As we come to the end of the year and plan for 2022, there is still a huge amount of financial uncertainty in the world due to Covid, the global economy and the prospect of inflation and interest rate rises in the UK. This only continues to make it difficult for companies to generate revenue and make a profit.
Unfortunately, there is no simple solution available to deliver increased turnover and profitability. However, there is a way for companies to release money that is tied up in poorly managed third-party supplier contracts.
It’s been estimated that the average company loses about 10% of annual revenue due to poor contract management practices. This means that for a company with a profit margin of 10%, even halving this loss could increase profit margins by 50%. Imagine what could be done with any extra money freed up by managing supplier contracts better?
For many companies the procurement process stops once they’ve sourced the goods and service and signed the contract. The contract then gets filed away and is forgotten about. This means that there is no easy way of accessing it to either check it to ensure both sides’ obligations are being properly fulfilled, read the small print (probably for the first time!) or share the information with colleagues, especially when the member of staff who negotiated the contract leaves. There’s also no audit trail of any changes or of new documents being added.
Managing supplier contracts is something that we all do in our personal lives, from mobile phone contracts to mortgages. We do it to ensure that we always receive the best value, don’t waste money and work with the most suitable suppliers. It’s therefore a process that can easily be transferred into our corporate lives.
No matter the size of the company, it’s never too early to adopt a contract management process. It becomes even more important as companies grow, as the contract value increases, there are more people involved and there is a higher staff turnover.
On-going contract management is key to continuing to receive best value from the supplier throughout the lifetime of the contract, preventing contracts from auto-renewing and when done properly provides opportunities to save time and money working with the supplier.
Creating a contract repository ensures that contract details and associated documents, e.g. SLAs, are easily accessible, which delivers better visibility and control over the contracts allowing collaboration and saves time and ultimately money.
It’s important to actively manage any contract notice periods and end dates, so that no deadlines are missed as these can be expensive. Some contracts may automatically roll-over, resulting in price increases or having to pay for goods or services that are no longer delivering value or worse still are no longer required. It also means potentially missing an opportunity to change suppliers, change requirements, reduce consumption and waste or miss out on new innovations. It’s estimated that companies lose around 4% of savings opportunities because of auto-renewing evergreen contracts every year.
Scheduling key contract dates means that it’s easy to prioritise what needs to be done by when and that any sourcing activities can be run properly without the need for a last-minute rushed approach. Its good practice to run sourcing activities towards the end of every contract or every couple of years to ensure the continued receipt of best value.
As we’re approaching the end of the year, now is a good time to start getting on top of supplier contracts and planning to manage them better in 2022.
Contract Management can either be done on spreadsheets and shared drives or by using a digital solution that helps to automate the processes, maintains permanent records and is a document repository. If you would like to learn more about how a cloud-based self-service procurement software can help you go to https://oboloo.com/ for more information.