Tag Archives: contract management

Going Global While Being Ethical? Smart Contract Management Can Help

The risks associated with ethical sourcing have never been higher. How can you go global without compromising your ethics?

ethical sourcing
Photo by Pascal Bernardon on Unsplash

For enterprises with complex, global supply chains, the risks and challenges associated with ethical sourcing have never been higher. Over the past decade, supply disruption has gone from being an exceptional event to at least an annual – if not quarterly or monthly – occurrence. Most organisations are simply not prepared, even though they may have checked the box with fairly narrow supplier risk management assessments. 

One reason for the increased risk? Contract visibility. The ability for companies to instantly locate, retrieve, analyse and track contracts across the enterprise, continues to be suboptimal at many large companies. When these contracts are sitting as unstructured data in a repository that’s difficult to search — or even worse in someone’s desk — bad things happen.

For example, one technology consulting firm missed $1.5 million in revenue recognition when a manually-tracked contract expired, but work was still performed against it. Discounts and rebates are overlooked, and unwanted renewals happen on autopilot. Poor contract management can also lead to reputation and brand damage when companies unknowingly use unethical suppliers.

So what can we do? Gaining visibility into commercial engagements can help.

Blockchain-based contract management is changing the game

As organisations become more and more concerned about supply chain risk, the need for better visibility is more critical than ever before. Enterprise contract management software provides that visibility by tracking what a firm’s worldwide obligations, entitlements and business relationships truly are.

This software gives organisations a firm grasp on their supply chain, key suppliers, the composition of the products they’re purchasing and the locales in which they’re operating.

Technologies like AI, Machine Learning and Blockchain are proving key for enterprises to mitigate risk in the future. This contract management space is a hot sector and continues to experience rapid growth. According to MGI, the market itself is worth $20 billion. This is reflective of large enterprises’ desire to digitally transform their commercial foundation. This helps them save money, reduce risk and improve compliance.

For example, customers like Mercedes-Benz Cars have already taken advantage of this technology. They have done so by utilising smart contracts on the Icertis Blockchain Framework to create an immutable distributed ledger of transactions.

This helps to ensure global sourcing and contracting practices adhere to Mercedes-Benz Cars’ strict requirements for sustainable, ethical and secure sourcing.

The future of ethical globalisation

I recently attended The Big Ideas Summit, a great event for procurement professionals that brings together the top figures in the industry to discuss the current business landscape and bring unique, innovative ideas to the table.

Right now, we’re in the early stages of technologies like blockchain and just starting to see major impacts. Three years from now we’ll have conclusive data on how blockchain has helped increase visibility into, and compliance among, supply chains.

Already, these blockchain and distributed ledger technologies are significantly changing the way organisations do business with vendors, partners, and customers, impacting the way companies approach, execute and enforce business contracts.

Although most organisations associate blockchain technology with the financial services industry, it has potential use within the manufacturing, government, healthcare and education sectors as well. This includes how those industries execute and enforce contracts.

For example,the Icertis Contract Management (ICM) platform is already used to manage 6.5 million contracts at companies like 3M, Airbus, Daimler, Microsoft, Sanofi and Wipro in more than 40 languages across 90 countries. The AI-powered platform allows customers to increase contract velocity and agility, proactively manage entitlements and obligations, as well as surface commercial insights and intelligence.

One day, blockchains that utilise distributed ledger technology may even allow for contracts that are self-verifying, self-executing and autonomous. Companies can exchange terms, events, and information throughout the lifecycle of a contract without relying on brokers or middlemen.

This streamlined approach to supply chain management will help reduce costs and solve the hardest contract management problems on the most easy to use platform, thereby improving the bottom line.

To learn more about Icertis’ contract management software, visit the Icertis website.

How to Create a Buzz Around Contract Management

It can be hard to create a buzz around contract management. Get it wrong and it can sting badly. Get it right and the results can be honey-sweet!

Photo by Karsten Würth (@karsten.wuerth) on Unsplash

Procurement can sometimes be a real flash in the pan. The commercial squad can descend on any project that looks big enough, ugly enough or sexy enough. Money and risk can be like bees to honey – the higher it is, the sweeter the taste. It’s a sure fire way to get procurement’s attention!

Procurement professionals can be highly skilled at project planning, sourcing and providing commercial advice leading to strong contract frameworks. But when the show is over often everyone moves on to the next big shiny thing. 

While there is merit in ensuring that a solid sourcing exercise is executed, often the cream on top comes from executing exemplary contract management.

Contract Management? Yawn!

Contract management doesn’t have to be boring! If businesses get serious about contract management then serious results can be realised. There is nothing worse than a set and forget contract. It is almost guaranteed that some gold is being missed somewhere.

Contract management is quite simple at the heart of it (although admittedly it could definitely do with a re-brand).

How to Get Started

1. Ride on the buzz of signing. Capitalise on the newness of the contract by setting up the relationship meetings correctly at the beginning.

If you are a procurement person who will not be managing the contract then set up the meeting with the key relationship managers on both sides of the fence. You’ll be surprised how much value you can keep extracting, even if the contract is only freshly anointed! 

2. Take time to get the roles and responsibilities right and make sure each party understands their role.

3. Measure results and performance in a meaningful way. At the beginning of the project think about good ways to measure success. Make sure to ask your internal customers and supply market for ideas. 

