Don't Forget Agreement Management

Opinion: Sourcing is just the beginning — not the end — of the savings process.

Opinion: Sourcing is just the beginning — not the end — of the savings process.

Atlanta — June 19, 2003 — No one doubts the power and value of strategic sourcing. It's a proven business technique to unearth the best contracts on products and services as well as establish smarter relationships with suppliers.

Indeed, given today's rocky economy, it is imperative that large companies employ strategic sourcing in some form — through an in-house team, consultants, procurement outsourcers or some combination.

And yet even more critical than identifying savings is extracting and sustaining them.

Procurement professionals know that strategic sourcing only stakes a claim to savings, and that once a hard-earned new contract has been signed, the real work begins. They know sourcing is just prospecting for savings and that compliance management is the day-to-day operations activities that extract those savings. It's hard work that requires proper tools and processes as well as a motivated team to transfer those opportunities to tangible results.

A recent study showed that, on average, negotiated savings established by strategic sourcing engagements begin to diminish in value by the end of the first fiscal year, leveling off completely by the third fiscal year. The lost value is largely due to a lack of strong compliance management.

To extract prospective savings, procurement professionals know:

  • Contracts have to be properly rolled out with the help of key stakeholders

  • Policies and procedures must be in place to support execution

  • Supporting technologies have to be deployed to channel spend to contracted suppliers

  • Adequate resources need to be employed to monitor and manage the process

Let's look at these points one at a time.

Roll Out New Contracts

The rollout of a new contract cannot be an afterthought. Proper rollout requires up front coordination with key stakeholders to ensure the right product or service requirements are defined and the special strategy for deployment gets established as part of the strategic sourcing program. Careful planning and early stakeholder buy-in help overcome problems and resistance in advance of the implementation process.

It follows that the benefits of the new contract must be communicated to buyers and others who will be impacted by the terms and provisions of the agreement. This requires an effective communications plan to clearly articulate the importance of the supplier decision in terms of savings prospects and other benefits for the whole organization. It's called change management, and it's crucial to your success.

Establish Policies and Procedures

To deal with the lack of internal compliance or sub-par supplier performance, you need to document your policies and procedures and establish a governing body to apply the rules and resolve issues. Whether you apply the carrot, the stick or both depends on your organizational culture, but well-documented policies upfront can help ensure quicker resolution of issues.

Deploy the Right Tools

Savings are mined not just from new contracts, but also from improved processes. That's why it's crucial for large organizations with hundreds or even thousands of buyers and support personnel to deploy supporting technologies for e-procurement and contract management. e-Procurement automates the transaction flow and helps ensure buyers are channeled directly to the right suppliers. Contract management offers enterprise-wide visibility to the terms and conditions of your strategically sourced agreements so buyers know what's expected of suppliers.

Pick Adequate Resources

You must deploy skilled resources to manage commodities, measure and monitor spend and supplier performance, report on areas or departments not in compliance, and resolve issues. Only by providing adequate resources can you perform the functions necessary to sustain your hard sought savings.

Within every large organization, there are always savings to be mined, but you'll have to do more than just prospect for them. To extract real cost reductions, you'll need to stake your claims, document and communicate your expectations, deploy the right tools and sufficient resources, and continuously measure your progress.

Larry Hall is president and CEO of Atlanta-based FacilityPro, a procurement solutions provider.