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While the level of spend under contract varies by sector and category, in most organisations at least 50 per cent of all third party spend is governed by contracts, or legally binding agreements between the parties to offer – and accept – goods or services.
Despite this, many organisations do not have clear contract management practices or roles and responsibilities, with supply chain relationships being managed in an ad hoc and sporadic fashion. Best in class contract management arrangements involve the continuous evolution of the contract, building and sustaining excellence within client-supplier relationships and an ongoing assessment of whether the terms of the contract and service delivery mechanisms are right for both parties.
A significant amount of spend falls under the procurement radar as it is made up of low frequency small payments that companies usually make to many different suppliers.
Best practice in corporate procurement is typically reserved for companies’ strategic purchasing. Greater savings are expected from tackling larger areas of spend, which comprise the majority of a company’s buying.
Transactional procurement and low value purchasing, known as tail spend, is estimated to make up half of a company’s indirect and direct spend.
Having the right kind of relationship with your suppliers can lead to better cost analysis and market intelligence, and a more sophisticated sourcing strategy.
Without rigorous contract management and supplier relationship management (SRM), much of the original value from sourcing activity can disappear rapidly after the letting of new contracts. Considering the effort invested in gaining benefits from sourcing, it seems strange to let this value be eroded over time, rather than reinforce it and build greater value as the contracts progress and mature.
Procurers who are leaders in their field understand that professional contract management and SRM can deliver both incremental benefits and cement those already achieved.
Successful contract management can deliver significant value to your organisation. Having the right tools and processes in place can have a dramatic impact on your ability to manage contracts efficiently and effectively.
Research has shown that up to 75% of the savings created from new contracts can be lost within the first 18 months without strong management arrangements in place.
Much is being talked and written about the ways data can be used to drive efficiency, reduce costs or acquire and keep customers within an organisation. But there is another way in which data can really help businesses make things better; data of the right sort can radically improve the return on purchasing goods and services.
Good cleansed data can drive a more strategic view of procurement, enabling informed decisions to be made earlier in the procurement lifecycle. Without it a business can, for example, view total spend in a very siloed way but not truly understand the size of cost saving opportunities that exist. Opportunities can include price variance, consolidation, contract terms, payment discounts or duration right through to simple purchase to pay efficiencies. But without accurate and more importantly cleansed granular data, or even the assurance that the data you do have is all it should be in terms of compliance, senior stakeholders will not be able to accurately advise the board on the financial implications of all purchasing decisions.