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In the push for growth, companies have to deal with a growing number of suppliers. That means more contracts to manage – a good problem to have, until it becomes a real problem.
In large companies, suppliers deliver everything from office supplies to consulting services, and issue thousands – sometimes millions – of invoices each month.
Within that hailstorm of payments and disbursements are mistakes that undermine savings the underlying supplier contracts are supposed to deliver.
The reasons for overpayment range from simple error to outright fraud. The latter occurs rarely, but even small instances of human error – typos, erroneous tax calculations and duplicate payments – can quickly add up to large losses.
Supply chain complexity is another factor. Companies can be geographically dispersed with multiple legal entities, have a multitude of ERP systems, and large volumes of transactional data to manage both internally and from the supplier.
Poor contract compliance impacts the bottom line. Research from Ardent Partners has shown that noncompliant spend on suppliers can add an extra cost of between 12% and 18% for the average enterprise.
Contract renegotiation can be the trigger to address these issues, and institute controls to help stop leakage before it happens.
An opportunity to ensure contracts deliver full value
Whether a contract is approaching its natural end of term, or you’ve decided to call time on one that’s been allowed to renew automatically, contract renegotiation offers procurement teams a unique opportunity for a reset with suppliers.
Both parties will enter the discussion knowing there will be an open conversation about what’s worked and what hasn’t. There will be trading and operational history to draw from, and inform conversations about how the new contract should be structured.
Alongside necessary updates to pricing, clauses, service level agreements, discounts, rebates and other terms, the door will be open to discuss invoicing issues, process improvements, and how both parties can work more effectively to meet their business objectives.
Benefits of getting it right
To minimize leakage, companies often undertake recovery audits and recoup much of what’s been lost to mistakes, misunderstandings, or in the worst case – fraud. Cumulatively those can equate to hundreds of thousands and or even millions of dollars.
Some audit programs, however, are retrospective and reactive. Rather than stopping the source of a leak, they gather up the drips – often years after the fact.
There are costs associated with this, plus time and effort. Relying on them to recoup losses could also be risky if the target is a strategic, high-value vendor relationship that could be damaged by frequent requests to return money.
The better option is to take what you learn from an audit and use those insights to implement a contract compliance program. Doing so puts you on a preventative footing that looks for process and value improvement across the full source-to-pay spectrum for the suppliers you specify.
If you set a best practice framework and apply the insights and learnings post audit to the entire supplier contract lifecycle, this can limit or even prevent the issues that cause overpayment in the first place.
The mechanisms to achieve that include standardized contract language, a centralized repository of approved contract templates, and systems that make contract search, discovery and review easy to execute.
Benefits of a contract compliance program:
- Improve visibility into existing contracts
- Drive greater on-contract (i.e., compliant) spend
- Increase supplier-side contract compliance and adherence to SLAs
- Reduce savings leakage
Fine tuning supplier relationships
Contract compliance programs will also have systems to track and manage a supplier’s performance obligations.
Taking payment terms as one example, while most invoices have due dates and agreed penalties for late payments, it is not uncommon for companies to fail to catch them.
Businesses also frequently over-pay for goods and services because they haven’t kept track of volume or other discounts built into the vendor contract.
Adequate controls and processes as part of an ongoing contract compliance program can minimize issues like these or eliminate them altogether.
The tie that binds
Contracts are the tie that binds companies to their supply chains. They should deliver all the value that procurement teams have negotiated, and meet the specific terms agreed by both parties.
But without visibility and control, businesses expose themselves to savings leakage. That’s why contract compliance is so critical to protecting margins.
Contract renegotiation offers a perfect opportunity to start the process. By incentivizing greater on-contract spend, reducing risk, and improving supplier relationships, organizations can preserve the value their procurement teams have worked so hard to secure.
Want to learn more?
Download our e-book Five Best Practices for Renegotiating Supplier Contracts or watch the webinar Five Key Components of Managing Supplier Contracts.
 Ardent Partners: Beyond Recovery: Unlocking the Full Value of your Contract Compliance Program, 2019