4. Execute. Set the meetings, carry them out, do the surveys, do the reviews, gather the data, analyse the data, report on the data. 

How to do it right

Being organisationally ready is key. While individuals can carry out actions and get results, true value is experienced when the culture of the organisation (or the procurement team) is geared towards supplier relationship and contract management (SR&CM).

The best examples can be seen where dedicated SR&CM resources reside in a procurement team, rather than expecting individual team members to carry out these tasks within a role that encompasses many other specialisms.

Contract Management Challenges

Being aware of the challenges of embarking on a culture of change can help to set reasonable expectations of what is achievable and how long it may take. Knowing some of the sticking points from those that have gone before can be helpful in scoping out the scale and length of journey that is ahead.

The common challenges can be:

  • Resource. Obtaining sign off to get dedicated resource and gaining buy-in on the idea. Finding the right skill sets can be difficult. Sometimes new roles and directions can change the culture of the team.
  • Internal customers complaining about suppliers but either: not telling anyone; not telling the supplier; not telling procurement; and / or all of the above, plus not being willing to measure performance once mechanisms are put in place.
  • Bias – not wanting to use a supplier “just because”. To manage true poor performance (as opposed to perceived), then procurement need something tangible to build the picture and also, to give the supplier a genuine chance to improve.

What is the pay off at the end of the rainbow?

If procurement functions commit to embedding contract management into their team environment there can be many rewards.

  • Increased capability within the Procurement team – opportunity for other specialisms within procurement to learn from SRM&CM experts
  • Increased capability in the business as the contract managers and people dealing with the suppliers in the day to day increase their commercial acumen in regards to having tough conversations (or good ones!) with suppliers
  • Closing the gap between the supplier and the buyer. Understanding each side of the fence and the challenges experienced from both sides.
  • Ability to tackle poor performance in contracts effectively and efficiently as evidence is gathered, reported on and monitored. We’re not talking big brother looking to punish the supply market, there are often improvements required on both sides.

This article is solely the work of the author. Any views expressed in it are those of the author and do not necessarily represent or reflect official policy of the New Zealand government or of any government agency.

5 Big Procurement Challenges Addressed by Enterprise Contract Management Software

This article was originally published on the Icertis blog.

Procurement is a complex part of global business that carries serious commercial and regulatory risk. These risks are especially pronounced when a company does not have an effective way to centrally manage its contracts.

In a recent survey conducted by ProcureCon, leading procurement officials were asked about contract-related challenges they’ve faced that caused revenue leakage, increased cost or financial penalties. Here were the results:

A critical component to tackling each of these issues is enterprise contract management software, which sees contracts as live documents enshrining all risks and obligations incumbent upon an organization.

Indeed, good risk management begins with good contract management. With enterprise contract management, you can identify and manage risk throughout the contract lifecycle with proactive insights. A configurable risk model helps track risks across different categories, such as financial, contractual, performance and third party.

Let’s look at how each of the above challenges is addressed through contract management software.

Challenge: Higher operations costs

Finding: 43 per cent of respondents said higher operations costs have hurt their procurement organisation.  

Because contracts are the foundational element of modern commerce, they govern every procurement action and transaction a business undertakes. With the power of a modern contract management system with an ability to seamlessly integrate with procurement systems in place, an enterprise can gain unprecedented control over spend.

Through full visibility into all their commercial relationships, contract management software ensures that cash flow is complying with corporate plans, and allows executives to continually monitor money moving in and out of the business at all levels of the supply chain.

Challenge: Slow contract creation and approval

Finding: 46 per cent of respondents cited slow contract creation and approval as a challenge.

With enterprise contract management software, users can accelerate and optimize the contract authoring process. For example, users can self-service contracts with pre-approved clause libraries, eliminating the need for legal to get involved at every level of the authoring process but still control contract language.

Configurable notifications alert relevant stakeholders for revisions, redlines, and approvals, ensuring nothing gets missed. And robust, highly configurable rules increase flexibility while driving quicker approvals and execution.

Challenge: Unclaimed entitlements/lost or untapped revenue

Finding: More than half of respondents cited unclaimed entitlements or loss of untapped revenue as a challenge.

Best-of-breed contract management software draws on artificial intelligence (AI) tools that index and “interpret” every entitlement in each contract across the enterprise, allowing users to achieve the full potential of negotiated contracts through better enforcement of commercial terms.

The software captures the terms of products and services, prices, discounts, rebates and incentives in a structured form after interpreting the entitlements. You can then integrate the data with enterprise systems and help enforce terms for better savings and revenue performance.

You can also avoid missed entitlements or revenue potential. For example, sourcing organizations can automatically check purchase orders against agreed upon contract language to detect incorrect billings issues with regard to slabbed discounts or other innovative payout models.

Challenge: Missed obligations

Finding: 55 per cent of respondents said missed obligations have been a challenge.

Contract management software gives unprecedented insight into these contractual commitments, ensuring nothing gets missed. The same indexing and reporting capabilities used to surface entitlements also capture a business’s obligations to third parties, preventing leakage caused by lost business or penalties.

Challenge: Regulatory enforcement actions

Finding: This emerged as the most common challenge for procurement leaders, with nearly 3 in 4 saying they’re concerned with regulatory enforcement due to noncompliance.

It’s no wonder this was the number one concern, given the serious financial penalties and lasting brand and reputational implications of regulatory violations.

