Contract Management – Building the business case through highlighting opportunities

We launched the second of our papers recently in a series (sponsored by BravoSolution) titled “Building a Business Case for Contract Management”.

Most procurement people know how important contract management is, but we often struggle to get investment needed in resources, training or tools to support better performance. This series of three papers gives some tips around how to make the case convincingly. In this second installment, we look at the opportunities and how to capture those to form a key element of the business case. (In the final paper, released after the summer, we’ll look at the risks that good contract management can address).

Here’s an excerpt from the paper – and you can download the whole thing now here, free on registration. In this section, we’re looking at how you might quantify the opportunities arising from better contract management.

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“Using benchmarking or external evidence can also be useful. If we can identify another organisation that is achieving better results from some aspect of supply, setting that as an aspiration with a benefit linked to that may be feasible. If there is no external guide, and where the contract management opportunity is aspirational, setting a measurable target can feed into the business case. Here are some examples where that sort of approach may be useful:

• We will target a cost reduction of 5% by working with the supplier on alternative specifications for this equipment / raw material / component. That potentially is worth 500,000 Euros a year.

• Improving delivery reliability and the process for scheduling deliveries will allow us to reduce material stocks by x%, reducing working capital requirements by £1 million.

• We will roll out this contract to 5 more countries where current prices are around 7% higher, saving $250,000.

A further option here is to put probabilistic estimates against opportunities, in effect discounting them given the inevitable uncertainty around the numbers or even the likely delivery. We will talk about that in more detail in the next paper when we focus on "risk".

It is often even tougher to put numbers around the more innovative or strategic benefits that improved contract management might bring. A statement that says, "we will obtain supplier innovation and ideas that will help us generate an additional £1 million per annum in our own product sales" may be the best that can be done. Quantifying and measuring the pay-off from such opportunities to support a business case is not easy. So it may be that it is useful to include such aspirations, but not rely on them as the core of the case.

Another approach is to use past examples where effective contract management has paid off in the past and relate that to the current investment situation. Whilst past performance is no guarantee of future performance, as our financial advisers will tell us, using "stories" to illustrate the effect of good supplier and contract management can be surprisingly powerful.

"Here's an example of how we managed another contract similar to this one last year and saved a million" can be a powerful addition to the business case. An investment in contract management should certainly not be purely a leap of faith, but including a few "war stories" can be very useful. And we'll have more on the use of case studies in the risk paper to follow.

So, with a combination of predicted hard benefits, supported by credible targets and measurement, plus the use of narrative stories to illustrate other opportunities, the business case can take shape”.

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