Contract Management, which can be defined as the execution and monitoring of a contract for the purpose of maximizing financial and operational performance and minimizing risks, involves tracking purchases against contracts to insure preferred suppliers are used, rates adhered to, and discounts and rebates collected. Contract Management is important, because, as mundane as it sounds, it is another part of the sourcing process that can bring a number of benefits to the organization.
- Standardized Processes and Procedures
This helps to decrease maverick buying and decrease supply risk while increasing spend leverage. The net effect is that buys as a whole become less costly and more valuable and a much greater percentage of negotiated savings are captured by the business.
- Spend Visibility
Probably the most valuable benefit of a contract management system – which lets you know if you are buying from the suppliers you’re supposed to be buying from at the right times, quantities and prices – it can also help an organization standardize on consistent contract terms and conditions. Furthermore, it also allows for easy identification of contracts with suppliers in high risk zones due to natural disasters, political unrest, or economic uncertainty, which is critical to the development of appropriate organizational risk management strategies.
- Improved Compliance
According to Aberdeen (Practical Approaches to Contract Management Deployment) compliance management is improved 55% with a contract management system.
- Solid Foundation for Spend and Performance Analysis
With all of the contract conditions and negotiated prices and fees in a central location, it’s a lot easier to compare actual purchases against contracted buys. This allows policy or regulation violations to be caught and dealt with immediately and insures that all spend is known and available to be appropriately leveraged in sourcing projects.
- Rebate Management
Contract Management systems make it easy to track rebates and insure that all of the savings negotiated in a sourcing cycle are captured.
- Reduced Maverick Spending
With a contract management system, a buyer can immediately determine if a contract exists, who the contracted suppliers are, and what the contracted prices are. No longer is “I didn’t know we had a contract” or “I didn’t know I wasn’t supposed to do that” a valid excuse!
- Evergreen Contract Elimination
Without a contract management system to automatically alert a buyer of contracts coming up for automatic renewal, many auto-renewing contracts are likely to go unnoticed and automatically renew, locking the buyer in for another buying cycle. With a system in place, the buyer can be alerted weeks or months in advance, depending on how long a sourcing cycle normally takes for that commodity or service, and take appropriate action.
For more information on the benefits of Contract Management, see the Contract Management 101: A Total Value Management Introduction wiki-paper over on the e-Sourcing Wiki. In addition to more detailed information on the benefits, as well as more benefits, it also defines contract management from a sourcing and enterprise perspective, outlines the basic requirements of a contract management system, and overviews some best practices to help you get the most from your contract management system.