Boardroom Chatter: Cost Reduction (Part 3 - Contract Management)

Claire Taylor
Claire Taylor,
Over lunch, the CEO, CFO & CPO of a large corporation were having a discussion about how to reduce costs.
CEO (to the CPO): “You said the other day that we could further reduce costs with better contract management - what do you figure we could save?”

The CPO outlines the current position and targeted savings they are working towards:
  • $1.7M savings by increasing on-contract buying from 65% to 85% (20 percentage points) by making them fully visible to all buyers at purchase time 
  • $400,000 savings by using improved contract visibility to consolidate duplicate contracts and gain higher volume discounts 
  • $200,000 savings by preventing incorrect prices on POs (e.g. failure to use quantity price breaks)
That’s over $2.3M in annual savings. 
CFO: “Based on a review of current contract activity we've done together, we’ve identified additional ways we can save as well…”

CFO: “Here’s our estimate of avoidable expenses we could achieve:”
  • $250,000 approximate savings by avoiding automatic renewal of contracts without re-negotiation, and in some cases, contracts we don’t even want to continue (e.g. maintenance agreements) 
  • $50,000 approximate savings from reduced manpower required to handle contracts (e.g. manual authoring, filing, creating time-based payments, monitoring for review, etc.)
That’s another $300,000 savings a year from better, more efficient management of contracts within Procurement.

CEO: “So let’s recap what you’ve told me…”

CPO & CFO: “Here’s the summary:”
  • $2.3M through increased on-contract buying and better compliance with contract terms 
  • $300,000 through avoidance of unwanted automatic contract renewals and elimination of non value-added manual contract administrative manpower – 1 FTE. 
That’s a total of about $2.6M a year.

CEO: “That’s savings that would go directly to our bottom-line. I like that idea, but why can’t we get more people using our negotiated contracts today? And why can’t we keep better track of them today?”

Employees say:
  • “Who knows what suppliers we have discounts with – I can’t keep up with memos and emails saying I should buy from this supplier or that.” 
  • “I don’t have time to look up the details of supplier contracts when I need something fast – I usually just put in the list price and assume the supplier will discount it properly.” 
  • “It’s a shame that maintenance agreement got extended – we don’t even use that equipment anymore.” 
Procurement people say:
  • “Contracts are filed all around the company – no one really knows what all contracts we have. 
  • “Many contracts are still only on paper and not at all visible in our e-procurement system.” 
  • “There is no standard for what information we have across contracts, or how we categorise them – it’s impossible to do any kind of automated analysis.” 
  • “We try to keep up with contract expiration dates, periodic payments, purchase activity compliance, and all those things; but even though we spend a lot of time trying, we still miss a lot of things.” 
CEO: “That’s all more complicated than I realised. What capabilities would we need to get the savings you outlined?”

The CPO and CFO combine their respective notes to make a list on the whiteboard:
  • A single, centralised electronic contract repository where all contracts are stored 
  • Standard information templates for each type of agreement (e.g. simple, framework, call-off, blanket, price lists, etc.) 
  • Integration of contracts directly into eProcurement for buyer visibility, automatic terms compliance, and capture of purchase activity 
  • Automated monitoring of scheduled events and expiration dates with email alerts to the appropriate people 
  • Automatic generation of scheduled payments for authorisation 
  • Performance analysis reports and KPIs 
CPO: “There are other benefits we could achieve with automated contract management as well…”

In addition to the $2.6M annual savings and cost avoidance we can clearly identify today:
  • A consolidated view of our commitments and liabilities 
  • Reduced risk of lapses in contract coverage (e.g. insurance or warranties) 
  • Better information for spend analysis 
  • More time available to procurement professionals to negotiate more contracts that generate more savings
If you'd like to discuss this topic further, get in touch today or click here for further information on contract management.
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