A robust library of clauses and templates goes a long way to reducing ad-hoc, or maverick contracts. Readily accessible templates, combined with a rules-driven workflow engine, helps support compliance throughout every stage of the contract management lifecycle.

Contract management software can cross-check country- or region-specific rules with relevant contracts. Compliance, down to the smallest supply subcontract, can be continually monitored through integrations with external software. Contract management software can even take a preventative role in compliance, via innovative contract creation tools.

Sophisticated contract management software can identify such regulatory enforcement and compliance obligations not just from their own contracting policy and authoring rules but also from customer specific contracts and cascade them to buy-side contracts used for fulfilling commitments. This makes the whole supply chain subject to internal regulatory enforcement and compliance actions.

To learn more about how a modern CLM solution can improve procurement at all levels of the supply chain, download this report from ProcureCon.

Vivek Bharti is general manager of product management at Icertis

The Time Paradox of Contract Management

When you’re busy it’s easy to let things slide and ignore contract management in the procurement process. But the idea that you’re saving yourself time by doing so is a paradox we would be well-served dismissing.

By andrey_l /Shutterstock

You’ve taken your time meticulously following the procurement process from inception of the idea through to contract award. You’ve spent all the time you needed getting your ESPD right and crafting some good contract documents to get the necessary competition and achieve best value. Your contract award reports have been signed off and you’ve even managed to fit in time for a lessons learned document.

But you’ve got another tender sitting waiting to be evaluated. And another that needs sign off from the stakeholders before you can publish. Not to mention that phone call you’ve just taken or email you’ve read assigning you a new project or asking for your input.

So you think to yourself, “It’s ok, I’ll arrange the mobilisation meeting and then the Operations side of the business can take it from there. After all, it’s an easy contract – it’ll take care of itself…”.

Stop. No really, stop. Why, after putting all the hard yards in to begin with, would you then choose to step back at such a critical juncture? Are you sure that without your input, all those savings and benefits you agreed with the supplier will be delivered? And can you prove you are getting what you asked for?

Out of Sight, Out of Mind

Let’s take a step back from this and stop blaming ourselves as individuals. Time is not on procurement’s side (as I have said in the past) and there’s not always time to perform all the necessary tasks as part of the procurement process. When push comes to shove and there are tenders to be published, one of the first things to get dropped, alongside training and development, is frequently contract management.

Why? That’s a hard one to answer. In many public sector organisations, the issue comes down to an unholy trinity of reasons.

  1. A lack of resources in procurement departments, be that head count, budget, or similar;
  2. A lack of time, which has been covered extensively in the past; and
  3. A high churn of tenders, meaning that getting the contract signed has become the priority.

Unfortunately, the reality is that the public sector is falling victim to the paradox of contract management. It might be felt that there isn’t sufficient time to manage contracts effectively, but without a procurement focus, how are organisations going to realise savings offered by and agreed with suppliers.

In some cases, from personal experience, procurement isn’t even charged with the on-going contract management. In many organisations, both in the public and the private sectors, once procurement has put the contract in place, it’s passed to contract managers or end users for its duration.

Not Rising to the Challenge

Look for the importance of contract management and you don’t have to go far to see why and where it drives success. In the past 12 months there have been stark examples of where contract management has fallen down to disastrous and altogether spectacular effect.

The collapse of Carillion and the endless budget overruns of HS2 are just two examples. A bit further in the past, the National Programme for IT for the NHS, which cost £6 billion more than it should have and has, to date, only delivered a third of the predicted benefits, is another.

However, on the flip side of that there are examples of where good contract management has made a tangible (and quantifiable) difference in public sector projects. The new Queensferry Crossing over the Firth of Forth actually came in £100 million cheaper than initial estimates suggested, with credit being given to the overall management of the project.

The NHS Wales Informatics Service project has set up digital systems to aid patients with prescriptions and staff with communication, aimed at creating greater efficiencies across the strained health sector.

And if you’re unsure about procurement’s involvement in these projects, both have been nominated as regional winners for national awards at the GO Awards, which recognises best practice in public sector procurement across the UK.

Getting Mavericks Out of the Danger Zone

Let me start this section by contradicting much of what I have written before. Procurement needs to actively take on contract management, irrespective of the time commitment. And not only this, but it needs to be a priority on the same level as market analysis and tendering. As has been shown with the example above, good contract management can deliver savings and value, but it also extends beyond this too.

Improved compliance, standardising processes and procedures, spend and performance analysis and spend visibility are all key benefits. On top of this, it can help reduce maverick spend (a procurement favourite!) by taking away a route to using a non-contract supplier, or non-contract items.

And, as a final benefit, it’ll help you save time when it comes to retendering, extending or renewing contracts for existing services, as you’ll know far enough in advance to do the full procurement process properly. Not so much spend (money) to save (money), but more spend (time) to save (time). And maybe we can clear up a couple of paradoxes on the way!

I’d love to hear your thoughts on this article and the series of articles on the challenges facing public sector procurement in 2019. Leave your comments below, or get in touch directly, I’m always happy to chat!

Delays and Overspend – Do Your Contracts Have Your Back?

If the pot of gold at a contract’s end is realised savings, why do so few contracts provide adequate cover for completion delays and overspend? It’s time for the public sector to get serious about damages.

By Everett Collection /Shutterstock

In procurement we are no strangers to contracts overrunning or budgets being exceeded. As hard as procurement professionals try, sometimes it’s just not possible to get a contract placed in time, have works completed to schedule, or stay within the original budget.

