The goal of every good contract management system is not only to manage contract data, but to increase the likely success of each vendor contract. Before you put together your next RFx process, plan for success by avoiding some common contract pitfalls.
Start on the Right Foundation
Procurement professionals doom some vendor contracts before they begin because we build them on the wrong foundation. This failure can come in two ways.
The first foundational failure is in not knowing what you need. Before beginning to put together an RFx document, meet with all the stakeholders in the organization and find out their critical list of needs from this purchase. You’re not looking for a wish list of all the cool things you could accomplish. Instead, look at the mission-critical requirements that you will need to measure and monitor to verify you are getting exactly what you want.
The second thing that will doom your contract management foundation is focusing on the wrong part of the contract. In most situations, you are purchasing a component or service that you cannot produce in-house, because it would be more expensive or because you don’t have the best expertise to accomplish the task. You are looking for outside specialists to supply ability that you don’t have, so take advantage of it! Focusing on the outcome instead of the process allows room for your suppliers to give you the value of their expertise in ways you might not have thought of. Put only the absolute critical details in your RFx process and see what your suppliers can do to increase value for you and them.
To make sure you begin your new vendor contracts on a solid footing, detail what you know you need and leave the rest to your suppliers. Here’s where you can put previous data from similar contracts to good use. What worked last time and, more importantly, what didn’t work? Looking at your previous data from your contract management system before you enter the RFx process can remind you of problems you may have learned how to avoid in a previous purchase. This gives you the option to set up the needed changes from the start on your new contract, giving new suppliers the best chance at success.
Successful Contracts Have Constant Visibility
Your contract management solution should offer visibility throughout the contract cycle, for both you and your vendors. Visibility to data gives both you and your vendor a way to manage key measurement statistics at every point. When contracts fail, it’s often the fault of poor communication between the supplier and the buyer.
Using an e-Procurement solution will help your company to collaborate with your vendors, giving you more effective risk management by addressing problems before they become critical.
Implementing a system is only half the battle. You also need to make sure integrate your vendors into your solution too. According to a Forrester survey of over 400 procurement departments, they attributed over half of system failures to poor supplier on-boarding (30%) and poor user adoption (27%). Make sure your contract management system includes connecting all new and existing vendors to supply regular data input and showing them how to monitor important terms.
Establishing a system to allow for easy access to data throughout the contract process also defeats another problem that many purchasing contracts face, known as “out of sight, out of mind.”
Procurement can often concentrate resources more on the sourcing and contracting portion of a purchase than on management of the process. Once the contract is in place with good performance metrics, it’s often tempting to forget about that contract until completion. Managing by outcomes is not a good risk management practice. Using a comprehensive contract life-cycle management system (CLM) to monitor contracts while still in process will help improve contract compliance, standardize processes, and reduce the chance of contract failure.
Clearly Define the End
Contracts can also fail because the finish line is hard to find. Confusing contract terms leave vendors in an ambiguous state trying to accomplish a goal that may or may not be correct. If they head off down the wrong path, they can’t reach a satisfactory end, so make sure your suppliers have a clear map of the journey you both expect them to complete.
All contracts will end.
- Contracts can end by performance. We hope for a good result where everything is completed to the satisfaction of both buyer and seller. Negative performance can end a contract, too. For instance, a vendor might go out of business, making it impossible to perform their duties of the contract.
- Both parties can reach a mutual agreement to end a contract. If one or both of the contract parties have made a mistake, it may be easier to end the contract early and move on and reset.
- A breach of terms can also end a contract. If your vendor does something that violates a core term of the agreement you have, then a contract can end for lack of compliance with the terms.
Make sure your contracts don’t fail because of ambiguity. For the benefit of both you and your vendor, try to spell out the terms for success or failure on all of your contracts. Use SMART goals: Specific, Measurable, Achievable, Relevant and Time-Specific. By defining your contract goals in these clear, objective terms, you and your vendors will have a clear vision of success right from the beginning. Your contract management system will track the necessary data along the way to minimize risk and improve your business relationships.
Prepare for Success
To find out if an eProcurement solution is right for you, contact our solution experts about cloud-hosted eProcurement solution from ProcurePort today.