Introduction

We all know, having a contract before entering any business agreement paves the way for smooth operations shielding company’s from any legal loophole. We’ve even spoken about it in great detail in one of our newly minted blogs titled types of procurement contracts. While we won’t delve into the specifics of a procurement contract, it is pertinent we discuss the action that is an entire process on its own- procurement contract management.

Do you know, as per the Journal of Contract Management report, 71% of companies are unable to find 10% or more of their contracts. Imagine the time and labor one would have to spare just to keep track of the right contract version. The volume and variations involved is overwhelming. An average of 9.2% of annual revenue is lost due to contract mismanagement, as per a WCC report. One can claim that since procurement and contract management is often manual it tends to impact efficiency. Such challenges hinder the performance and process of procurement and businesses end up losing valuable opportunities.

Thus, this is when having a contract management process in procurement saves the day. Procurement contract management streamlines the complicated and arduous task of maintaining contracts, their terms and conditions, deliverables and deadlines. The entire action from when the contracts are created to when the contract is terminated is laid out in a systematic manner to enable operational efficiency.

With this blog we aim to provide you with a clear understanding of procurement contract management, the procurement contract management best practices, and procurement contract lifecycle management along with an ideal procurement contract management system to automate your company’s process.

What is procurement contract management?

Procurement contract management is the holistic process of managing contracts, its creation, execution, and termination. Contract management process in procurement involves creation of contracts, overseeing them, negotiating terms and conditions, monitoring compliance, following regulations, tracking timelines, and measuring performance. The main objective of procurement contract management is to protect a company’s interest by ensuring that its contracts are properly managed, followed and able to deliver the desired results.

It’s a fact, effective contract management of procurement and purchase is directly connected to the health and performance of a company. It also caters to the relationships a company has with its supply chain and customer market.

Procurement contract management process

It is one thing to understand the concept, and another to apply it effectively and consistently. Here are the five steps of the procurement contract management process, when performed in order can help businesses accomplish their goals.

1. Establish contract requirements

The project manager or the procurement team is responsible for informing the contract manager about creating a contract with a specific vendor. They communicate what will be needed from the supplier, including materials, services, pricing, deadlines, technical specifications, and other requirements, with utmost clarity.

2. Authoring the contract

After understanding the scope and deliverables, the contract manager drafts the legal agreement. Some organizations have a ready-to-go template wherein confidentiality clauses, operational conditions, payment terms, legal compliance, risk management, contract termination, and additional details are already stated in detail. Only small additions related to the seller and procurement requirements are added. At the same time, some entities prefer to draft the whole document, which makes this step in the contract procurement process a bit lengthy.

3. Agreeing to the contractual terms by both parties

After drafting, the contract is sent to the procurement team for a thorough review and then to the seller. The seller sometimes adds their redlines if they don’t agree to the terms or need some modification to specifications and send the contract back to the buyer. If all terms and conditions listed are agreeable, the contract is sealed. This step is time-consuming and requires many resources.

4. Signing the procurement contract

Once a procurement contract is drafted, reviewed, negotiated, and approved, it’s ready to be signed by relevant stakeholders from both parties.

5. Adhering to the procurement agreement

Post signing, the seller gets to work and ensures they adhere to the agreed conditions. Meanwhile, the buyer constantly reviews the procurement contract to ensure all obligations are being met.

Objectives of contract management in procurement

• Compliance enforcement

Having a contract management process in procurement ensures all the terms and conditions laid out in the contract are adhered to without a glitch. This ensures control over interactions with vendors, mitigating risks so that neither of the parties are faulting and businesses tend to get the most out of contracts.

• Better cost-saving opportunities:

When a contract specifies mutual goals and establishes governance structures to keep the parties’ expectations and interests aligned over the long term, suppliers become critical partners in lowering costs, maintaining quality, and driving innovation for a business. Massive cost-saving discounts such as delivery costs and volume discounts are leveraged to add value and competitive advantage to the organization.

• Fosters trust and collaboration:

A legally enforceable contract benefits highly complex vendor buyer relationships in which it is impossible to predict every what-if scenario. Additionally, it identifies and mitigates the risks present with a vendor you want to get into business with during the contracting process, which bolsters transparency in the procurement process.

