Procurement contracts or purchase contracts are legally binding documents between buyers and sellers. They protect the rights of either party and lay out the terms and conditions clearly.
McKinsey’s study shows that companies lose 9% of their value in sourcing due to poor contract management. This amounts to $2.5 trillion for the global 500 companies. Managing contracts with spreadsheets and manual approval is time-consuming and expensive. Even with digital documentation, many organisations struggle with the scattered contracting process across multiple data silos. Contract management software provides a single point of access for contracting throughout the organisations.
Challenges With Contract Management
Different types of procurement contracts are created for vendor selection, product selection, supplier vetting, payment terms and order and delivery. Organisations use different types of contracts based on project complexity, time period, resources and financial interest. Manual contracting is outdated and results in resource wastage. Contract management software helps procurement leaders maintain and manage multiple contracts simultaneously.
Some of the challenges with traditional contracting are:
- Large procurement businesses handle thousands of contracts, increasing the complexity
- Lack of contracting training for procurement staff
- Lack of resources to track and monitor contracting
- A narrow contracting view stops organisations from enabling future value creation
- No KPIs to link contracting to the total cost of ownership
- No standard benchmarking clause that ensures reasonable market prices
- Lack of proper inflation adjustment
- No scope for continuous improvement
Benefits of Contract Management Software
Implementing e-procurement will help organisations maintain, track, monitor and optimise contracting effectively. An automated solution helps streamline other associated processes such as invoicing, purchasing and order management systems. It also helps the procurement staff understand the contracting terms and conditions before purchasing.
Some of the benefits of streamlining the contracting process with a procurement solution are:
- Improved compliance with organisational and governmental standards
- Increased risk mitigation
- Enhanced control over contract documents within the organisation without outsourcing
- Automatic reminders and alerts to notify procurement staff about renewal dates
- Easily accessible audit trail which is readily available at anytime
- Increased contract visibility for all stakeholders
- Expedited approval times
- Better financial management with reduced maverick spending
- Data-driven forecasting that brings value to contract negotiations using data analytics
- Increased security to protect contracts and privacy
- Improved transparency promotes collaboration between internal and external procurement teams
- Easy to import and export electronic contracts and manage multiple document types
- Simplify the contract creation process with updated and ready-to-use templates
- E-signature integrations reduce manual documentation complications
How You Can Achieve Contracting Performance Efficiency?
Improper contract management leads to poor supplier performance and a 10% to 20% increase in procurement costs. Effective management of contracts is crucial to reduce the value gap. Otherwise, the cumulative anticipated benefit at the start of the contract will be eroded by the end of the contract period. Procurement software helps organisations derive value from contracts.
With the ever-changing industry regulations and introduction of new market values, organisations must employ effective obligation management in their contracting process. It will ensure that enterprises don’t renew contracts they don’t need and pay for something that is never used. Automated procurement solutions provide intelligent insights into corporate values to create strategic contracting terms and conditions.
The primary goal of contract management software is to ensure that the procurement team handles every contract consistently. The first step towards adopting digitisation may be faced with resistance. Still, a gradual approach will help the procurement team draft better contracts, avoid dangerous pitfalls and enhance compliance overall.
#1 Implement Benchmarking Practices Using Standard Contract Reviews
E-procurement automates the screening process to scan contracts for specific phrases related to value, performance, and key metrics. Sourcing managers can review and validate these phrases, and the procurement team can support their negotiations with this data. It will promote vendor innovation because contracts could be carefully drafted to pay for the outcome instead of the service provided.
#2 Uncover Contracting Needs Based on the Different Parameters
The contract requirements for procurement and legality can be combined before contract writing when the entire contracting process is streamlined. This will help organisations update their terms and conditions to include performance requirements for all suppliers. Depending on the situation, it can also help companies include penalties when the supplier fails to meet performance mandates.
#3 Increase Transparency, Coordination & Collaboration
All the stakeholders involved in the contracting process, including the procurement and legal team, can work better if there is a single source of truth. The advanced contract management system provides version-controlled document management so that everyone on the team works using the same data. E-procurement helps integrate contracting and vendor management to create a strong feedback loop. It also helps in creating an efficient contract governance programme that uses performance data to take action immediately at the first offence. This prevents risk escalation throughout the contract lifecycle. The improved collaboration will also help organisations to reduce scheduling delays, cost overruns, and poor quality.
To Sum Up
The use of contract management software is imperative for organisations because 80% of procurement functions are carried out without understanding contract terms and structure. This loss of value can only be recovered when the procurement team is aware of the mandatory rules for supplier relationships. The software helps organisations align their procurement functions with industry best practices. E-procurement, including managing contracts, helps derive data insights and analytics that optimise the contracting process.
Procol is a leading procurement software that maximises the efficiency and value of contracting performance. Schedule a demo to learn how automated contract management is useful in avoiding common contracting pitfalls to drive business profits.