Contract Management: Opportunity for Procurement to Mitigate Risk

By Nikita Saharia Chaturvedi

September 28, 2016 at 10:37 AM

Lloyd_Alexander_1.jpg“Procurement is not only being asked to find new and creative ways to drive improvements to the corporate bottom line, but also to help manage the growing risk that can negatively impact the company,” says Lloyd Alexander, Vice President of Contract Strategy at Seal Software in a podcast interview at My Purchasing Center. 

“The success factor for achieving all this is predicated on knowing exactly what relationships the company has with suppliers so procurement can maximize terms within contracts from a financial standpoint while mitigating risk they pose as well.”

This is a relatively new role for procurement. As global business moves at an accelerated pace so too does procurement. Gone are the days when procurement was mainly concerned about cost and quality. While both are still its responsibility, procurement today is thinking about—and acting on—such issues as risk, especially as supply chains expand into other regions of the world.  

“Procurement policies, government regulations and supplier relationships differ greatly around the world and procurement organizations need to understand them and how they can impact their companies,” Alexander says. 

Take contracts for example. Government regulations may call for specific terms in agreements. Procurement needs to ensure that all supplier agreements have these terms to maintain compliance. And, if the regulations change, procurement needs a way to quickly locate or amend contracts to stay in compliance.

Another area is mergers and acquisitions, the volume of which has increased significantly lately. With M&A activities come thousands of suppliers and contracts that need to be assimilated into the business. As Alexander sees it, the procurement value add in M&A activities is in its ability to quickly assess where multiple suppliers exist, and analyze their contracts to determine which to move forward with based on a comparison of the terms and conditions. 

What else can procurement do to help their companies? “Procurement organizations need to make sure they have ongoing access to contracts and visibility to the terms buried within them,” Alexander says. “It is easy to lose sight, and so many things can happen that can impact the supply chain and the health of the company.” This is why, he adds, automating contract management is critical. 

Suppose a key supplier declares bankruptcy or announces another major change to its business. Procurement needs to know quickly the ramifications per the terms of the contract. Or, say, a natural disaster hits a region where suppliers are located, procurement needs to quickly assess the risks that it poses to the operation and the options based on terms in the contract.

 “I can’t stress enough the importance of being in control of contracts,” he says. “One unknown term in one contract can have a detrimental impact on a company. We’ve seen instances where one company will acquire another and not analyze the contracts they inherited. What happens if one contract contains an unlimited liability provision? That is not good, and the company probably won’t realize it until it is too late.”

It’s not all negative. There are positives. In fact, there’s a potential wealth of cost savings that can be found in contracts. Alexander points to analyzing payment terms in multiple contracts. Finding mismatches can result in working capital savings and a positive impact to the corporate balance sheet.

Also see the My Purchasing Center podcast, Procurement's Role in Mergers: Assess Contracts, Select Suppliers



Tags: purchasing Risk management Supply chain management Contract management Procurement Technology sourcing
Category: Blog Post

Nikita Saharia Chaturvedi

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Nikita Saharia Chaturvedi is a Contributing Editor with My Purchasing Center. Readers may reach her by email at nsaharia@mediasolvegroup.com or follow her on Twitter @nikitamarketeer.


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