GLOBALISATION has heightened the need for a robust contract management system. It is increasingly becoming very clear that organisations can no longer do everything for themselves alone.
It must always be remembered that there are various specialisations and material resources required in production systems, which are beyond the capacity and capability of any individual company.
Modern day specifications are now beyond the economic competence of any individual company. Almost all organisations will at some point depend on a wide range of supply sources dotted around the globe.
Contract management tools will, therefore, define a clear understanding as to what each supply chain partner can do and is expected to do in black and white.
Contracts are generally regarded as important tools for risk mitigation. Failure to establish a seemingly simple contract management system can result in major headaches at a later stage when it matters most.
A robust contract management system will seek to prevent risk long before it gathers the momentum to affect supply chain efficiencies. The bigger and more complex a contract, the more the risk.
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Supply chain professionals are fully aware that contracts that go wrong can easily have serious consequences that reach far beyond the companies immediately involved.
There is need to protect the name of the company from being muddled in unnecessary petty reputational risks. Strong contract management inevitably allows for strong supply chain management processes coupled with a corresponding reduction in the likelihood and impact of some of the potential risks.
Some organisations do not maintain a centralised contract repository. As a result, contracts are stored across fragmented and scattered departments where expiration and renewal dates are difficult to track. This can easily result in delays and cost leakages, making it very difficult to leverage on the full use of a functional contract management system.
Part of a contract management system will entail the establishment of a central searchable repository that can be made available to members of staff as and when necessary.
A contract repository will increase supply chain spend visibility. Without an accurate, verifiable contract repository containing information about your key suppliers and service providers across departments, maverick spending is a high probability.
Contracts will,therefore,define where the organisation’s every dollar is going. They will ensure that spend visibility is magnified, curbing maverick spending, undocumented and unapproved expenditures are easily detected.
The creation of a centralised contract management repository is also critical for the safe storage of legal documents in one place and these can be viewed, edited and shared by all parties within the organisation but from different departments at the same time.
This will not only improve visibility and transparency but will help all parties to interact and negotiate within a single system that manages the confidential contracts securely.
The information in the contract repository can flag contract expiration dates and confirm when contractual milestones have been attained.
Organisations across the industry divide are now realising that contract accountability and transparency are necessary to meet regulatory and compliance standards.
Contracts will form the basis upon which audits or risk assessments are carried out. We all know audits, as painful as they can be, are critical for contract compliance monitoring.
If contracts are poorly monitored, they can easily create legal and regulatory challenges and potentially increase supply chain risks while at the same time damaging supplier relationships.
For compliance expediency, contracts are the lifeblood of an effective audit trail, they can be relied upon to regulate relationships and to measure organisational performance.
Over the years, contracts have historically been viewed and tolerated as regulatory and compliance tools of trade. Although very unpopular and in some cases not aligned with expediency, contract audits are regarded as legally mandated and accepted causes of delay in supply chain management.
The strength of a company’s contract management strongly influences the performance of a procurement management system, vice versa. Without a doubt, there is a symbiotic relationship between contract management and supply chain management.
They need each other badly. Contract management resides at the intersection of supply chain management’s deliverables and the supplier’s performance outcomes. Contracts are generally regarded as the glue that binds transactions between the supply chain department and suppliers.
My final thoughts
As individual items, all the issues discussed in this white paper are pertinent on their own, but when put together they present unquestionable building blocks for the establishment of a robust contract management system.
As the economic landscape remains subject to shifts, savvy procurement professionals are getting rid of clunky filing cabinets. In this hyper competitive business environment, long paper trails have since run their courses.
A contract management system is a veritable linchpin to success. The renewed heightened interest in contract management is, therefore, well founded.
Drawing on decades of experience, it must be remembered that a contract is only as good as the data and process used to create it. A binding contract will only be as good as the input it receives.
For supply chain professionals, establishing a robust contract management system is probably not your priority activity for now. But there is need to refrain from a pathological focus on prices and cost reduction efforts only and shift attention to the establishment of a robust contract management system as a way of adding value. The real value of contract management comes over time and requires significant time and effort.
- Nyika is a supply chain practitioner based in Harare — charlesnyika70@gmail.com