Disrupting the Source-to-Contract Cycle: Putting Contract Management at the Start of Sourcing

contract

The sequential source-to-contract cycle is an accurate representation of how most procurement organizations identify and select suppliers. But it’s not necessarily the best way to approach this process.

The typical sourcing cycle begins by searching for and evaluating suppliers on two key criteria: capability and price. Procurement releases an RFX to identify potential partners that are capable of delivering the needed goods or services within the profit model the organization has created. Yet evaluating suppliers on these criteria alone does not provide a complete picture of whether that company can and should win the business.

When supplier selection gets to the contracting phase, procurement often finds that there are additional considerations that hamper or even derail the sourcing process. Suppliers operating in foreign jurisdictions, for example, may not meet regulatory requirements tracked by legal, disqualifying them even after winning the bid. Requested documentation could cause the supplier to change the specifications for its product, invalidating the earlier quote.

For these and other reasons, contract management should not be considered a final step in the sourcing process. Instead, procurement should include contract compliance at the beginning of the cycle, defining it as an essential reason alongside capability and price. Doing so will create significant opportunities for procurement to reduce value leakage, guard against serious risks and accelerate the pace of businesses.

The New Process: Moving Contracts from the End to the Center

 To understand this new model, it helps to go back to the first step in the strategic sourcing cycle.

Before issuing an RFX to the market, procurement first needs to evaluate past spend, category strategy and the supply market to know what potential solutions are available. Including contract management at the beginning of the sourcing process means that, when using a dedicated enterprise contract management platform, past contracts can be mined for data such as price, supplier performance and distribution of supplier by subcategory or geography.

Once a fully informed strategy has been devised, the organization can then solicit bids. Beyond the basic information included in RFXs (capability and price) procurement would also include all of the contract language it wants vendors to agree to for the final award. Vendors then make their bids while adding redlines to the proposed contract. Doing this third element earlier allows vendors to make more competitive bids, as well as shows procurement how much negotiation will be required with a vendor to reach an agreement.

With the beginning of contract negotiation already executed during the bidding stage, procurement can then move from delivering a letter of intent to a fully negotiated and signed contract with maximum efficiency. A digital contract management platform easily facilitates this process, and then provides ongoing benefits through improved supplier performance monitoring if connected with other enterprise systems that evaluate various performance metrics.

Benefits of Contract-Centric Sourcing

While moving contract management to the beginning of sourcing creates a new model and workflow for procurement, the benefits that organizations can realize outweigh the challenges of process redesign.

Perhaps most obvious is the ability to accelerate the pace of sourcing. Integrating contracts into the full sourcing lifecycle makes the whole process faster — from forming a category strategy to cutting out back and forth during bidding and streamlining delivery of the final award. Acceleration from contract management could support agile product development, moving ideas from design/engineering into production seamlessly instead of holding up the process in securing parts or essential components.

Acknowledging the importance of contract management to sourcing will also better support legal departments, which will know procurement is taking appropriate measures to protect the business from external risks. Putting potential regulatory compliance hurdles front and center in the sourcing process (e.g., GDPR, RoHS, anti-slavery laws) forces suppliers to address potential issues proactively, ensuring the business won’t be, for example, incorporating restricted substances or inputs made with forced labor into its products. This can also apply to reputational risks, as procurement can incorporate CSR factors such as supplier diversity into its sourcing strategy.

Finally, procurement organizations can never ignore the value of savings within a sourcing exercise, and advancing contract management to the beginning of sourcing does just that by optimizing the entire process. By applying artificial intelligence-based analytics to contracts analysis, automating routine labor in bid solicitation and negotiations, and streamlining the award process for full-time employees, procurement organizations can bring additional savings totaling as much as 3.5% of all external spend down to the bottom line, according to estimates from McKinsey & Company. What’s more, the time saved by eliminating excess back and forth with vendors can then be applied to more worthwhile projects, whether executing a more ambitious contract-backed category strategy or supporting supplier innovation efforts.

Starting from the Foundation

Taking a digital approach to contract management is a key way to enabling enterprise-wide digital transformation. Because there is nothing more business critical to a firm than its contracts, prioritizing a strategic, digital-first approach to contract management creates a foundation for other fully digital processes. Naturally, this also applies to sourcing.

While the process of evaluating and selecting suppliers has always incorporated contract management, putting contracts at the outset of sourcing is a fundamental change to the source-to-contract cycle. But with new capabilities enabled by digital contract management platforms, such an approach to sourcing is now not only feasible but an attractive way for procurement organizations to deliver numerous new benefits from this essential business process.

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