; but, also the management of them through SRM (supplier relationship management). Which is why they should at least have a mild introduction to basic legal terms and conditions and their implications.

But since they aren’t, it leads to the question of how someone without legal training can write, implement, or even manage contract terms, correctly? And, how can management expect this to be done without proper category management understanding? Especially when we consider the end of the category management process is focused on SRM (supplier relationship management) and includes Quarterly Business Reviews to assess the supplier performance around contract terms.

Contract Training and Software Systems

Aside from category management and legal training, there are a multitude of tools in the legal contracting software space. A lot of the times these are complemented by other supporting procurement software solutions, but not all organizations have both of these implemented.

This can be viewed as a simple solution if you have enough resource and time to properly manage each contract and supplier. (Which typically isn’t the case.) Even larger companies with extensive sourcing or procurement teams aren’t equipped to manage contracts that can be over 60 pages in length for a single supplier. Which makes it one of those things a category manager may skimp out on when pressed for time.

Because at the other end of the spectrum, what happens if you are on a smaller team, that doesn’t have the time to manage all contracts and suppliers? A single person having approximately $100M of global spend could easily just focus on SRM and contract management as a full-time job. And still not cover them all ensuring they don’t lose value and are compliant! But who would want to?

Focusing in on Contract Negotiations

Interestingly enough, the typical focus for most procurement Executives is on the negotiations prior to the final contracting. Even the use of new e-procurement tools typically outweighs the purchasing of contract management part of the software system. So we can assume, the tracking and implementing them effectively isn’t a top priority, the negotiation portion therefore is. It makes sense that even the validation of the savings isn’t high on the list for smaller companies. They simply don’t have the time or resources to spend on it.

And this is where the problem lies. One person could spend the majority of their time in their job focused on the negotiation of great rates, terms and KPIs/SLA’s. Which could turn out to be all for nothing? Why? Because most people forget that the management of post-contracting could arguably be more important than the original negotiation of rates and SLA’s. Check out these articles to learn more about the leakage and how to track ROI.

Poor Contract Management Costs Companies 9% – Bottom Line

Value Leakage – ROI Calculator for Lifecycle Management, Contract Management Software.

Contracting Solutions

So, what should be the focus for category managers and strategic sourcing staff so that we don’t see value leakage? Well, here are a few tips:

• Use the 80/20 Rule when prioritizing suppliers and contracts that should be focused on. (Top 80% of suppliers with the majority of spending should be focused on)
• Larger organizations should look at creating positions that allow for category managers to focus on the cyclical process of true category management (continuous review and improvement)
• Incentives should be made (or penalties) for the suppliers who are proactive and actively support the SRM / Category management process.
• For smaller organizations, make sure the terms and conditions are manageable for the limited staff support they have.
• When possible, ensure you have solutions that either integrate together or are have a seamless integration as a single solution.

And check out this McKinsey Article for additional solutions on contract and savings management.

Please click here to read more of the industry-leading thoughts, from Ms. Category Management.