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Improve Your Business' Procurement Procedures With These 4 Contract Management Metrics

    
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Procurement is a much broader process than evaluating bids and awarding vendor contracts. The procurement team takes a close look at the organization’s needs at all levels, assesses the best suppliers, and continually strives for more cost-effective, value-creating supplier relationships. Contract management insights help procurement officials maximize the results of their work.

Procurement Procedures Best Practices

Improving procurement procedures begins with understanding how effective procurement works. Developing a clear plan to track and evaluate procurement procedures in your organization.

The State of Georgia outlines seven stages of procurement for contracts with the state. Your state may have its own guidelines directing competitive bids, or your company may use its own standards for supplier contracts. In many cases, procurement includes the following steps:

  1. Need identification
  2. Pre-solicitation preparation
  3. Solicitation
  4. Evaluation
  5. Awarding the bid and completing the contract

After the contract is completed, an excellent procurement team still isn’t finished. Analyzing the following areas via contract management can inform future procurement decisions.

Cost Savings

Budget is an ongoing business concern. Evaluating procurement procedures often stems from concerns about capturing the best value on each contract.

Financial officers and directors can turn to contract reports to assess how much the company has saved by working with certain vendors. Contracts hold pertinent financial information, including rates, payment terms, and the rebates or discounts that the company negotiated. Following up on contracts helps ensure that the company actually realizes these promised future savings. There are a few ways to measure cost savings, including tracking the implemented savings vs. forecast cost savings, or evaluating the total cost of ownership of the contract relationship.

Cost avoidance is another factor to consider, although this can be challenging to track. Excellent procurement procedures help lock in the best rates for the business. Avoiding rate increases, or getting extra services bundled into a contract package at no additional cost, represents savings for the organization.

Supplier/Spend Ratios

An old business rule used to say that 80% of business came from the top 20% of clients. In today’s world, 20% is far too generous a number! CAPS Research claims the average organization spends 80% of its procurement budget on only 6% of its suppliers.

Low supplier/spend ratios may suggest the procurement team is doing a good job selecting suppliers who are able to handle the bulk of the company’s needs. Identifying these top performers (or identifying the need to cultivate relationships with star-quality suppliers) gives decision-makers insight into the most valuable supplier relationships.

Use contract management features like advanced, customizable searches. Saved searches make it easy to group and track progress of top supplier accounts over time. Auto-alerts are an essential contract management staple to prepare for contract renewal. The organization may want to expand its relationship with top suppliers and terminate underperforming supplier contracts. Successful management requires plenty of advance preparation time.

Procurement Cycle Time

Robert Half, founder of the eponymous staffing agency, once called postponement, “The sincerest form of rejection.” If you’ve had to groan through a long procurement cycle, Half’s words probably ring true.

Waiting for an agreement to progress through each stage until it’s finally complete is frustrating for everyone involved. Bidding suppliers want to hear a decision about their proposal. The winning supplier needs to prepare for the influx of orders. The organization started the whole procurement process to fulfill an unmet need, so shortening the cycle is a focus area for procurement improvements.

Improving cycle time starts with identifying bottlenecks and common delay points. Do signatures create a holdup? Try switching to electronic signatures. Do the organization’s upcoming needs often come as a surprise? Implement an additional supplier contract review. Contracts contain details on work scope, budget, and length of service. You can use reports on successful and underperforming contracts to anticipate when you might need to search for a new supplier, or look for holes in what top suppliers are offering.

Compliance

After the contract is signed, one role of contract management is confirming that the contract remains compliant with its own terms and external guidelines. Compliance issues can present serious problems for the company.

The “best” case scenario if a contract isn’t in compliance is that the supplier isn’t breaking laws or regulations, but is failing to perform according to the standards laid out in the contract. Probably, the organization will not choose to renew the relationship, and a potentially lengthy search for a better replacement supplier begins. A worst-case scenario would be if a contract’s compliance breach breaks laws, putting the organization at risk of fines, penalties, or even having its license to operate the business revoked.

Any supplier that faces compliance issues should be a red flag for the procurement team. A preventative approach is best for the organization. Procurement best practices include adding compliance-related considerations into the pre-solicitation and solicitation process.

Make compliance documents available on a secure, shared server so everyone can access news about upcoming changes. If a new regulation goes into effect on January 1, 2019, save searches for contracts expiring after that date so general counsel can prepare any needed updates. The better executed the procurement process is, the higher chance that the business will see improved compliance, service, and prices in supplier relationships.

 

 

Download How to Use KPIs for Successful Contract Management