While recent studies suggest now is a good time for short-term contract negotiations, companies must also strategize for the long-term management of procurement contracts.
As a result of the economic slump, many procurement professionals believe they are in a better negotiating position with their suppliers and thus have major influence in the steering of their businesses.
A recent study by supply management software provider BravoSolution and independent research consultancy Loudhouse found that 51 percent of respondents say they are in a stronger negotiating position with suppliers and 48 percent state they have more flexibility when it comes to reviewing existing contracts.
However, the study also found that 69 percent of chief procurement officers (CPOs) had not examined the impact of the last six months on their supply management strategy. "Overlooking risk in the mid-term and lacking investment in process efficiencies, many businesses will feel pain in the next 12 months with the potential of supplier flexibility drying up," Nader Sabbaghian, CEO of BravoSolution, said in a statement
To prevent that from happening, CPOs must carefully manage their supplier contracts as they "guide the purchasing process" as every type of contract has "some impact on the overall performance of a business," Aberdeen Group
says. "[T]he effects of procurement contracts are among the most immediate and tangible, leading enterprises to place the highest level of priority practices for developing, administering and supervising procurement contracts during these tight times.
"The effective management of the contract creating process in combination with the development of greater analytics and reporting capabilities around contract compliance delivers real value and returns for enterprises," Aberdeen Group continues.
There are several strategies procurement teams can implement when it comes to managing procurement contracts. Before any of them can be put in place, however, companies are strongly urged to carry out an unbiased and comprehensive assessment of the current procurement contracts management processes and related capabilities, independent risk consultant protiviti
and the Association for Operations Management
(APICS) say in their 2007 study Procurement Contract Risk Management
Once assessed and agreed upon, companies should then evaluate the gap between the current state and the desired level of capability and performance. "Set clear overall strategic and operational objectives and performance expectations for the organization's procurement contracts management process," the study advises. "Without such a vision and objectives, it is unlikely that the desired level of performance, control and capability will be achieved." Purchasing
suggests focusing on producing a few key metrics across all spend categories, and building and refining those metrics for the ones with the greatest impact on business.
These objectives must be set for the short- and long-term. "You're not going to be able to do everything in one day," Ken Hartman, manager of indirect and global sourcing technology for Boston Scientific
, told Purchasing. "So you want to focus on the things that have the biggest impact to the business."
For mid- to longer-term investments in procurement contracts management process capabilities, protiviti and APICS advise companies to make investments in organizational tools and technological upgrades, as well as those that will improve strategies, policies and practices.
Creating a contracts template that has the appropriate clauses, terms and conditions as well as installing a central repository for all contracts are additional actions companies could take to improve their procurement contract management process, InfoSys
notes. All authorized parties should have access to the central repository, allowing them to see and compare the past and current contractual information.
"By consolidating contracts and related documents into a central location, the first step to take is enabling action on these contracts," Aberdeen Group advises in its Procurement Contracts: Real Value, Real Returns
report. Contracts that are scattered across the business "handcuff the ability of an enterprise to manage the pricing or service levels governed by these contracts. Additionally, local management and storage means that knowledge of that contract and the relationship with the supplier are often also lost if that contract leaves the company."
Supplier relations are another important aspect of contract management. The Aberdeen Group report encourages companies to engage suppliers as collaborative partners to allow both parties to engage in actions that are beneficial to each side. Having a strong relationship with suppliers gives buyers a chance to take preemptive measures to recognize and avoid supply chain disruptions. This helps avoid extraneous costs and contentious interactions. Moreover, "establishing a closer working relationship with suppliers also paves the way for compliance by suppliers to contract pricing and service levels," the report adds.
Lastly, businesses are advised to use key performance indicators (KPIs) for measuring contract management performance. These provide "more granular visibility into contract management activities" and allow organizations "to more accurately assess their performance," the Aberdeen study says. The KPIs should not only measure standard contracts-related metrics like compliance and spend, but also cycle times, supplier compliance to service levels and capture of rebates.
Corporate Purchasing Confidence Presents Risks for Long-Term Savings
BravoSolution, April 14, 2009
Procurement Contracts: Real Value, Real Returns
by William Browning III
Aberdeen Group, March 2009
Procurement Contract Management
by William Browning III
Aberdeen Group, Feb. 24, 2009
Procurement Contract Risk Management
protiviti and The Association for Operations Management
Aligning to the Best Practices for Combating Challenges Faced in Contract Management
by Raj Rajendran
InfoSys, Nov. 4, 2008
Four Tips on Spend Analysis for Small Companies
by Susan Avery
Purchasing, April 9, 2009