In the public sector, the negative outcomes associated with these contracts are magnified. After all, they are usually delivering public services or infrastructure, and spending public money. The root cause for delays and overspend this can frequently be tracked to poor contract or relationship management, scope creep or unrealistic cost or project estimates at the outset.

While many of the issues can be attributed to internal process, with the public sector very much its own worst enemy, sometimes external suppliers and contractors are at fault. However, in many cases, the contracts that have been agreed and signed lack the clauses that would help protect procurement and the wider organisations against the costs associated with the delays.

As the challenge of delivering projects on time and in budget increases, we have to asked the question – why is public sector procurement so bad at using liquidated damage or penalty clauses in contracts?

High Profile Failures

Before taking a closer look at the clauses that could assist the public sector in their contracts, let’s have a look at some of the most high profile examples of projects that have suffered colossal overruns or budgetary overspends.

It won’t take you very long to find some examples in the media of these projects. What these 4 have in common is that even though some of the fault lay or lies with contractors, the public sector (and therefore the taxpayer) was and are the one to shoulder the burden of additional costs.

In 1997, a plan was put in place to build a new home for the recently re-established Scottish Executive (to become the Scottish Government). Initial estimates for the project were a total budget of £10-40m and an opening date of January 2004. By the time the building opened in October 2004, the total cost had risen to £414.1m (a figure confirmed in 2007).

Despite an enquiry stating that the wrong type of construction contracts had been used at the outset, and claims of contractors overcharging, no legal action was taken against contractors to recoup any costs.

  • London Olympics and Paralympics

Although the Games frequently have Olympic-sized budgetary overruns, the London Olympics and Paralympics in 2012 took the gold medal for the most expensive summer games ever. When London won the right to host in 2005, the budget was estimated at £2.4 billion. By the time the games were completed, the total cost ran to over £8.7 billion.

The London Organising Committee of the Olympic Games (Locog), essentially a private company, were criticised for the contracts it put in place, particularly for security for the Games. However, in the end, the UK taxpayer ended up footing the bill for the new budget.

Another project that looked to re-introduce a service that had been lost to the City of Edinburgh, the trams were originally budgeted at £545 million and be completed by 2011. In the end, the network delivered was only a third of what was originally planned, cost £776 million and didn’t start operating until 2014.

Again the finger was pointed at the contracts being used and courts found against Transport Initiatives Edinburgh (TIE), the public company responsible for project delivery, on a number of dispute with the main contractor. However, there was never any money recovered from contractors, leaving the taxpayer out of pocket again.

  • Crossrail

The most recent and still incomplete example of the group. At the time of writing, the project is already 9 months delayed to start operating, received 3 bailouts in 2018 totalling over £2 billion, and is already £600 million over budget. Even these estimates may prove to be lower than the actual final cost, and currently there is no agreement on who will shoulder this burden.

It’s all very well saying that contracts were at fault for these delays and budget issues, but the specifics of this are rarely highlighted. For example, were clauses put in place in the contract to help return money to the Local Authority or Government where delays occurred? This brings us round to our focus – Liquidated Damages.

Your Contract Shield

Liquidated Damages – A fixed or determined sum agreed by the parties to a contract to be payable on breach by one of the parties.

Before we do anything else, let’s caveat that in the examples above, and in many other cases, the fault may lie with the contracting authority in part or wholly. In this case, Liquidated Damages would be as much use as a chocolate fireguard. But where it can be proven that the contractor is at fault, then we’re in business.

The important part of the definition above is that the damages are a fixed sum, agreed by both parties up front. Damages which aren’t agreed in advance and have no set value are classed as penalty clauses, and are unenforceable in most contracts.

The key is for work to be done up front on this between the contracting parties. This means that levels of damages are agreed and aren’t subject to challenge further down the line. The damages also have to be realistic in line with estimates of the costs of a breach of contract, including delays to completion or commissioning.

For example, if you have a construction project, you might look at the day rate being charged by the contractor and agreed that this will be the rate used for damages per day in the event of delays. For the most part, Liquidated Damages will likely be capped at a certain value (say 20 per cent of the total contract value), providing a level of fairness for both sides.

Setting Up Your Clauses

Clearly, given the intricacies of the laws surrounding contracts, this isn’t something that procurement should be approaching in isolation. If you do feel that your contract would benefit from a Liquidated Damages clause, then you should engage at the earliest opportunity with your Legal department.

Make sure the clauses are set up correctly and called out clearly in the contract. Once you have awarded your tender, you should take time to speak to the successful supplier. This will ensure that the clause is agreed to and everyone is aware of the full implications of it.

No-one wants to use these clauses in contracts – it suggests that something has gone wrong in the contract management, plus the damages aren’t going to cover the full extent of the costs too. But by having them in place to begin with, procurement can help to limit the possible damage to their organisation in the event that budgets or schedules go awry.

I’d love to hear your thoughts on this article and the series of articles on the challenges facing public sector procurement in 2019. Leave your comments below, or get in touch directly, I’m always happy to chat!

Accelerating Procurement With Contract-Centric Sourcing

Today’s procurement organisations are being asked to move faster than ever to source the materials needed by their companies. How can contract-centric sourcing help?

By Alexyz3d  / Shutterstock

Today’s procurement organisations are being asked to move faster than ever to source the materials needed by their companies.

