How much value is your business gaining from your contracts?
If an executive asked you what a given contract was worth, most of us would likely give an answer based on the estimated spend with that supplier as a result of projected volume, negotiated costs and term. While this would be an accurate answer, it limits the “value” of the contract to its transactional footprint.
Any procurement organization that has ever tried to make the case that their contributions to operational performance exceed savings dollars in number and form will quickly see the problem with cost-based contract value. In other words, we have to find a way to express the true value of contract assets in terms of what they allow the business to achieve or what they prevent.
[inlinetweet prefix=”” tweeter=”” suffix=”#ContractManagement”]It is one thing for procurement to know where a contract is stored and an entirely different thing to actively understand and leverage the value of what was committed by both parties[/inlinetweet]. That mutual commitment is important to both parties and cannot be reduced to a straight dollar value without loss of opportunity.
For example, let’s say a contract allows your company to buy 100,000 components per year at $1.35 each for three years. We might say that contract was worth $405K. But what if the contract has a terms in it that ensure the supplier will meet our demand even if their own operation goes down, prioritizing our needs over other customers’. That continuity might allow your company to keep the lines running and avoid delaying your own deliveries. How much more is that protection worth?
The adoption of contract lifecycle management (CLM) solutions is growing in prevalence for that very reason. Companies — and their procurement organizations — understand that the time between contract execution (signature) and expiration or renewal offers the incredible potential for value creation.
The same holds true with services contracts. We all like to think about seizing value upside, but not every contract is a success. If procurement puts strategic termination conditions in place, contracts can save money that would otherwise be wasted on an unqualified or underperforming service provider and allow resources to be redirected to a third party who can get the project back on track.
Procurement must start thinking of contracts as more than documents used to store negotiated details.
Although contracts exist as documents (likely with multiple attachments and associated assets), they should also function as ‘living’ representations of relationships between buyers and sellers. Third-party relationships are as complex as the conditions they exist in the midst of. They need the support of well-crafted contracts, agreements that are able to support the full range of activities and decisions that take place.
Although procurement is usually the owner of in-place contracts, they serve the requirements of the entire company, hence the need for enterprise access, visibility and control.
How much would you say your contracts are “worth?” Are they living up to their full potential for value creation? Do they serve the needs of all interested parties? How are you currently managing your contracts? If spreadsheets, point solutions and other limiting choices are hampering your ability to maximize full contract value, run the numbers to find out how much more you can achieve. And if those contracts contain unseen procurement data (and unrealized potential), then integrating your procurement and contract management solutions is going to be critical.
If you would like to see first hand how integrated, cloud-based modular contract management and procurement solutions can create a multiplier effect that boosts value across your enterprise, schedule a demonstration of the Determine Cloud Platform.