Finding the Right Balance

Accountancy SA,  Sep 2007  by Hassim, Mohsien

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SUPPLIER CONTRACT MANAGEMENT

This article is the 3rd in the series of articles covering the fascinating and evolving topic of Strategic Sourcing. The 1st article in the series provided an introduction to Strategic Sourcing with the 2nd article focusing on Supplier Relationship Management (SRM).

This article will provide an introduction to supplier contract management, some guidelines, key benefits of proper supplier contract management and the inclusion of a case study where the experiences on how contracts with suppliers were managed are shared.

Organisations the world over are in a continuous quest for developing sustaining relationships with stakeholders in their supply chain. This quest has evolved over the years from a simplistic one-on-one relationship where suppliers to the business were an 'extension of the family! However, with the advent of globalisation and the need to source products from all corners of the globe, business is faced with a need to appreciate in full the importance of supplier relationships coupled with a strong need to understand in full the importance of formalising the supplier relationships through contracts.

Supplier Contract Management has slowly become an important component for effective supplier relationship management that is directly linked to securing the supply of key commodities needed for sustaining business.

Defining Supplier Contract Management

Supplier Contract Management is the formalisation of a supplierbuyer arrangement where one party supplies a range of products/ services (i.e. commodities) to the other, whereby the terms of business are documented in a structured document(s) that provides clarity on the legal obligations of each party. Management of this formalised relationship allows an organisation a degree of control over the deliverables and performance requirements.

The use of contracts in business relationships has long been the lifeblood of a business, as the contracts provide the terms, pricing, and service levels of customer, partner and/or supplier relationships. Contracts provide a framework by which an organisation manages and mitigates risk in its supplier relationships. As a result, contracts have become the living breathing documents that control the dynamics of everyday business in an ever increasing fashion. Contract management requires the systematic management of contract creation, execution, compliance and analysis to maximise performance and minimise risk.

With the increase in the complexity of doing business coupled with the increase in transaction volumes and value in an ever tightening regulatory framework has resulted in businesses taking note of the importance of proper management of contracts with their suppliers. Most organisations manage their contracts through a decentralised, paper based approach using ad hoc spreadsheets or databases. This exposes the enterprise to significant risk.

In a recent international survey, 81% of companies said that just finding contracts was problematic (up to 10% of their contracts were lost) and 71% of companies listed contractual risk as a major area of concern and reported they did not have a reliable process in place to alert key parties to contractual risk. (Source: Realyst Contract Risk Management)

Using the Contract Lifecycle

The adoption of a Contract Lifecycle model assists in following a structured approach to supplier contract management. Understanding the lifecycle of a contract is crucial to managing it effectively. Contract lifecycle management (CLM) allows for enhanced visibility, control, and performance in the areas of meeting and complying with regulatory requirements, risk management, and cost control. This requires companies to improve the processes and tools they use to manage the various activities involved in contract management, from contract creation to performance measurement.

International research by bodies such as the IACCM and Aberdeen provides significant insight to the lifecycle of a contract and can be described as follows:

* Creation, including negotiations and collaboration; document redlining and approval; ensuring use of standardised contract templates and clauses; and enforcing business oversight and controls.

* Activation, including establishment of a central repository for all contract information. This repository should be searchable, and integrate directly with key transactional systems in order to make contracts "active".

* Compliance, including proactive tracking of internal usage of preferred suppliers and contracted pricing, as well as monitoring and auditing of contract terms, changes and performance, to ensure regulatory compliance.

* Analysis, including the active enforcement of spending against budgets; and balancing orders between preferred suppliers, to optimise usage and returns; also, term analysis of contract performance and attributes to determine budgeting, sourcing, supplier management and risk strategies.

Why the need for Supplier Contract Management?