It’s a difficult position to be in. Under the current sourcing paradigm, the multi-step process of securing the vendor is time-consuming, and even then can expose a company to risk and leakage.

But the good news is that there is another way. In this blog, I will introduce readers to what we call “contract-centric sourcing,” a new paradigm for sourcing organisations that can save millions in leakage and accelerate the buying process.

The current paradigm

The current paradigm looks something like this: first, the buyer issues an RFx, and then evaluates vendors who respond on two criteria: technical and commercial capabilities. The vendor’s technical capabilities relate to whether they will be able to truly fulfill the buyer’s needs. Commercial capabilities relate to whether the vendor’s price for its products or materials fit into the buyer’s profit models.

Choosing a vendor is a business-critical decision, as the wrong vendor can disrupt the entire supply chain, so sourcing professionals want to exercise reasonable caution when making their choice, slowing down the process.

Contract negotiations slow sourcing

Even after a Letter of Intent (LOI) is issued by a buyer, the actual contract still needs to be negotiated. At this point other departments will get involved, including legal and finance. Legal, for example, may recognise that the jurisdiction the vendor operates in requires extra anti-child-labor documentation, and insert a clause requiring that documentation.

Since it is a contract, these clauses will have to be negotiated with the vendor, who may respond by changing the commercial terms of the contract. For example, the vendor could come back and say that the extra documentation will force them to charge more for their product. This back and forth can dramatically slow or even derail the sourcing process.

Non-optimised contracts

After all this time-consuming effort to choose a vendor and then execute a contract, the contracts often return less-than-ideal results. McKinsey and Company estimates that about 3.5 per cent of spend is leaked in the source-to-settle business process. More than half of that leakage is due to noncompliance either with government regulation or internal company standards, both of which come down to a disconnected contract management process.

Using contracts to transform your sourcing process

While this way of doing business has long been accepted as the norm, the paradigm is becoming a major liability as the pace of commerce accelerates. Here at Icertis, we are focused on using digital contracts and AI-infused contract management software to transform companies’ commercial foundation. This includes putting contracts at the center of sourcing.

Contract-centric sourcing is a new paradigm that allows procurement professionals to both accelerate their buying processes while also reducing leakage.

Contracts: a third pillar of vendor evaluation 

Here’s how it works. Contract-centric sourcing introduces contracts at the very beginning of the sourcing process and makes contract compliance a third pillar by which vendors are evaluated, next to technical and commercial capabilities.

Before an RFx is even issued, buyers evaluate past contract data to map out a category strategy that will deliver the most long-term benefits to the company. This helps the buyer craft the right RFx for their business needs.

Then, as part of the RFx, the buyer presents prospective vendors, via a digital contract management platform, with all the contract language they would like the vendor to agree to. The vendor redlines the contract based on its own needs and requirements. Once all vendor bids are in, buyers are able to evaluate how much contract negotiation would be required before choosing a preferred vendor and issuing an LOI. With the help of AI, the buyers can compare vendor redlines and determine which redlines represent acceptable changes and which are red flags.

(Note: A vendor redlining a contract does not disqualify them. It simply surfaces all redlines before a vendor is selected, so that those disagreements don’t rear their head unexpectedly later in the buying process. It’s all about visibility.)

Capturing Negotiations 

Since this process is administered on a single contract management platform, all discussion between the buyer and the vendor about contract language is captured in a single place (as opposed to several lawyers’ email inboxes) for later reference both during the lifecycle of the contract and after.

Sourcing organisations that link contract management and sourcing have a huge wealth of data about a vendor’s past negotiation strategy and behavior, as well as how well they perform against contract language. This is powerful data that hasn’t been fully leveraged in the current paradigm.

The Approach of Leading Enterprises 

Leading enterprises are already adopting contract-centric sourcing. Daimler is using the Icertis Contract Management (ICM) platform to completely rethink how it manages 500,000 suppliers. Daimler officials determined contracts were the natural place to start an overhaul of the procurement system, since it is the contract that underpins the entire buyer-supplier relationship.

“The deployment [of ICM] optimises the source-to-contract process by ensuring best-in-class supplier evaluation, selection, contracting, and collaboration,” said Dr. Stephen Stathel, head of Daimler’s New Procurement System.

The business world is changing. It’s no longer enough for procurement organisations to balance risk with accelerating business; they need to find ways to reduce risk and accelerate the pace of business.

Icertis is sponsoring Big Ideas Summit London on March 14th. Sign up now as a digital delegate to follow the day’s action wherever you are in the world.  

Are Smart Contracts A Game Changer for Procurement?

Are smart contracts, enabled by blockchain, the next big thing or just a temporary hype?

What is a contract? Put simply, a contract is any agreement that is built on the logic “if…[ABC] – then…[XYZ]”. And we make these kind of arrangements very day both in business and our private lives.

  • If I’m working on the development of the Procurement department at a particular company from 8am to 5pm Monday to Friday – then I’m paid £5000 on the 25th day of every month and I earn the right to have 25 vacation days per year
  • If I pay £45 on the first day of the month – then I get an unlimited internet package for the entire month delivered to my IP address from this internet provider

This is the basic logic behind all kind of contracts.

What is the no.1 problem with contracts today?

Nobody can guarantee the implementation of a contract’s conditions on both sides.

The employee might come into the office every day, but half of their working time is spent watching YouTube in the coffee area.

