Are you concerned about avoiding contract noncompliance? Are you worried about whether or not your contract management program is working?
You should be.
Here’s the thing: noncompliance can cost your company a lot of money.If your organization isn’t managing its contracts effectively, it could be opening itself up to several risks.
If your company isn’t managing its contracts as well as you’d like, you’re not alone.
According to a recent Benchmark Report, “Challenges in Procurement,” 50% of Procurement Executives stated that they are achieving less than 50% contract compliance. This is an alarming finding when one thinks about the risks involved.
If your Procurement organization is like many others, it may be making several common mistakes. Maybe you’re entering into contracts that have evergreen clauses. Maybe you’re not making sure that your suppliers are adhering to the agreement as well. Perhaps you’re not negotiating the best terms for your company.
This post will give you 10 effective tips that will make it easier for your Procurement team to improve its contract management program. As you implement the tips given in this article, you will lower risk, save money, and build better vendor relationships.
Tip #1: Don’t Auto-Renew Evergreen Contracts
It might seem tempting to just allow your contracts to auto-renew. Sounds much easier, right? Instead of renegotiating the contract each time, it can seem more convenient to have it renew on its own. But it might not be a good idea.
Sometimes, companies lose money by allowing their contracts to renew automatically. Contracts that contain evergreen clauses typically require you to terminate the agreement within a certain amount of time before the contract ends. Sometimes, the timeframe can be anywhere between 30 – 90 days.
Here’s the thing, if you don’t give the vendor notice within that timeframe, your company is obligated to renew for another term, which may not be beneficial to your organization. This is why you should avoid contracts with evergreen clauses.
What if you were able to renegotiate the contract? What if you could get better pricing? Better delivery times? Better payment terms? Entering into an evergreen contract could open you up to the risk of limiting your flexibility.
Tip #2: Conduct Your Own Contract Compliance Audit
Usually, when you hear the word “audit,” it’s being done by the vendor. This is especially true when it comes to software licenses.
However, there’s more to it. If you’re going to have an effective contract management program, you need to audit your vendors as well. Just like your vendors will want to make sure that you are abiding by the terms of your contract, you need to do the same.
Here’s a few tips:
Determine the Extent of the Audit
First, you need to figure out how extensive your audit will be. Will you audit the whole document? Or are you just concerned by a particular passage?
Determining the extent of your audit will keep you from wasting time because you will know exactly which parts to look at. Of course, if you’re going to audit the whole document, it’s a good idea to make sure that your Procurement organization has the time and resources to devote to this task.
Identify Your Objectives
After you figure out how extensive your audit will be, you must figure out what you’re trying to accomplish with your audit. You need to know what your end goal is.
There are several different objectives you might be interested in.
- Making processes more efficient.
- Recovering costs (from overpayments).
- Managing risk.
- Identifying fraudulent activity.
This is incredibly important. If you don’t know what you’re trying to get out of the audit, you won’t be as effective.
Work With your Supplier
Auditing your suppliers isn’t a confrontational thing…it’s just meant to ensure that both sides are living up to the agreement.
It’s a good idea to develop a dispute resolution process that both you and your vendor can agree upon. There might be times when there are disagreements between both parties. Having a dispute resolution process that is already agreed upon will help you resolve these disagreements in a way that preserves the relationship.
Evaluate the Success
After performing the audit, take some time to figure out what went well and what didn’t. Were you able to accomplish your objectives? What should you look at in future audits?
Tip #3: Create a Consistent Process
One of the main keys to successful contract management is ensuring that there is a consistent process in place. You want to make sure that each contract is handled in the same way.
Ideally, this process should be documented and easy to understand. There should be no ambiguity as to what one should do and how they should do it.
Come up with a workflow that each member of the team will perform. You can make adjustments as necessary, but it is important to have an established process that everyone follows.
Tip #4: Make Sure the Right People are Involved
Successful contract management requires you to make sure that you have the right people on the job. You shouldn’t have tons of other people managing contracts. You know that saying about too many cooks, right?
Ideally, you want to have one person that is responsible for overseeing your contract management program. This person’s team should be the the ones that handle this function. When each member of the team knows their role in managing your company’s contracts, it lessens the likelihood of mistakes being made due to confusion.
Tip #5: Communication
No contract management plan will succeed without effective communication, right? Whenever you’re implementing new processes or policies, you have to make sure that everyone involved has a full understanding of the initiative.
Here are the three most important things each stakeholder needs to understand:
Why are you doing this? What is the ultimate objective of this initiative? You need to articulate what you’re looking to accomplish by upgrading your contract management program.
Not only that, you need to also articulate the ultimate benefit this will have for the organization and for the stakeholder. This is extremely important. If people don’t see how they benefit from your initiative, they will be far less likely to buy in.
What policies are you going to put into place? How will you enforce them? What will you do to ensure accountability?
Every stakeholder should know what is going to be done in order to enhance your contract management program. When your stakeholders have the right guidelines to follow, they won’t have to worry about whether or not they are doing things the right way.
Your stakeholders also need to know how things are supposed to be done. They have to understand the process they need to go through to fulfill their function. For a contract management program to work, each person involved needs to know what role they play in the initiative.
Tip #6: Make Sure you Negotiate the Best Terms
Successful vendor management means knowing how to negotiate the most favorable terms for both parties. You need a contract that works for both you and your supplier.
The first thing you need to do when starting a negotiation is to establish your objectives. What are you trying to get out of the deal?
Here’s a few factors to consider:
- Delivery time
- Payment terms
- Maintenance and service (after the sale)
- Total cost of ownership
- What your organization needs/doesn’t need
You also need to understand the supplier that you’re dealing with? What position do they have in the negotiation? Do they have a lot of competition? Or are there only a few other companies you could do business with? These questions will help you determine what your bargaining position is.
Upgrade your Contract Management Program!
If you’re reading this post, you’re obviously looking for ways to avoid noncompliance. It’s possible that your organization might be making some of the mistakes mentioned earlier in this post.
The best way to save money, lower risk and maintain positive supplier relationships is to create a contract management program. It’s something that will prevent your company from dealing with the negative consequences of noncompliance and it will make your job a lot easier.
Now, go get started!