What are collaborative contract solutions?
A collaborative contract solution is a technology that fosters a collaborative culture of contract authoring which can bring together the two functions and drive compliance and control while at the same time foster better supplier relationships, which in turn can deliver real savings with minimal risks to the supply chain.
The contracting process has always been a major point of discontent between procurement and legal functions within an organization. The goals of the legal department to achieve control and compliance often clash with procurement’s objectives to build collaborative relationships with suppliers.
This has become extremely pronounced now such that procurement feels that it needs to become a strategic value contributor pushing the business performance of the organization rather than simply focusing on getting the lowest price.
A study by IACCM throws up several results that suggest that the relationship between procurement and legal teams are less than cordial in most organizations. Nearly 70% of the study respondents felt that the relationship between the two functions needed to improve.
It is not surprising that the primary reason for discontent between the two functions was the contracting process. The biggest fear that most legal departments have is whether the procurement function can ensure that the contracting terms will be adhered to the post contract awarding. This may seem like a paradoxical situation. If the procurement function gets into contracts with suppliers in the first place, why would it not want to adhere to them?
Several factors result in maverick or off-contract purchases. Most of these occasions are primarily ad-hoc purchases, where buyers resort to buying from whichever supplier is available quickest and at the most opportune time. More maverick spending means higher total procurement costs and fewer on-time orders, which is clearly not a recipe for achieving procurement efficiency.
Research by APQC says that organizations with 16% maverick spend on average nearly $17,000 more per procurement FTE as compared to organizations with maverick spend of 1%. In fact even the on time delivery percentages for such organizations was nearly 6% lower than their peers. It is, therefore not surprising that legal teams have doubts over the correct execution of contracts by the purchasing/procurement department.
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Why should you use Zycus iContract for collaborative contracting?
The need of the hour is for the contracting process to enable collaboration between the procurement and legal functions rather than be a cause for dissent. At a strategic level there is a growing need to redefine the relationship between the two functions. Collaborative contract solution needs to ensure
- Real and incremental savings
- Improved contract outcomes
- Better process streamlining and compliance
- Mitigation of risks while taking advantage of dynamic market conditions and better renegotiation
- Proactive and collaborative management of change
- Powerful analytics that deliver strategic value
All this is easier said than done. It is imperative that a process is created within the organization that makes contract authoring, creation and management simpler. Although getting buy in from employees in the procurement and legal teams is important, the first step to have an effective process in place is to invest in the right technology.
Collaborative contract solutions should be able to foster collaboration by providing clause libraries and standard contract templates that ensure contracts don’t miss out on any mandatory clauses and terms. This will help in reducing the time for legal review as well as ensuring minimum exposure to risk.
Although it should provide a sufficient collection of standardized clauses and templates the contract management solution should also have customizable Contract Management workflow that permit the insertion of clauses that help organizations take advantage of market conditions and supplier discounts.
There should always be room for renegotiation, especially for volatile commodities. This can be achieved by putting clauses like escalation/de-escalation clauses or conditions on contract renewal based on prevalent commodity market prices that insure the organization against volatility risks.
Read our blog- 4 Lurking Dangers that Compromise Effective Contract Risk Management
What are the three major stages of collaborative contract solutions?
Contract Authoring
The collaborative contract solution should be able to create contracts with pre-defined workflows that not only incorporate feedback from all relevant stakeholders during the contract creation process but also take care of exceptions and approvals. The authoring process can be made easier and more compliant by having a central template repository that contains all pre-defined clauses.
Legal teams should have access to this repository to continuously update the latest clauses and ensure that the organization has no unforeseen risk in getting into the contract. All contracts should be housed in a central repository where they can be tracked and managed. The contracts should also be easily available through simple search processes to ensure easy access to all necessary stakeholders.
Contract Negotiation
Contracts should contain well-defined service level agreements (SLA), which are transparent to suppliers. The contracts should be the basis of all supplier performance measurements and should be the guiding factor in defining the KPIs for all supplier performance management processes.
Alerts should be configurable within the contract management software for tracking compliance both for users within the organization as well as supplier performance to contracted terms. Besides compliance alerts the solutions should also have alerts for contract renewals so that evergreen contracts don’t get renewed repeatedly without the scope of renegotiation-something legal teams always have in their cross hairs.
Collaborative contract solutions should be able to match contracts with spending data to help track any maverick spend and in turn provide potential opportunities to save. Analytics should also be provided on supplier performance in terms of discounts adhered to and quality.
Read our latest blog- The Ultimate Guide to Contract Performance Evaluation
Contract Signoffs
Electronic signatures have to be mandatory for any contract management solution implemented and should be enabled during various stages of the contract creation and approval process.
What results to expect from collaborative contract solutions?
An effective collaborative contract solution such as Zycus iContract can result in the following benefits
- Risk mitigation due to increased visibility into existing contracts
- Improved contracting process and reduction in overall cycle time
- Adherence to regulatory compliance requirements due to increased tracking of contract compliance
- Increased compliance to terms and conditions
- Spend compliance ensuring sustained savings. In fact, a recent survey of nearly 600 procurement professionals suggested that doubling contract compliance leads to a near 600% increase in savings generated through spend management activities
- Better collaboration due to standardized processes and agreed SLA’s between Legal and Procurement as well as procurement and supplier
Frequently Asked Questions on Collaborative Contract Solutions
What are the advantages of collaborative contracting?
An effective collaborative contract solution can help organizations generate sustained savings and build effective supplier relationships. But one of the major benefits of implementing a robust contracting solution-that both stores and authors contracts-is increased collaboration between procurement and legal working to the benefit of both.
Procurement is able to drive sustainable savings and meet its goal of being a strategic value contributor to the organization while legal teams are able to mitigate risks to the organization and ensure control and compliance.
Related Read:
What is Contract Lifecycle Management
Contract Management Skills Every Successful Contract Manager Should Develop
