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Organisations everywhere look to procurement in order to save money. But there is more that procurement can do than simply try to put an even tighter squeeze on suppliers' prices. For one thing, don't underestimate the value of great paperwork. Once the contract has been agreed, good contract management provides the necessary transparency to ensure not only that savings are achieved but that promised performance levels are delivered.
Virtually every procurement function is under pressure these days. In UK local government, the situation became particularly urgent in 2010 when the central government announced funding cuts of 33% to be brought in over the following five years. With the councils duty-bound to provide certain services to local residents, they became desperate for savings.
One membership group, the Local Government Association (LGA), noted that almost £30bn was being spent on third-party contracts. Its research, published in 2013, showed that better management of these contracts could save local authorities between 3% and 15% of the contract value.
Rob Woodstock, Accenture managing director, operations strategy for UK and Ireland, says the same lesson is true for all organisations. And while procurement has been successful in creating savings during sourcing and tendering, better management of contracts represents an untapped opportunity to improve performance.
“Contract management is critical in the procurement landscape,” he says. “As procurement matures, it is harder to achieve high-impact savings based on tendering. Businesses are now looking at alternative ways to find savings,” Woodstock says.
A holistic approach to contract management can improve collaboration between the procurement, finance, legal and even sales teams, which helps shorten time-to-value, accelerate contract cycles and identify new revenue opportunities.
As the LGA report makes clear, good contract management is about more than ensuring suppliers meet their contractual obligations. It can help to identify and manage their own and their suppliers' risks, and achieve savings and continuous improvement throughout the life of the contract. It can also identify efficiencies, avoid unnecessary costs, enforce penalty clauses and share additional income from growth.
Fragmented, dispersed, complex
Woodstock says, however, that procurement's approach to contract management is often fragmented. Contracts are dispersed throughout the organisation, stored in various departmental databases, thereby creating unnecessary complexity. Procurement cannot manage what it cannot even find.
“There is, generally, visibility of contracts [that have been] negotiated centrally by procurement, but many are negotiated and concluded in the business locally. There may have been legal oversight, but no procurement involvement. This creates a mixed picture in terms of visibility,” he says.
Trying to get to the bottom of this is difficult, complicated and expensive. “In contract management, there is a lack of automation and overreliance on manual processes. Procurement spends more time on administration than it ought to, and less on creating value,” Woodstock says.
This fragmented, complex picture of contract management can mean organisations miss opportunities to save money and face increased legal risks, Woodstock says. It also leads to difficulties understanding the pricing schedules across multiple contracts. “Even for those that are available, a large number are out of date,” he says, adding that there is often no visibility as to when contracts come up for renewal.
This means there is a large opportunity for savings through more simplified, efficient contract management. It can improve compliance of spending through the contract, ensure the business is on the right pricing schedule and monitor supplier performance to make sure it is in line with key performance indicators. Organisations targeting, say, 8% savings across procurement activity could see a two-point uplift through better contract management, Woodstock says. Conversely, poor contract management could drag performance two points short of target.
“As well as savings, businesses are looking to procurement for growth,” he says. “Innovation and supply chain support for growth means dealing with different types of suppliers, leading to different types of contracts, so procurement needs to be fast and agile in the way it finds [its] contracts [and manages them].”
At the same time, there are increasing pressures to better manage risk, both in terms of financial exposure and regulatory requirements, he adds.
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