Procurement contract management best practices

Like we said before, procurement contract management can be a complex and time-consuming process. But having a procurement and contract management system in place not only eliminates several issues but also streamline all aspects of the process. To ensure better understanding,we’ve listed some best practices that are categorized into three main areas:

1. Streamlining the process:

• Standardize contract terms: Developing commonly used contract templates can save time and ensure consistency. This approach can also establish clear expectations, reduce the risk of errors and misunderstandings, and improve the overall quality of the contracts.

• Centralize contract storage: Implementing a digital system for storing and managing all contracts ensures easy access and tracking. This helps reduce the risk of lost or misplaced contracts, enables effective collaboration, and improves overall visibility and control.

• Embrace automation: Utilizing technology to automate routine tasks, such as contract routing, approval workflows, and performance monitoring, can help reduce manual effort, improve accuracy, and increase efficiency. This helps reduce the risk of delays, errors, and other issues arising from manual processes.

2. Effective management of contracts involves several key practices that procurement managers must follow throughout the contract lifecycle to ensure successful outcomes. :

• Early stage management: Focus on “upstream activities” like defining goals and identifying potential risks before signing a contract.

• Assign clear roles and responsibilities: Ensure everyone involved (legal, finance, operations) understands their roles throughout the contract lifecycle.

• Track obligations: another critical component of effective procurement and contract management. This step requires defining and tracking all obligations for the organization and the vendor clearly, using reminders or automated tools for timely fulfillment.

• Monitor performance: It is essential to monitor vendor performance against agreed-upon metrics, followed by corrective action where necessary.

3. Communication and collaboration are vital components of successful procurement contract management:

• Engage key stakeholders: Involving all relevant departments from the beginning fosters collaboration and ensures timely addressal of potential issues.

• Maintain clear communication: Maintaining open communication channels with vendors helps address concerns promptly and builds a positive relationship.

4. Continuous improvement is another essential practice that must be followed to achieve successful outcomes in the contract management process in procurement:

• Conduct regular reviews: Periodical reviewing of contracts to assess effectiveness and identify areas for improvement is vital.

• Learn from past experiences: Analyzing past contract performance to identify recurring problems and implement preventative changes is also critical.

• Upskill the team: Investing in training for your procurement team on best practices and industry trends is also necessary.

5. There are also additional considerations to be kept in mind during procurement and contract management:

• Compliance: Ensure contracts comply with all applicable laws and regulations.

• Risk management: Identify and mitigate potential risks associated with the contract throughout its lifecycle.

• Sustainability: Consider including clauses in contracts that encourage environmentally responsible practices from vendors.

By following these best practices, you can achieve various benefits that ensure an efficient and effective procurement and contract management process. However, it is important to remember that successful procurement contract management is an ongoing process that requires continuous improvement and should be adapted to the evolving industry’s best practices.

What does procurement contract management systems do?

Here’s a breakdown of what a procurement contract management system is capable of:

Streamlining the procurement process:

• Centralized contract repository: A procurement contract management system provides managers with a secure and centralized location to store all procurement contracts online. This eliminates the need for physical copies, simplifies document retrieval, and facilitates collaboration among stakeholders.

• Automated workflows: A procurement contract management system automates repetitive tasks associated with contract creation, approval routing, and amendment processes. This improves efficiency and reduces the risk of human error.

• Standardized templates: The system can store pre-approved contract templates with standard clauses for various procurement scenarios. This ensures consistency across agreements and saves time during contract drafting.

Enhancing contract management:

• Obligation tracking: A procurement contract management system tracks all obligations outlined in the contract, both for the organization and the vendor. This includes deadlines, deliverables, and performance benchmarks. Automated notifications ensure timely fulfillment and adherence to the contract terms.

• Performance monitoring: The system allows you to monitor vendor performance against agreed-upon metrics. This provides real-time insights and facilitates proactive interventions if performance falls short of expectations.

• Risk management: The system can identify potential risks associated with specific contracts, such as late deliveries or non-compliance with quality standards. This allows managers to capture early risk mitigation strategies and informed decision-making.

Improved communication and collaboration:

• Centralized communication platform: the system can serve as a central platform for communication with all active vendors regarding contracts. This fosters transparency, streamlines information exchange, and reduces the risk of misunderstandings.