Maybe you pay each month for your internet service, but the traffic is too slow and connection gets lost at the most important moments…

In business these potential problems are solved by official contracts where a breach of contract could result in legal action.

But why should I trust my lawyers, my banks and the courts more than I trust my own business partners? Ultimately we are mutually dependent on each other so my business partner should be interested in maintaining that mutual trust. Moreover, why should I pay all these middlemen to implement and monitor contracts, why should I spend my time and money on court cases if the contract conditions have clearly been violated by the other party?

Blockchain is already addressing these issues with some success. And these “if… – then…” algorithms created with Blockchain technology are called smart contracts.

Example of Smart contract logic: Purchase of manufacturing equipment

Imagine a manufacturing company, MANCOM, needs to double its packaging line capacity. They are planning to get the new packaging equipment according to their technical specification, with production output of 10,000 pieces per shift, up and running at full capacity until 1st of June 2019.

After running their request for quotation (RFQ) – they have selected a company, YOURPACK, and prepare their Smart contract.

These Smart contract can include the following conditions in the protocol:

In the best case YOURPACK delivers the equipment to MANCOM before the 1st of March 2019, and gets 50 per cent payment automatically. Then before the 1st of June equipment runs with the planned capacity, and gets another 50 per cent automatically from MANCOM’s account.

If there are delays with delivery or installation – payment is reduced accordingly. So YOURPACK’s interest is to do everything in their power to make things in time.

If MANCOM delays the payment – the equipment blocks itself and cannot be used. So it is in MANCOM’s interest is to pay in-time and in full.

Once again, the main principle of the Smart contract is to use “if…then…” logic. And to decide upon the precise triggers that will lead to specific consequences. An important aspect of Smart contracts is automation – that is avoiding the human factor after the agreement is validated from both sides.

Invest time and efforts in writing down the causes and effects, which should be clear and transparent and which cannot be misinterpreted.

After you have agreed on the principles and the “if… then…” algorithms – give the assignment to programmers who will create their codes and protocols based on Blockchain.

Blockchain: the enabler of Smart contracts

At the heart of Blockchain we need the following core ingredients:

  • asymmetric cryptography – which gives the ability to create the records and protect them
  • distributed systems – which gives the ability to transfer value by making updates to the records

And the beauty of blockchain is that is allows us to digitally sign transactions. And what is even more important – you can prove it. After the record is created and distributed to the network, no one can modify or change it without others being aware of it. The levels of security and traceability are incomparable to traditional contracts and transactions.

Today we create huge contracts with numerous clauses and appendices. We hire expensive lawyers to create these contracts and then we hire yet more expensive lawyers to protect our rights, and prove in court what we meant by all those numerous clauses when the contract was first written.

Comparison table: Smart and Traditional contracts

Smart contractsTraditional contracts
Program or protocol, which uses Blockchain technology Paper documents composed using corporate and legal standards
Based on code, written in computer language Based on legislation and written by lawyers
You need assistance with defining terms of contract and with coding You need legal assistance to compose and register contract
Contract conditions are unchangeable once approved by all parties. They are transparent and automatically checked. If contract terms are violated – certain penalty, punishment or sanction occurs automatically Can be amended or interpreted differently by different lawyers. Conditions may be partly fulfilled or poorly fulfilled. If contract terms are violated – you resolve conflicts by negotiations or in the courts
The security of the transaction is guaranteed No guarantee, most laws can be bypassed
All transactions carried out without third parties and intermediaries Transactions are made with a number of other involved parties: lawyers, banks, courts or public services…
Transactions may happen using Crypto-currencies Transactions are made using traditional currencies through banks
When the terms of the contract are fulfilled, the exchange of values takes place instantly Exchange of values occurs with delays
The contract can be concluded with a person from anywhere in the world without personal presence The contract is signed only with the personal meeting of the two parties
Protection from corruption or fraud High risk of fraud, corruption or bribery

The next big thing or just a temporary hype?

Smart contracts are facing many challenges on the way to mass application in Procurement.

I don’t know how fast it will become a common practice, or the full possibilities behind blockchain technology for Procurement and Supply Chain Management, because we are only at the beginning.

In today’s world new technology can challenge and change the status quo within a matter of years. And I advise you to be at the forefront of these changes.

3 Top Tips For Dealing With Legacy Contracts

How sure are you that all your current contracts are still delivering their intended value? Or is the legacy beginning to hold you back?

In the third article in a series charting the key issues in public sector procurement, we examine the challenge of delivering value in long-term contracts.

As we have discussed in previous articles, time is a precious commodity in public sector procurement. The time taken to tender, retender or extend contracts needs to be factored in when making an initial decision on contract length.

Make the contract too short and there’s less scope for realising the value that you have worked into it, or very little incentive for suppliers to invest in the relationship (and potentially offer something of more value, for example, innovative solutions).

However, a contract that is too long has just as many issues. There’s more time for relationships to sour and more time away from the market where new solutions and technology might be providing better services and efficiencies. Finally it’s more time locked into a contract where costs are only likely to be on the rise.

There’s no right or wrong answer when it comes to contract length. A goods contract might benefit from a shorter term as it means new products or solutions can be assessed as the market develops them. There’s also the argument that for less complex goods a strong business relationship isn’t as critical, particularly if you aren’t going to do business with them again in the future.

That’s not to say certain products shouldn’t have longer contracts instead. Where there is high value, or a high level of complexity, a longer contract term may be necessary to ensure continuity of supply, or ensure the stability of a supplier.

