Contracting with external parties for the provision of goods and services is an inevitability for most companies. Depending on where a vendor is located and the scope of the services needed, long term agreements can become quite costly over time. Procurement professionals know all too well that cutting costs wherever feasible is critical to a business’s profitability and survival. But, when there are limited options available or a company is crunched for time, it may be necessary to enter into a contract with the first firm that presents an offer, irrespective of the projected costs of the arrangement. In these instances, companies must engage in periodic assessments over the life of the contracting relationship to identify potential ways to cut costs. Here are three cost-saving strategies for outsourced contracts:
Pay Attention to Flexibility
It is always wise to build some level of flexibility into a contract to ensure that a contracting relationship can adapt as circumstances change. In the past, the fundamental principles of contracting involved the inclusion of rigid terms and conditions, and even the most minor of breaches could become the largest of issues. Fortunately, in light of the unavoidable nature of change and the fact that everything moves at record speed these days, there is increased emphasis on incorporating agility into most business contracts. This kind of flexibility diminishes the likelihood of disputes, and it can help reduce extraneous costs associated with contracting. Companies must ensure that they are familiar with the flexibility that a contract affords and use those provisions to their advantage to avoid unnecessary expenditures.
Ensure Obligations are Met
One of the key ways to ensure that a company is getting the most out of a contracting relationship is by ensuring that the contractual obligations are being met on both sides of the equation. This requires an organized management approach and diligent oversight, as failing to pay attention often leads to cost leakages and overruns. To avoid this type of financial seepage, it is important to establish clear benchmarks to evaluate the progress of the contract and to hold responsible parties accountable for their performance, or lack thereof. Of course, this does not mean that there has to be an antagonistic or adversarial approach to the management process, as this can end up leading to a deterioration of the working relationship. The goal is simply to motivate each side to perform to the best of their ability to ensure that all sides receive the value they anticipated upon entering into the agreement.
Identify Mutual Savings Options
In addition to working together to maximize performance and efficiency, the parties to a contract can take it a step further by collaborating to identify ways to fulfill their ends of the bargain in a way that leads to mutual savings. Even the simplest of measures such as reducing the number of shipments or sourcing cheaper production components can result in massive cost savings. The most important thing to remember is that small amounts of money saved in one area often causes a ripple effect leading to savings elsewhere. But, the only way this will occur is if the parties make a concerted effort to identify where such savings are even possible and then implementing the appropriate strategy to realize those gains.