An automated, connected system helps companies stop the costly leakage that results from contracts not being connected to operational systems. By working together to develop a holistic strategy to bring together various procurement and supply chain sub-processes into a strategic, easy-to-execute plan, procurement departments can create greater value for the business.
That said, transformation will require some change management inside the procurement department and the rest of the organization. The following five stages will guide you along your journey.
[Editor's note: This is an excerpt from our eBook "Realising a Holistic Approach to Procurement Through Advanced Digital Contracting," co-authored by Klaus Richter, former CPO of Airbus. Access the full eBook here.]
Stage 1: Procurement Process Efficiency and Effectiveness
Seeking operational efficiency and effectiveness through contract automation is a natural place to start—especially for organizations where procurement is perceived as a drag on the pace of business, either due to being risk-averse or generally slow. In these cases, contracts are a powerful tool to deliver speed and scale compliance across a company's buying operations.
In this initial phase, organizations can quickly improve efficiency by:
- Integrating contract management and RFx processes to create a single source-to-contract motion, thereby increasing the effectiveness of the procurement process multi-fold.
- Applying a practice of category management to exercise influence on the source-of-supply profile.
- Integrating contracts with P2P/finance systems to control unchecked issuance of work authorizations or supply orders outside contract terms.
Cycle time reductions achieved through these initiatives will deliver credibility to transformation efforts and lay the groundwork for more ambitious projects.
Stage 2: Supplier Performance – Bid vs. Did Measurement
At this point, many organizations may still view the RFP process (the "bid") and supplier management (the "did") as separate activities. It's commonly believed that simply putting a vendor performance measurement system in place improves the quality of services delivered.
Unfortunately, the obligations of the buyer and vendor teams are often not communicated to the operations department. Poor handovers prevent companies from realizing the improved quality or projected savings captured in the contract. In fact, it is a leading cause of leakage for the business.
Advanced Contract Lifecycle Management (CLM) technology can address this value loss by leveraging artificial intelligence to automatically extract obligations and entitlements from a contract and track it through to fulfillment. In this way, the right CLM can facilitate smooth, objective, and easy digital governance of the contractual performance of suppliers to prevent leakage.
Stage 3: 360-Degree Supplier Relationship Management
In large organizations, a single vendor is often engaged in various parts of the buying organization through different legal entities. This can result in suboptimal delivery. For example, different vendors may be charging different prices for the same commodity or may have committed to different SLAs for the same price. There may even be different expense reimbursement models.
Because contracts define every vendor relationship, advanced CLM technology is the ideal tool to create a single view of what suppliers a company is working with to identify areas for improvement. At this stage in a company's journey, implementing a 360-degree view of a relationship using AI technology gives the sourcing manager better control over costs and drives efficiencies within the relationship.
Stage 4: Spend Management and Cost Modeling
Once the previous stages are complete and the primary procurement processes and vendor governance are addressed, there is an opportunity for procurement to expand its sphere of influence throughout the company—specifically, spend analytics and cost modeling.
Spend analytics provides valuable insights and patterns that often lead to improved or more efficient alternate working models, sources of supply, or materials.
Cost models are important as they can set benchmarks against the competition and identify what materials or services should cost. Additionally, because cost modeling can provide control over current vendor solutions and services, it can also be used to evaluate the value of new product innovations that contribute to the company's overall success.
Stage 5: Injecting Innovation
Success in today's business climate requires collaboration with innovative vendors. At this final stage of the journey, mature procurement practices, as well as cooperation and governance, have been established among the procurement organization and the departments that use the acquired materials or services. Now sourcing managers have an excellent vantage on the market. Procurement can be much more effective in not only identifying new applicable trends and technology innovations but evaluating them against the long-term business plans of their organizations. Armed with this, procurement can be the champion that drives value and improvements for customers.
The strategies outlined in each of the five stages will greatly advance the role of procurement within the organization. The possibilities are enormous, and potential can be realized when procurement participates in strategic business planning and has a shared destiny with the operations teams. Embarking on the transformation journey with a phased approach will ultimately earn procurement a “seat at the table” that will result in positive results company-wide.
To read the full eBook, Realizing a Holistic Approach to Procurement with Digital Contract Management, access it on-demand here.