A service contract might be better served with a longer contract. There’s more time for both parties to develop their relationship and gives the supplier time to understand the service without looking over their shoulder from Day 1.

But what of the contracts that professionals have no say over their length?

The Legacy Issue

It’s inevitable with the churn of professionals that at some point you will end up in a role where there are contracts that have been put in place by colleagues who have moved to a new role, or left the organisation entirely.

And you’ll certainly not be alone in thinking, “why have they done this?” when you get your hands on the contract specifics. You’ll probably even end up attributing issues on the contract to PBE (Previous Buyer Error) – even if you swore you’d never be one of those people!

In the public sector, the majority of these contracts will be in place for 3-5 years, potentially with an extension period should it be applicable for the contract, good or service. The extension could be up to another two years, meaning there’s a long time between procurement exercises for the product in question.

A hangover from previous public sector practice in procurement is perhaps the willingness to set contract length at 3 years and rarely changing. This might be the norm for frameworks (limited to 4 years at its longest length anyway), but as we have mentioned, there’s scope to make the length shorter where appropriate.

Another consideration for legacy contracts come in the information that is attached to them. It’s likely that, unless it’s been refreshed, most of the information will be out of date. Without the up to date information, you may not be able to see the full picture and it’s something that will have to be done as a priority when it comes to any extension or retender.

Finally, you should always be aware of what Terms & Conditions the contract was issued with and if it complies with all current regulations and legislation. Compliance is key here, so you shouldn’t hesitate to speak to your Legal team. It’s also something to remember when setting up new contracts that they account for all legislation, both current and potentially to come into force during the contract term.

From Legacy to Cutting-Edge

There’s no getting away from the legacy issue. You might put in a terrific, watertight contract now, but in 3-5 years’ time, it could be one of those legacy contracts your colleagues are wrangling with! If there’s no getting away from it then, what is there to do?

Never think you can’t put your own mark on a contract, even if it’s already up and running. Even a contract that’s over halfway through still has another half where you can contract manage and add value, all the while looking at options for the new contract.

So what are my top tips for dealing with the legacy issue? I’ve put some below:

1. It’s never too late to start contract management

Ultimately, preserving or releasing value in a contract comes down to the quality of the contract management. And it’s never too late to do some good contract management. If you work on the basis of any value is good value then even half a contract is enough time to make sure that your organisation is getting something out of this.

2. Use the time to build relationships

If you’re struggling to release any value from a legacy contract, use the remaining time to build up good relationships with the incumbent supplier. You’ll get to know their business and anything you learn can help when it comes to putting together new requirements for the next contract. At the very worst, you’ll get a chance to assess the whole market and see your other supply options!

3. Prepare for the new contract

Don’t leave it too late to start working on the new iteration of the contract (or retender). You might have planned for a good exit, but you need to be sure that any new contract going to do a better job. Use the time wisely and make sure that you put any lessons learned into practice.

3 Ways To Take The Pain Out of Contract Management

Managing supplier contracts is one of the most fundamental and, arguably, simple tasks undertaken by procurement teams. But for many it’s also a major source of anxiety. So why does procurement find it so difficult to successfully manage supplier contracts?

 

Given the ever-improving technology landscape and growing popularity of cloud-based SaaS solutions, one would assume that effective contract management is now commonplace among procurement professionals. Almost a hygiene factor, surely? Not in our experience.

The key challenge is maintaining contract repositories with rigour and to the high standards required. But even where organisations have well-embedded enterprise resource planning systems, this alone does not guarantee that contracts are being successfully managed.

This is rarely about a lack of willingness to improve the process – in fact, most teams are hugely concerned about it, with the majority actively looking for better ways to manage contracts.

Why so hard?

Supplier contracts provide a detailed overview of the pipeline of current and upcoming projects within an organisation. Without this line of sight, the procurement function is likely to be on the backfoot when projects end and contracts terminate. This is of particular concern in areas such as telecoms and software, where significant penalties are charged when contracts automatically roll over.`

Much of the problem lies with how contracts are filed, stored and updated – often in multiple systems or, even worse, in individual desk drawers across many different departments depending on who ‘owns’ them. As a result, procurement can potentially have zero visibility over many contracts, creating significant risks if suppliers are not being managed effectively throughout the contract lifecycle.

Given that up to 70% of spend is repeated year on year, failing to have visibility over contract expirations and extensions in sufficient time to fully leverage all the strategic sourcing levers available means vital savings opportunities are likely to slide under the radar.

Easy as 1, 2, 3

A well-maintained and up-to-date contract repository can provide a complete overview of all contracts in operation – from those in a supplier cluster, e.g. a central supplier contract with several sub-contracts to those that function company-wide.

The key is integrating contract management into everyday processes so that it becomes part of what procurement teams do rather than an afterthought. Three quick steps to achieving this are to:

  1. Make your team accountable – Include contract KPIs in your procurement team’s objectives. All buyers and category managers should be responsible for ensuring that they hold signed supplier contracts for the categories they work on. It should be their responsibility to gather them from other departments, even though they are not the ‘owners’, and to upload them into a contract management solution.
  2. Capitalise on the results – Procurement leaders should routinely review their teams’ compliance with keeping contract management solutions up to date and actively use the output to drive better category planning and organise quarterly workloads.
  3. Choose the right technology solution – Using a standalone contract management solution is helpful, but on its own it can get neglected very quickly. Select an integrated procurement technology solution that links contract management with other modules such as spend analytics and supplier performance management. An integrated solution that connects different modules together provides more insightful output that can inform better decision-making, e.g. linking spend analytics with contract management allows procurement teams to track supplier contract compliance and ‘spend under management’ – key indicators to how well procurement is doing within the wider organisation.

