Procurement is changing. It used to be about acquiring products and services for the best price. Now, it’s also about giving executives the analytics and guidance they need to make better business decisions. Procurement professionals play a strategic role beyond simply controlling expenses. They’re now also expected to manage legal and regulatory exposure, while providing stakeholders with valuable intelligence across a much broader range of objectives.
Business transactions and dealings are increasingly layered with supply chain complexity and deeper, multi-tier relationships on both the debit and credit sides of the general ledger. Added to that are third-party non-customers and non-suppliers such as service and maintenance partners. It has become apparent that executives across industries are now realizing a greater degree of outsourcing production and services in a transition that has impacted the contracting process at the very core.
Gaining a complete view
Visibility into contracts reveals savings by rationalizing suppliers, negotiating better deals, and taking advantage of incentives. It also means better risk management assessment through a clearer understanding of service-level agreements and uptimes, whether liabilities are covered by insurance, and whether to use standard versus non-standard items and conditions.
Increasing company spend under management by centralizing and analyzing an organization’s contracts is essential for controlling expenses, as well as reducing rogue spending and limiting the company’s vendor roster. In fact, for many organizations merely understanding how much of its spend is actually under management and how much is not, is not always easy. Some estimates put the average non-contracted spend in large organizations as high as 40%.
Unsurprisingly, contract management has emerged as a necessary core competency of the procurement function. Further, it is an area that can never be outsourced or otherwise contracted out. It is surprising, however, that most companies don’t take the automated contract discovery and analysis route. Instead choosing, organizations choose to do nothing, or to rely on time-consuming and error-prone manual methods that capture the bare essential data points only from immediately available contracts.
The early development of contract management software most often focused on the two most prominent sources of contract value, namely operations including outsourcing (including procurement), or the “buy side”, and the “sell side” or sales. This naturally led to a siloed approach to implementation, and the end result has always been a lack of coordinated awareness and visibility.
Even among those who have a software solution in place, many still “manage” their contracts in silos in which some contracts are in the software tool itself, others reside in folders on the network, some lurk as attachments in users’ inboxes, and yet more only exist as hard copies.
In response, some organizations have turned to contract lifecycle management (CLM) and procurement systems. These solutions too often force companies to draw a line using some form of the 80/20 rule in order to focus scope, which inevitably leaves behind hidden crucial details that go beyond the face value of a contract, such as conversions, intellectual property rights and protection, management of third-party relationships, automatic renewals, and tracking and controlling risk through survivability and indemnification.
However, the technology has recently shifted to a more cross-functional approach that blurs the lines between departments and business units. This makes it possible to tap into the strategic value of contracts across the entire organization and gain a more coordinated view. Contract discovery and analytics platforms that employ advanced technologies (including artificial intelligence and machine learning) have emerged to derive greater insight into the full contract corpus.
No contract is an island
Achieving a correct view of contracts, to drive performance and mitigate risk, requires complete visibility into them with a federated view across multiple repositories. This includes clarity into the incumbent levels of metadata in a structured, commonly accessible format, and ideally integrated with related software infrastructure.
Technology is now being used, propelled by advances in artificial intelligence and machine learning, to extract, to required levels, metadata. It may range from fundamental attributes such as cost and quantity to more complex issues such as delivery obligations, counterparty credit risk, and geopolitical issues. Line-of-business executives and vendor management specialists find this invaluable as they the puzzle of who does what for a company and the contracted performance expectations, in order to do vendor performance assessments.
Sourcing teams are now looking beyond the single dimension of purchase price reductions, by using rich contractual metadata content to identify contractually lagging or missing areas. Further, it allows organizations to chase spend that has traditionally been under sourced, fragmented, or otherwise under-managed. Moreover, procure-to-pay and source-to-settle solutions are guiding procurement departments toward better decisions by providing visibility into all relevant contractual fields (such as discount levels, quantity breakpoints, delivery times, and commitment levels in both quantities and dollars).
In any case, procurement officers need to remain mindful of an often-overlooked factor for the management contracts. Time, specifically reducing hours spent and the associated cost of searching for specific contracts and terms to achieve a level of actionable visibility and analysis, has historically been and continues to be substantial. This reality often forces companies to compromise on the number of contracts to include in the process and the number of data points to extract.
A significant aspect of this is focused on the benefits of improved contract implementation, particularly cycle-time compression and the possibilities it reveals. Extended time frames not only jeopardize longer-term contract lifecycle opportunities, such as the ability to enable ongoing visibility into various contract exposures, but they also increase risk in areas where price-driving factors are at play, as well as make it more difficult to quantify risk itself. There is no substitute for technology to underpin contract visibility efforts, and truly achieve the necessary and desired results in a useful timeframe.
A disruptive decision
Gaining clarity into contracts represents a disruptive decision with the potential to delivers both buy-side and sell-side opportunities. On the sell side, this analysis can be of incalculable value in understanding supply chain considerations such as custody and control requirements, or regulatory compliance in the form of environmental product declarations. Favorable results can also be gleaned on the buy side by containing risk, influencing spend, and gaining clarity into pre-negotiated clauses with suppliers and sub-suppliers.
Achieving any of these goals can be difficult, especially at organizations where contracts are hard to find and the data they contain is even harder to extract, understand, and manage. Procurement professionals are under tremendous pressure to resolve these matters as they look to save money, protect against uncertainty, and provide analysis that can be used to claw back revenue in the quest for stronger growth.
Procurement should, in consultation with key internal stakeholders (including legal and sales), lead efforts to implement a more sophisticated, automated approach to contract discovery and analysis. This is the first step in capturing real and lasting contract visibility.