Unlocking the strategic value in contracts.
A recent McKinsey study was chock-full of surprises in terms of procurement and CLM, including this little gem:
Across industries, total procurement operating expenses are typically less than 1 percent of total spending. By underinvesting in this way, companies are overlooking a significant source of value: suboptimal contract terms and conditions combined with a lack of effective contract management can cause an erosion of value in sourcing equal to 9 percent of annual revenues. For Fortune’s 2016 Global 500 companies, this 9 percent would have equaled $2.5 trillion in value.”
Kind of makes you wonder, what’s in your contracts?
Monitoring contract performance isn’t a new role for procurement teams, but it is a growing one. As you will read a lot on our website and in analyst reports, one of the primary drivers for this is supplier management (and hence, risk management). IACCM (International Association for Contract & Commercial Management) recently stated that “poorly administered business partnerships at Facebook wiped out $150 billion in market value in 90 minutes last month. As the social media giant learned, it’s not enough to mandate compliance in its contracts, companies must have a robust way to monitor compliance and take immediate action to remedy non-compliance.”
Contract compliance enforcement is not solely procurement’s job — in fact, it’s everyone’s job in an enterprise — but being on the front lines and dealing with third-parties every day puts teams in a great monitoring position. Maybe “enforcement” is the wrong word; leveraging, monetizing, value-wringing are really the idea here. When procurement has access to full contract visibility through a data-integrated contract lifecycle management solution, they are ideally placed to unlock the spend management and cost savings potential. Quantities, timing and other conditions / obligations represent significant opportunities to control costs and risk.
You can’t leverage what you can’t see.
Another eye-opener from the McKinsey report is this: 80 percent of procurement functions are not fully aware of competitive terms and contract structure. With a solid contract management solution, or better yet, an enterprise contract lifecycle management strategy, procurement leaders can capitalize on their centralized position to analyze contracts and identify where the potential lies.
As Andrew Bartolini stressed in the latest CPO Rising 2018: The Age of Intelligence, procurement alignment with broader business objectives is a paramount goal for leading procurement professionals. Likely, those objectives include maximizing third-party value while minimizing risk. A solid grasp of the business contract situation gives procurement the wide-angle situational awareness they need to think bigger strategically about how to best manage global supplier relationships. As McKinsey states, by getting all relevant parties involved at the outset of the process, procurement can start with a comprehensive perspective on TCO and value creation.
This is where “thinking enterprise” creates the biggest impact. When a contract management solution is integrated with a single source of Master Data and metadata, then the CLM is a trove of invaluable data that procurement can exploit with advanced analytics. From there, it’s a matter of how best to use that procurement intelligence to make better spend and business decisions that impact the bottom line. A full view of organizational contracts also gives procurement the global perspective to identify trends, areas of supply chain weakness and ways to improve process efficiency.
By unlocking the strategic value in all those contracts, procurement can then use that data to deliver results that build influence.
If you’re ready to increase your procurement influence through contract management, schedule a demonstration of our modular, configurable CLM on the Determine Cloud Platform.