Blog / 08/10/2020
Contract management in Procurement as part of the lifecycle is a necessity and most organisations understand the benefit of managing third parties throughout the life of the relationship.
The importance of negotiating to get the best terms at the contract stage requires oversight post signature to ensure that the full value is delivered. Additionally, change is a reality of most relationships but particularly with longer term commitments, requiring proactive management to maintain the relevance of the contract and keep it current. Contracts are not there just to be filed away and never looked at again.
However, for many businesses, limited resources, and the requirement to continually support new projects and sourcing activity means that compromises are made on the contract management activity and only the high spend suppliers get any attention. Is that always the right choice?
What about third party risk?
Spend is a good indicator of a supplier’s importance to a business as typically, large spend is evidence of consolidation of key requirements and / or high volume usage. However, there are often smaller spend suppliers who provide key elements of a company’s solution (particularly in the IT software space) that can have a large impact on the business if they fail. This is why risk is also a key factor in the Supplier Relationship Management model.
Most procurement professionals will be aware of the Kraljic matrix*, but how many organisations use it in practice when deciding the relative importance to the business of each of their third parties? And even if they do use it, is it regularly reviewed across the life of a supplier relationship to ensure the initial assessment remains accurate?
In the current climate, it is likely many businesses have become much more focused on the impact non-delivery or delayed delivery of goods and services could have on their business performance. In many cases, organisations will have felt the impact first hand and found out the hard way if they had correctly assessed the risk and even more importantly implemented robust plans to mitigate it. What it may have shown them is that in these difficult times, it hasn’t been the large scale suppliers or the high spend partners that have let them down but the smaller ones who never made it onto their radar.
So, what is the answer?
- Spend cannot be the only measure when considering where to focus your supplier management attention.
- Information is key and a rounded review of the supplier relationship is needed to ensure the prioritisation is correct. Considerations such as the supplier’s impact on the organisation’s business performance, the risk and impact of failure of the supplier as well as the evolution of the market and / or spend levels with them must all be considered.
- Regular reviews of the relationships are necessary to ensure the focus remains in the right place.
Take a look at your supplier base with a more varied lens and you could be surprised by the results. If you aren’t sure where to start or don’t have the capacity, get in touch, we would be happy to talk to you about the support we have given other businesses and how we have helped them deal with these types of challenges.
*Kraljic, Peter (September 1983), “Purchasing Must Become Supply Management”, Harvard Business Review.