The previous two articles addressed procurement stakeholders and their direct needs, and the balances with corporate needs that procurement sometimes have to apply. One area that both groups can both focus upon profitably is contract management, both in the longer run, but also during a crisis writes Jonathan Dutton for Supply Clusters members.
Building a control framework around maverick stakeholders, even compliant ones for that matter, is only ever half the answer to spend control. The real value lies in shaping the corporate culture to one of cost control. That is ‘training’ the employees to buy better themselves and to find ways themselves to cut costs as a way of doing business. And this is more achievable in a climate of crisis where most are working to help the cause and to ‘do the right thing.’
The influence of corporate culture in spend control
Over recent years, procurement have played a strong role in shaping this approach. Yet, there is more work to do. More in some organisations than others, as cultures dictate.
But one area of mutual benefit could be that of contract management – a blind spot for many organisations over the years. Both stakeholder groups and procurement practitioners have occasionally been guilty of ignoring contract management – an area where they could work together as a team much more effectively and for everyone’s benefit, including even the suppliers!
Contract management teamwork
You see, Procurement can sometimes celebrate early. That is, sign the contract, count the savings, close the file and move on to the next deal. Metaphorically throwing the file ‘over the fence’ to the business, for them to ‘manage’ the contract and duly forgetting that the work truly starts when the contract is signed – that is not where the work stops!
Suppliers usually want to see through a deal with the person they negotiated and worked with. They are often reluctant to confer the loyalty they ‘owe’ the deal maker to a new party in the stakeholder group – “… but we agreed with JD that…”
Yet, stakeholders can also show little interest in contract management sometimes – “I’m supposed to do what exactly?’ they protest. Like anything else, contract management done well looks easy. The truth is that it takes work and diligence to make a contract work well. It also takes good relationships, both internally and with suppliers, and no little teamwork. In a word, effort.
Traditionally stakeholders try to delegate contract management to, guess who? Yes, the supplier. They can manage it, surely? They want it to succeed don’t they? They can do it.
But this can be a recipe for avoiding responsibility – until it’s too late. Because, post-contract, stakeholders only really get interested in suppliers when things stuff up. Go wrong. Fail to arrive. And then it is a bit too late. Call procurement then, eh?
Procurement’s role in contract management
Organisationally, contract management has traditionally fallen under the responsibility of the procurement team. In the private sector there is no question on this. The idea that those who ‘created the need, serve the need’ drives the thinking and organisational responsibilities. And suppliers like this too.
Of course, contract management work is only really required on long lead time supply lines. This generally means the supply of ongoing services or capital projects. Or long-term service contracts. Or the ongoing regular supply of DIRECT support (raw materials, components, goods for resale). And this is where contract management’s great responsibility and great potential truly lies. Making things happen where the “rubber hits the road” and ensuring they happen in a complaint fashion.
This is a primary reason that contract management is gaining new respect. The other reason is that diminishing returns are increasingly apparent in procurement processes after so many years bagging savings for eager CFO’s.
To put it bluntly, there are only so many times you can go out to tender for the stationery contract and expect to generate meaningful savings. The seventh attempt, anyone?
Ultimately, contract management works directly to the procurement team’s first responsibility. No, not to reduce price. But to secure supply lines. Many are frantic right now working for that – not price bashing.
Exacerbating the problem is the fact that Australia is a globally remote market of few suppliers – an oligopolistic market. More isolated than ever at present – with no air traffic to speak of. And often, in the business-to-business landscape, we are buying from a duopoly or even a practical monopoly. Price movement rarely flows in such an environment, and certainly not at the seventh attempt.
So, if procurement starts to struggle to make savings, when most addressable spend has been repeatedly addressed, what then is the role for procurement professionals? Why do we need them?
I believe that procurement’s role is to bring value. The difficulty is defining what exactly value is for your organisation, because it differs for everyone. And over time, it changes. The challenge for procurement managers is to tune in to the corporate mission and to make sure their contribution is relevant, meaningful and measurable.
This means the focus may no longer be savings, as such. The value created may still be life cycle cost focused, or it could be risk management orientated, sustainability driven or even compliance or process driven. For that matter it could be innovation inspired, or even quality/service improvement tasked. Perhaps it’s using procurement as an instrument of policy. The only difficulty is then defining what policy is to be achieved through professional procurement, and how?
Good contract management is an area so often starved of the attention and resources it deserves whilst procurement grapples with the far sexier strategic sourcing problem. Yet this contract management work can often make a true difference: where the theory is tested in practice, where on-budget and on-time delivery counts. Ever more so in a crisis – certainly on operational supply lines.
Too often in the past, procurement professionals have signed and forgotten. They have celebrated victory early, counted the savings, the cost avoidance, the improved terms, the instant remedies. Then they’ve passed the contract over to the business operation to manage. Only not very well, as it turns out.
Operationally, the business is usually customer or stakeholder focused. It typically becomes supplier focused only when there is a supply problem (i.e. non-delivery). The business effectively outsources contract management of the supplier – to the supplier.
Yet this is where delivery matters. This is where we garner the hard and soft purchase benefits we listed so assiduously in the original business case document or even won in the conference room negotiation. Yet these wins are too often forgotten and unrewarded downstream when they really count. And often remain undelivered and unrealised.
If savings tend to zero over time, benefits realisation can be the new ‘savings’ for us all. Professional contract management can yield these benefits. It can ensure they are delivered, captured, applied and counted. That they are hard won after all.
Of course, aggregators oversee and proactively manage contracts on behalf of their members. At Supply Clusters their 37 contracts in place are measured, checked and evaluated constantly. They also market test contracts and terms periodically. And dashboards can include supplier performance quite readily. An off-the-shelf solution to controlled buying in difficult times?
Contract management automation
In addition, today, contract management automation systems can do the heavy lifting, by keeping documents in one place and sending alerts for key milestones, for instance. Indeed, nowadays, there are arrange of automated and technical solutions to help busy buyers get on top of contract management extend the control framework to post-contract – we discussed these in the previous Supply Clusters article. There is certainly no need to over rely on EXCEL anymore – in the way most procurement teams do to oversee their strategic contracts portfolio.
With this sort of help, procurement managers can achieve a lot, especially on operational direct supply lines, long-term service contracts or capital projects. These are all areas, surely, where many organisations are still looking for more value.
Working as a team with your stakeholders can garner more for your business than pure savings ever could. And your stakeholders will surely thank you for it. Even when it looks a bit like an extended control framework… until then, there is always Excel.
March 2020 Procurement #supplyclusters www.supplyclusters.com.au
About the author:
Jonathan Dutton FCIPS is the former founding CEO of CIPSA - the procurement peak body in this region. He now works as an independent management consultant specialising in procurement and has a non-executive role at Supply Clusters www.jdconsultancy.com.au