Companies tend to spend money in prosperous times to fund expansion and research & development, often oblivious of good common sense. It is well accepted also, that in tough economic times, organizations become better economic managers. The need to consider carefully every dollar spent is heightened by slower sales and lower revenue, though this should be the norm, rather than the exception.
We have already seen a cautiousness descend across the business landscape even within companies yet to feel any direct effects of the financial downturn; putting a freeze on hiring and taking a second look at upcoming expenditure ‘just in case’. This in-turn has a flow-on effect on the vicious circle that is the drop in consumer and business spending and the already severe credit crisis. Indeed the real effects are yet to be felt by business, because many customers are still spending 2008 budgets that were granted 12 months ago, and governments who do not spend these budgets will have no chance of seeing them again in 2009.
In these increasingly tough financial times, customers are now looking closer at their procurement processes and to where they can gain greater cost efficiencies, and the procurement profession that has been slowly gathering momentum inside organizations will now have a greater chance to have a significant influence at the C-level, because what they have been doing for the past several years has a direct and significant impact on the bottom line and financial reports. Where companies were solely or predominantly relying on sales growth, companies are now looking to both direct and indirect supply departments for cost savings to realize profit forecasts.
Good procurement practices including rigorous contract development and sourcing processes, and the governance and compliance of contracts post award is now more important than ever.
Delivering greater value in existing supply arrangements is a very important way of extracting cost savings and influencing the bottom line. This requires tighter management of relationships already in place and will see companies safely through to renegotiations of these agreements and to potentially more favourable conditions and service levels that may have not been considered during previous negotiations.
Customers now need to be tightly governing the compliance and performance for spend under contract, to allow the realisation of any rebates or discounts reached for group spend or penalties (and rewards) for performance measures. Often these targets are negotiated but never enforced, and group spend targets are not met because organisations have no visibility into supply contracts. They do not know what agreements they have in place.
Contract review and renewal dates become even more important, because if these are missed, customers will have to continue to purchase at rates negotiated prior to significant changes in market conditions or sell at lower than market prices or with no longer favourable terms and conditions. There is precedent of missed renewals costing millions of dollars in missed savings opportunities or increased revenue on single contracts.
The need to be tracking supplier insurance levels through agreement renewals is of critical importance, as is the tracking of contract issues, timelines and variations, to reduce budget blowouts and scope creep. Internal procurement processes must be tightened and corporatised to reduce off-contract purchasing and to place more rigour around the supplier engagement process, even for lower end spend.
An example of the efficiencies that can be created during renegotiations are tighter SLA and partnering arrangements that reward suppliers based on positive performance milestones in tighter market conditions. These milestones are difficult to negotiate unless existing KPIs (Key Performance Indicators) are already being monitored, or there are no benchmarks against which to measure existing suppliers.
The most important thing is that organizations know what their commitments are, know what their risks are, and implement a pro-active systems approach for administration tasks associated with contract management. This allows contract managers to get back to the real business of commercial management; people and relationships.
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