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Embracing innovative procurement solutions that transform sourcing and contracting

11/10/2021 By

Procurement in itself is a cumbersome, time-consuming and tedious process. Hence, most organizations don’t effectively manage their spend.

And one of the significant yet overlooked aspects impacting spend and procurement management is procurement categories.

The invisible role and impact of procurement categories in spend management

Procurement categories are a grouping of similar goods and services with overlapping demand and supply drivers and sources. For example, “procurement in construction” is a broad term. It can be further broken down into various procurement categories, such as concrete, masonry, wood, iron, steel, electrical, fire systems and paint types. Strategically managing each procurement category can improve overall sourcing and procurement processes and optimize overall spend management.

However, the real challenge arises in the practical world when dealing with distinct procurement categories because they vary according to the size and type of organization and the supply market. The cost, quality, fee models and delivery models differ when you deal with different suppliers for each of the different categories.

Imagine the time and effort wasted in executing RFPs for each category, across business units.

Hence, traditional procurement methodologies often result in multiple suppliers delivering the same component to the same company because each contract was negotiated for a specific business unit.

Unfortunately, it’s not uncommon for a business to report multiple agreements for the same product across departments.

Here, rather than approaching different suppliers for different items, it is advisable to determine how much your organization spends on all category items and specific items within those categories.

With category management, procurement negotiates a single contract covering the needs of all business units. This gives the company more leverage for favorable pricing. The aggregate purchase volume for a category also attracts top-tier suppliers that have a better reputation for quality and for meeting deadlines. This approach can generate significant discounts and greater procurement efficiency.

Challenges in executing RFPs for distinct procurement categories

  • Slow RFP-to-award cycle times: Manual processes can make comparing and evaluating RFP responses take forever.
  • Poor RFP collaboration: Aligning the interests of several departments is difficult when relying on emails and spreadsheets to organize the process.
  • Lack of RFP visibility and data: Not having insights into the status of suppliers’ responses hurts the process of comparing bids, verifying supplier compliance requirements and onboarding new vendors. And without data from a digital tool, visibility and the potential for analysis-driven growth are limited.
  • Poor contract management: Since contracts exist in all departments, it can be difficult to coordinate with all interested parties. With contract lifecycle management (CLM) automation, legal departments should be able to control compliance but offer all departments a way to build compliant contracts on their own.
  • Lack of contract visibility: Manual processes like emails and spreadsheets make it difficult to track a contract. So when you have thousands of contracts, no one person or group can manage them. A digital repository helps organize contracts and lets all stakeholders check the status and access contract terms at any time.
  • Underperforming contract value: Digital documents can be linked to other digital processes in a business so that deadlines, financial terms and other milestones mentioned in the contract can be met — all of which ensures the value realization expected from the deal that was agreed to by the company and the supplier. CLM automation also helps gather data to fuel analytics for the business.

Eliminating RFX process challenges with intelligent tools — Hope or hype?

To avoid strained supplier relationships, increase RFX-to-contract turnaround times, and fix misaligned processes and silos, stakeholders and other team members can get help from mature, intelligent RFX and contracting tools. These tools help overcome inherent process challenges.

With intelligent RFX tools, you can create RFP templates and invite suppliers to submit proposals. From a centralized database of RFPs, you can shortlist vendors, evaluate their responses and award them contracts — all with a few clicks.

Demand is king, but unless the category manager has sophisticated tools to translate the demand into streamlined sourcing and contracting processes, the strategy of category management is going to fall flat.

AI-enabled source-to-contract solutions can help organizations source more effectively across the entire procurement process and help achieve efficiency and spend management goals, just like category managers help with the big picture of procurement.

Using AI, a robust RFX tool in an S2C solution can help analyze bids and assess vendor risk, in addition to injecting efficiency in your RFX process. Similarly, AI-enabled contract management included in an S2C solution can help extract metadata and clauses, aid in the import of third-party paper and legacy agreements, and seamlessly connect the bid response to the contracting process.

By linking sub-process areas like spend analysis with sourcing and procure-to-pay, the visibility, collaboration and value created in one area is carried forward and often amplified within the remaining connected sub-process. Organizations that connect these processes recognize value sooner due to the supplier management, compliance and process efficiency gains realized overall.

Digital answers to challenges in sourcing, contracting

To get insights into how these challenges are being addressed, we talked with Sunil Masand, SVP and Head of Product at Aavenir, a provider of source-to-pay solutions built natively for the cloud on the ServiceNow platform.

Spend Matters: Technology in this category is known as source-to-contract. How can having a robust contract module and a modern RFX module change the expectations for procurement professionals and their customers, like their internal stakeholders as well as external suppliers?

Sunil Masand: Be it source-to-contract, source-to-pay or procure-to-pay — it all starts with an RFX. A robust and intelligent RFX management software not only simplifies the process but also turns opportunities into savings. Most people focus on effective collaboration with external parties. However, RFP software helps with seamless collaboration internally as well as externally. With AI-enabled automated workflows and analytical dashboards, it speeds up RFX cycle times and closes contracts faster than ever.

Artificial intelligence has helped procurement buyers with “guided buying” decisions. How is that type of feedback being made available for the RFX process and the contract lifecycle?

I will say not only “buyers” but the entire gamut of procurement professionals can benefit immensely from AI-enabled RFX tech. Spend classification, vendor matching, capturing supplier master data, detecting anomalies — all of this is helping procurement professionals with guided-buying decisions. It helps make decisions that are in line with the company’s thinking. For example, if your contract included payment terms of net-30, Aavenir’s Contractflow solution would point out that most contracts with this vendor are net-60 terms. Flagging deviations like this saves all parties a lot of headaches down the road.

The best example is one of our proud customers, Johns Hopkins University. With AI and rule-based customized workflows, we could help them centralize sourcing requests, vendor onboarding and the entire contract lifecycle. With centralized sourcing and contract management, they have achieved an 80% faster contract turnaround.

So, in a nutshell, AI helps in making guided-buying decisions and helps one avoid making unwise and premature decisions.

What are examples of those unwise decisions?

There can be many, at each stage of the process — like not using the suppliers you have onboarded earlier, accepting incomplete or non-standardized quotations, ignoring supplier performance history, showing a bias toward incumbent suppliers, ending up doing dark purchases, and so on.

For whatever reason, biases in buying tend to favor the incumbent supplier. Maybe upper management favors that vendor or more likely procurement gets in a rut and places orders with one main supplier because it doesn’t have a big picture of all of its buying activity. The bias toward incumbents also goes for the RFP process. You need to have a way to base decisions on data and alleviate bias from the selection of vendors. Aavenir’s RFPflow solution helps those sourcing evaluations focus on the data.

In contract management, structure and experience are key. For example, if you have a new SLA and you’re negotiating terms, it would be helpful to have a template that fits the type of contract you’re negotiating. You need to have language that is specific and measurable. Our Contractflow solution has clause libraries that help pick the right language when you’re looking at vendor evaluation and contracting.

This Brand Studio post was written with Aavenir.