5 Things To Know About Effective Contract Management

The first thing to understand about contract management is that it doesn’t just entail awarding and managing contracts.

Contracts form part of every business and the more you have, the less risk you’re exposed to. That’s why you need to have good management processes in place to manage every contract in your business.

1.      Where are your contracts?

You should have contracts for the following (at minimum):

·         With your partners and suppliers

·         If required, customer contracts

·         Employee contracts

The majority of B2B suppliers will insist on contracts being agreed. To avoid your business being on the losing end of contractual obligations, the process needs managed. You must know and fully understand the terms you’re agreeing to when you enter a legally binding contract.

2.      Never sign without negotiation

That’s a rule to live by in business.

There’s always some wiggle room and it’s the entire reason for part of the duties procurement officers do day in, day out. Assess, identify and negotiate.

They need to review all the terms, understand them and find the areas within the contracts that need revised to improve those terms. Moreover, better terms are most often ripe for the picking. You don’t get if you don’t ask.

3.      The ball remains in the buyer’s court so play responsibly

When you’re negotiating contracts, you cannot be in the mindset of scrounging for every saving you can. Savings are all well and good but never at the expense of a positive working relationship.

One of the worst things for contract management is to have one party feel unjust due to extravagant terms. What can start out as a standard RFP (Request for Proposal) can have numerous bids, the most attractive ones will be analysed, scrutinised and all too often sabotaged.

When suppliers are keen to jump aboard and partner with you, in particular the smaller sized firms, often the owners are looking for security of finance, rather than good terms.

The result is that they don’t have the capacity to understand the entire scope of works being agreed to until it’s too late. They find themselves bending over backwards for too little remuneration in comparison to the efforts put forth. Next thing you know, the quality of service declines, and it’s affecting your customers.

That’s the price of cheap sourcing.

Don’t look for best pricing. Focus on best value.

4.      Build the relationship before the contract

You won’t get a great discussion going into negotiating terms of agreements between two parties without the relationship first. When RFPs are first put out, the focus should be on building relationships with suppliers first because often is the case, that’s a representation of how your working relationship will be, possibly for years to come.

If that rapport isn’t there, the working relationship will be poor. That’s just to start with because the contracts will come up for renewal. When you get to that stage, it’s best to be on good terms with a supplier who gets your business, understands it, and works closely with you to enhance your customer’s experience.

Changing suppliers doesn’t help customer service in the short-term but sometimes, things don’t go to plan, negotiations break down and you find yourself beginning the tendering process over.

The management of contracts is never done. As long as they’re in place, they need managed and so do the people and companies involved.

5.      Analysis must be thorough

For contract management purposes, there are four ways to assess risk to business finance, and the legal responsibilities or ramifications of commercial contracts.

The four main types of analysis include:

PEST analysis

·         Political

·         Economical

·         Social

·         Technological

SWOT

·         Strengths

·         Weaknesses

·         Opportunities

·         Threats

STEEP

·         Social

·         Technological

·         Economical

·         Environmental

·         Political

STEEPLE

Same as STEEP with the addition of…

·         Legal

·         Ethical

Most businesses will be familiar with the SWOT analysis to assess threats and use that for their internal and external risk assessments. However, when there are changes to the economy, the political landscape cannot be ignored.

Take for example the UK’s exit from the EU. That’s politics affecting businesses of all sizes. That brings legal compliance issues into the risk assessments, and by adding in the issue of ethics for CSR policies, the STEEPLE analysis is the more in-depth option for a comprehensive risk assessment.

Manage your contracts and you’ll be better placed to manage risk within your business, thus preventing complications further down the line.

Without contract management, risk management would be impossible.

Image courtesy of stature.com.sg.

Do You Need To Transform Your Procurement Process?

How your business partners and gains buy-in from suppliers will influence not just your overheads, but your CSR policy, Procurement policy and quite possibly even extend to your HR policy too.

There’s a magnitude of variables involved in procurement that to the average business owner, without a professional procurement team (or even just a manager) in place to manage suppliers, things won’t go as smooth as they could do.

What Professional Procurement Entails

·         Understanding Value

This goes beyond assigning a monetary value to lock in savings commitments through procurement. Value differs by company and it’s the business owner who ultimately determines what he or she defines as value.

Your company may value supporting SMBs for goods and services supplied, while another may place more importance on the value of green sourcing.

Whatever values your company supports and works hard at upholding as part of your CSR policy, can be supported and further championed by working with suppliers with the same core values.

Values go beyond figures.

·         Professionalism throughout procurement

One of the best approaches to ensure professionalism in procurement is to ensure your buyers, whether in-house or outsourced, are invested in continual professional development.

In the UK, you can simply check with The Chartered Institute of Purchasing & Supply (CIPS).

By investing in people who invest in keeping their expertise current, you can be certain that your company will meet or even exceed compliance requirements.

In addition, further areas that will not be neglected is market research, which is essential prior to issuing RFPs (Request for Proposals) to begin the tendering process. Moreover, ethical standards will be included in the analysis of potential suppliers as well as having sound organisational knowledge.

When CPD is part of your HR policy, complimenting your procurement policies, you will find it to be beneficial for improving your entire procurement process.

The fundamentals

Combine...

·         The Principles of fairness

·         Integrity

·         Transparency through competitors

By using the above fundamentals, you will achieve better operational efficiencies, reduce corruption, increase effectiveness throughout your supply chain… all of which brings us right back to the starting point of value – your business will reap the benefits of value for money, and your policy will enhance customer trust, and enable your business to gain a competitive edge.

Plus, you get the data to make further improvements to your procurement process

Data analysis is critical for business development. The longer you’re operational, the more data you will collect and store both in paper format and in digital format.

The majority of the data gathered by procurement professionals must be understood in order to enhance your business processes.

Data analysis can be done whenever you feel the need to, quarterly, bi-quarterly, annually or ad-hoc.

With the magnitude of data at your fingertips,

·         Benchmarking can be done

·         Supplies and suppliers monitored

·         Contracts evaluated

Introducing a transformation process

Chances are, there’s something above that your business hasn’t covered already with your systems and business processes. To implement any of it would involve transforming how you currently manage your suppliers, contracts, tendering process and quite possibly, your entire procurement policy.

The good news is that it’s not too late to make changes, because frankly, to experience efficiencies through procurement, it takes an ongoing approach.

There are plays you can make for the short-term, others will be long-term. 

Whatever your ambitions are to better your supplier management, there are three steps you can take that will transform how your business buys-in.

1.      Assess your current procurement situation

2.      Plan changes strategically (seek advice if you lack the market research or organisational knowledge)

3.      Implement the changes you deem necessary   

      This 3-step approach will need to be done periodically. The more your business matures, the more frequently your procurement team will need to repeat the above three steps to ensure any gaps are identified, addressed and changes implemented for faster improvements. 

Image courtesy of biddingo.com.