Contract Management Best Practices for Procurement Pros

Learn why its critical for procurement teams to have contract management best practices in place to proactively monitor promised benefits.

By Hugo Britt | June 18, 2024

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At what point in the contract lifecycle does procurement’s role end?

If your answer is “when the contract is negotiated and signed,” then you might believe that contract management is somebody else’s responsibility. The trouble with this approach is that failing to manage a contract increases the likelihood of value being left on the table. 

Let’s say the procurement team negotiated a 3-year contract with a 3% annual price escalator. Through their negotiations, they were able to secure a rate that was 12% below the supplier’s standard pricing. This equates to $500,000 in annual savings, or $1.5 million over the full 3-year term of the contract.

However, due to a lack of centralized contract management processes, a few issues arose:

  • The organization fails to properly track supplier performance. After the first year, the supplier starts missing service level agreements, resulting in an estimated $50,000 per year in lost productivity and quality issues.

  • The organization also neglects to proactively plan for the contract renewal. They end up auto-renewing at the supplier’s standard rates, losing out on the 12% discount they had previously negotiated.

In this revised scenario, the value left on the table is:

  • $150,000 in lost productivity/quality
  • $150,000 in discounts not realized on renewal.

So rather than capturing the full $1.5 million in anticipated savings, the lack of proper contract management means the organization only realizes $1.2 million – a 20% reduction in value.

And because contract changes or amendments weren’t properly documented and communicated, the organization loses out on negotiated discounts, fails to implement required updates, and opens itself up to compliance risks.

Contract management best practices

This highlights how critical it is for procurement teams to have the people, processes, and tools in place to proactively manage contracts and ensure the promised benefits are actually delivered.

Procurement may not be seen as the owner of the contract management function in your organization, but a strong argument can be made that it should be. After all, we’re the ones who negotiate the terms, manage supplier relationships, and ensure compliance. Leaving contract management to other departments can lead to a disconnect and missed opportunities.

A strong argument can be made for procurement to own and implement contract management best practices to monitor and deliver on promised benefits and value.

Benefits realization

Proper contract management is absolutely critical to ensuring that the organization actually captures the benefits that were identified and used to justify the contract in the first place. It’s not enough to just negotiate good terms – you have to actively manage the contract throughout its lifecycle to make sure both parties are meeting their obligations. Without a dedicated contract management process, all sorts of issues can arise that undermine the anticipated value.

Effective contract management involves clearly defining the desired outcomes, establishing robust monitoring and reporting processes, maintaining open communication with suppliers, and quickly addressing any issues that arise. This allows procurement teams to stay on top of contract fulfillment, identify optimization opportunities, and ensure that the original strategic and financial justifications for the contract are fully realized.

Without a mature contract management function, even the best-negotiated deals can fail to deliver their promised benefits. That’s why leading procurement organizations treat contract management as a core competency – because it’s essential for translating contracting success into tangible business impact.

Challenges within contract management

The key challenges in contract management include:

  1. Lack of centralized visibility: Contracts are often scattered across the organization, making it difficult to track obligations, understand risk exposure, and leverage buying power. Data may be stored in siloed spreadsheets, email attachments, or on paper, which means no one can get a meaningful view of the contract. 

  2. Manual, time-consuming processes: Despite plenty of contract management software solutions being available, many organizations still rely on paper contracts and manual workflows, leading to delays, errors, and version control issues. 

  3. Poor supplier relationship management: Without a centralized system and regular meetings and communication, it’s tough to holistically manage supplier performance, identify improvement areas, and drive continuous optimization.
     
  4. Compliance and risk management: Keeping track of contract terms, renewals, and milestones is essential to mitigating risks, but can be a major headache in large organizations with hundreds or thousands of contracts on the go. 

Best practice contract management

To overcome these challenges, procurement teams should embrace  the following best practices:

  1. Centralized contract repository: Maintain a single, secure database of all active contracts with key metadata (parties, terms, milestones, etc.).
     
  2. Automated workflows: Leverage technology to digitize and streamline contract creation, negotiation, approval, and renewal processes. Make sure your system has the capability to set up alerts for milestones such as contract expiry/renewal.
     
  3. Proactive relationship management: Establish regular reviews, performance scorecards against KPIs, and other mechanisms to drive continuous improvement with suppliers.

  4. Risk and compliance monitoring: Set up alerts and dashboards to stay on top of contract obligations, renewals, and potential risks.

  5. Data-driven insights: Analyze contract data to identify trends, optimize terms, and uncover opportunities for cost savings or value creation.

While the contract management function may have traditionally sat elsewhere in your organization, there’s a strong case for procurement to take the lead. We’re the ones with the deep supplier knowledge, negotiation expertise, and process-driven mindset to truly unlock the value of effective contract management.

How can a GPO help?

By embracing best practices and leveraging the power of a group purchasing organization (GPO) like Una, procurement teams can take the cost, time, and effort out of the earlier parts of the procurement cycle such as supplier selection, negotiation, and onboarding.

GPOs offer access to pre-negotiated contracts, streamlined sourcing, and specialized support – allowing you to increase your focus on contract management to drive benefits realization and greater business impact.

So why leave contract management to chance? Empower your procurement function to own this critical discipline and watch your organization reap the rewards.

Learn how Una works with you to manage risk and increase compliance utilizing group purchasing:

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