• Audit trail and version control: The system maintains a complete audit trail of all contract modifications, approvals, and communication. This ensures transparency and simplifies compliance audits.

• Enhanced reporting and analytics: procurement contract management system is capable of generating reports and analytics on various aspects of contract management, such as spending trends, vendor performance, and contract risk profiles. This data empowers businesses to make informed decisions and enables continuous improvement of procurement processes.

In a nutshell, procurement contract management systems automate tasks, improves visibility, and streamlines the entire procurement contract lifecycle management, leading to increased efficiency, reduced costs, and better risk management for businesses.

Future of procurement contract management

The future of procurement contract management is poised for exciting advancements since it is driven by technological innovation and a focus on strategic collaboration. Here’s a glimpse into what’s on the horizon:

Artificial Intelligence (AI) and Machine Learning (ML):

• Intelligent contract management: AI-powered systems will automate routine tasks like contract routing, risk assessment, and even essential contract clause negotiation. This frees up the workforce for more strategic analysis and supplier relationship management.
• Predictive analytics: Machine learning algorithms will help procurement managers analyze historical contract data to predict potential risks, identify contract loopholes, and suggest the best negotiation strategies.
• Self-learning contracts: Smart contracts will be able to adapt to changing circumstances and automatically trigger actions based on pre-defined parameters, streamlining contract execution and reducing reliance on manual interventions.

Enhanced collaboration and transparency:

• Blockchain technology: Blockchain platforms can be used to create secure and transparent shared ledgers for contract management. This fosters trust and accountability among all stakeholders, from procurement teams to vendors.
• Real-time visibility: Cloud-based procurement contract management system solutions will provide real-time visibility into contract performance, allowing for proactive adjustments and improved decision-making throughout the contract lifecycle.
• Collaborative workspaces: Procurement teams, legal departments, and vendors will have access to a centralized platform for seamless communication, document sharing, and collaboration on contract-related matters.

Focus on sustainability and social responsibility:

• Sustainability clauses: Contracts will increasingly incorporate clauses that promote environmentally responsible practices and ethical sourcing from vendors. This aligns with the growing focus on corporate social responsibility (CSR) initiatives.
• Supplier diversity programs: A procurement contract management system will be equipped with tools to facilitate supplier diversity programs, ensuring fair opportunities for a wider range of vendors, including small and medium-sized businesses.
• Impact measurement: Advanced analytics will enable measurement of procurement decisions’ social and environmental impact, allowing organizations to track progress towards sustainability goals.

The future of procurement contract management is all about leveraging technology to streamline processes, enhance collaboration, and integrate social and environmental considerations. By embracing these trends, organizations can create a more efficient, transparent, and sustainable procurement ecosystem.

How can Procol help with procurement contract management?

Procol, a leading procurement software provider, can empower an organization to streamline and strengthen their procurement contract management system through a variety of features and functionalities:

• Centralized contract repository: Procol offers a secure, cloud-based repository for storing all your contracts electronically, accessible from anywhere with an internet connection.
• Automated workflows: Eliminate repetitive manual tasks like contract routing, approval processes, and amendment requests.
• Standardized templates: Procol simplifies contract creation by providing a library of customizable templates, ensuring consistency and reducing drafting time.
• Real-time contract tracking: Procol provides a centralized dashboard that tracks key milestones, deadlines, and obligations, allowing for proactive management.
• Performance management: Procol helps procurement managers track all metrics outlined in the contract with automated reminders and notifications to ensure timely fulfillment.
• Centralized communication: Procol’s built-in communication tools for contract-related discussions are documented and easily accessible to authorized personnel.
• Improved transparency: Procol promotes transparency by maintaining a complete audit trail of all contract modifications, approvals, and communication for smooth collaboration and simplified compliance audits.
• Enhanced reporting and analytics: With Procol’s comprehensive reporting and analytics suite it is easy to generate reports on spending trends, vendor performance, and contract risk profiles.

By leveraging Procol’s cutting-edge features, businesses can transform their procurement contract management process from a driving efficiency, cost savings, and improved supplier relationships.

Conclusion

In today’s complex business environment, managing procurement contracts effectively is no longer a luxury; it’s a necessity. Manually tracking agreements and obligations can be cumbersome and error-prone. Implementing a Procurement Contract Management System (PCMS) offers a compelling solution to these challenges.

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