The way forward

Embedding contract management best practices into the procurement function and then incentivising the team to keep the repository up to date is crucial. Centralising information storage and assigning responsibility for maintaining it takes the guesswork out of who manages which contract within a large business – vitally important when managing multiple contracts.

Once this is in place the procurement function can then use the combined data to define company-wide procurement initiatives spanning numerous projects, managing risks and spend in a way that would not have been possible before. Now that’s not so hard is it?

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Improve Contract Compliance by Thinking Like Sales…Not Procurement

Call us crazy but we reckon Procurement would be better off looking at the Contract Management process the same way sales does…

Forest Foxy/Shutterstock.com

If you’re anything like me as a procurement practitioner, you think of our end-to-end process in a linear fashion. It usually starts with spend analysis or some other source of information (budget, ERP, BI system output, etc.) and ends with Contract Management and/or Supplier Performance Management. For us, this is completely logical because the sub-processes that we view as the most “active” portions of procurement – strategic sourcing and negotiation – have been dealt with at this point.

In Contract Management and Supplier Performance there is something of a phased handoff back to the budget owners. After all, the spend we bring under management is rarely associated with a procurement need; we are often just temporary custodians of someone else’s spend.

Unfortunately, the procurement phase that covers implementation and ongoing Contract Management includes the following two milestones:

  • The majority of the supplier’s value is created for the business.
  • Weaknesses and disturbances come to light, threatening to diminish total value and reduce contract compliance.

Procurement may see the contract phase as the end of the project, but our internal stakeholders (and in many cases, our suppliers) see this as the beginning of the effort. Everything up to this point has been theoretical, now it is real.

Contract compliance: think like sales

As crazy as it sounds, procurement would be better off looking at the Contract Management process the same way sales does. The day after you sign a contract is the first day of a new sales cycle. Your contract win is a prospect once again, maybe not for the same product or service they just bought, but for expanded coverage, increased volume, a longer commitment, or an alternate type of offering. This is the worst possible time to go hands-off, especially if you think there is the potential for more business.

Procurement may be guaranteed “more business” from their captive clients (a.k.a., internal stakeholders), but if those clients aren’t satisfied with the services and support they receive, they have no incentive to be loyal; to procurement or to the contract. In the alternate scenario, procurement stays involved to ensure a smooth transition to the new contract and serves as an advocate for the business as well as the supplier during the agreement lifespan. In this case, spend is far more likely to stay on contract where it lowers risk, increases savings, and delivers the desired value.

Here are a few examples of how procurement’s proactive investment in contract compliance can build loyalty for the future:

If the shirt fits…

In a sourcing project for driver uniforms at a freight company, several business divisions were combining their demand for the very first time. Each division brought their supplier and their current service levels to the table. Although being an incumbent was an advantage, the mandate was to select one provider for the whole company. This would inevitably lead to someone losing their incumbent so another division could keep theirs. After the selection was made, procurement redirected the team members who had been responsible for the sourcing effort to manage the rollout at the division transitioning to the new supplier. This not only minimized disruption to the business, it prevented the rise of resentment – something that could easily have lowered compliance and become a barrier for future sourcing efforts.

Have your supplier’s back

Sometimes you can tell that compliance is going to be an issue before the ink on the contract is dry. During a reverse auction for “35% water-added ham” at a wholesale grocer, procurement discovered that the category owner was secretly telling their incumbent supplier what they needed to do in order to win. After much drama, the supplier was excluded from the business because of their willingness to undermine the negotiation process. That left us with a guarantee of a new supplier and an ANGRY category owner. No supplier selected at that point was going to have an easy time with implementation. Knowing that contract compliance would be an issue, procurement took extra time to include metrics and SLAs in the agreement and worked with the new supplier to ensure that they would be able to report their performance back in detail. This effectively created a framework where they could quantitatively prove their performance. The wholesaler got the product they needed and the supplier was protected from unfair, costly complaints about their performance. Orders for “35% water-added ham” were placed and fulfilled with no disruption to local grocery chains. Yum.

Compliance credit where it’s due.

If procurement goes hands-off during Contract Management, we get no credit for value creation, but full credit for having created the circumstances leading to buyer inconvenience and frustration. The amazing thing is, that effective Contract Management is borne out when projected savings become realized savings – or not. And actual purchases become managed spend – or not. Without active Contract Management, there is a good chance that procurement’s efforts will be undermined and we’ll inadvertently create a tense relationship with internal stakeholders who we will, no doubt, need to work with again in the future.

In a Determine webinar featuring Spend Matters’ Jason Busch, Contract Compliance: Why It Matters to Procurement, he stated that contract compliance is more important than procurement performance. Strong words, but there are many components to that truth — and it’s a must-watch on-demand video.

Contract compliance and procurement’s role in ensuring it are a big and growing topic. You’ll find information on the subject in Determine’s extensive library of resources, or contact them to schedule a personalized demonstration of the Determine Cloud Platform.

This blog was orginally written for Determine by Kelly Barner .