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Procurement Awakens To Contract Management

May 24, 2011

Most Procurement functions have steadfastly resisted building competency in contracting. For years, many of them accepted the supplier’s standard terms, supplemented by their own purchase orders. The more powerful organizations (including those from Government) developed standard terms of their own , which were either imposed or resulted in a ‘battle of the forms’. Frequently they were inappropriate to the specific acquisition, but the average buyer appeared not to know and not to care – their job was simply to tick the box that the standard terms were in place.

This reflected an era in which Procurement felt little responsibility for outcomes. Their task was to select a supplier for price, quality and delivery. What happened next was the responsibility of the relevant business unit and the supplier. The increased power of the buyer in recent years has not helped; as IACCM studies show, the incidence of buyer-imposed standard terms has increased, with strong focus on risk allocation to the supplier.

To be fair, in-house legal groups contributed to this situation. They saw little merit in negotiating with most suppliers and felt little confidence in the ability of Procurement to handle contract variations. To the business units, the message appeared to be that contracts were of little importance – it was the word rather than the spirit that mattered. Hence they would find short-cuts around renewals, and changes or amendments frequently went unrecorded. There were in any case no formal systems to capture changes, claims or other contractual matters.

Software providers – especially in ERP and spend management – created systems that reflected this dismissal of formal contracts. They presumed a transactional approach that was based on standard purchase order terms; exceptions were to be viewed as ‘non-compliance’ and therefore avoided.

Some organizations did not fall victim to this syndrome; others have awoken to the weaknesses (and missed opportunities) that it represents. We have seen an increasing number turning to IACCM for advice, training and benchmark information. But this rigidity and absence of substantive skills or systems remains prevalent and represents a continuing source of buyer-supplier friction, buyer- business unit tension, and value leakage. Increasingly, we also see specific disagreements between Procurement and Legal over roles, authority and the allocation / ownership of resources.

There are several factors that are causing this awakening;  specific drivers vary somewhat between organizations.

  • Weaknesses in oversight are causing unacceptable business exposures, ranging from inability to pursue claims, to inadequate management reporting, to specific regulatory compliance risks.
  • An absence of formal contract management leaves the buyer exposed to supplier actions (or inactions) and results in erosion of expected performance and bottom-line savings.
  • Inappropriate contract terms and poor governance leave the business weakened in its efforts to cope with market volatility and change, or to handle the regular supply chain disruptions that affect our increasingly global supply networks.

Business continuity and resilience, as well as cost-effective operations, depend on discipline, clarity of roles and responsibilities and the quality of relationships. When developed and used appropriately, these are features of good contracting practices and process. Contracts are management tools and provide a core mechanism to ensure good communications and consistency of understanding – internal and external. Those who see them purely as instruments of risk allocation are missing the point – and are in fact generating risk for their business.

The supply-side is generally far ahead in its development of contract and negotiation skills and resources. In part this is because they recognize the importance to revenue protection and obligation performance; but it has also been a direct consequence of the move towards service and solution offerings (where outcomes are decisive) and the increasingly aggressive behavior of many customers. On one level, suppliers may not welcome increased professionalism in their customers’ contract management (it removes the opportunistic margin improvements that many achieve). But in general, I believe they welcome a trend that a) should result in more intelligent up-front negotiation and agreement of scope and terms; and b) will raise post-award efficiency, reduce costs and eliminate many of the causes of contention and claims.

So Procurement’s awakening is excellent news; though at this point, many remain asleep. Let’s hope they read this article!

One Comment
  1. Great post Tim.

    As you and I discussed in our recent interview, procurement need to really take the helm a business leader – looking both internally (at the business) and externally (at the supply market) – acting as a bridge between both.

    Further to your example with Government and Public Sector, many contracts have been put in place for years without challenge or innovation (this is also prevalent in the private sector – with many contract owners becoming comfortable with the relationships they have personally developed)

    We are running a series of blog posts (Redefining Procurement Series – http://info.buyingteam.com/buyingBlog/?Tag=redefining+procurement) which look to answer some of the points you raised above and hopefully entice the procurement community to sit up and realise the opportunities that lay ahead

    Chris

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