Contract management could be the next area where procurement’s transformation from a legacy purchasing function to a strategic value creator has the potential to meaningfully support the business as a whole.
Procurement has been on a journey over the past few years. The function has gone from tactical back office department to a key driver of resillience and strategic wins. Contract management is increasingly looking like the next stage in that evolution.
In the public procurement sphere, the UK government’s Procurement Act 2023 will likely elevate the importance of contract management. The act is due to come into effect in early 2025 (after a recently announced delay). Under the new law, the public sector will need to more closely monitor supplier performance. Companies will do this through Key Performance Indicators (KPIs). Organisations tendering contracts worth £5 million and above will need to assess performance using three different KPIs.
As the public sector reforms its approach to contract management, private sector firms can expect to start investing greater time, attention, and resources into the process as well.
Beware of contract drift
Plenty of businesses have found out the hard way that finalising a contract with a vendor and implementing the terms of that contract over its entire life cycle are very different things. Over the course of a contract, hard-fought terms can end up being forgotten, ignored or misinterpreted. This is broadly referred to as “drift”.
Contract drift can lead to increased spend, logistical failures, loss of liquidity, and supplier disputes. Not only that, but potential breaches of compliance can result in massive financial and reputational damage. Effective contract management can help negate these risks.
What is contract management?
Contract management refers to the process of managing a contract after the participating companies sign it. Handling contract management refers to all the activities that are required at different stages of the contract lifecycle. These start with the drafting, signature and mobilisation and progress through exit and termination.
Effective contract management can help your business drive positive results. Done correctly, businesses can use a holistic view of supplier performance to ensure that all parties are adhering to the terms of the contract.
Without an effective, holistic approach to managing contracts, businesses run the risk of having siloed data across disparate repositories, setting teams up for failure. Lower visibility makes compliance more challenging and audits unnecessarily complex. In turn, businessses can lose revenue if untracked spending and unused contract entitlements go unnoticed.
Organisations can avoid these risks by investing in proper contract management. Doing so will, in turn, create further value from the supply chain and create competitive advantage for the business.
Done right, contract management takes a holistic view of the supplier ecosystem, tracking everything from delivery, finance, and quality to risk and relationships. Digital tools like centralised contract management software can integrate into the source-to-pay process, and provide a wide range of benefits, from preventing siloed data to allowing more collaborative contract authoring between different business departments.
Until now, contract management has played second fiddle to other aspects of procurement like sourcing. However, a shift is taking place throughout the sector. Businesses are starting to recognise the value of contract management and its potential to drive value, improving their bottom line.
