The complex relationship between contract managers and their procurement counterparts features a core value expressed by both parties: improving business results. Contract managers are in charge of handling all of the contracts in an organization and effectively managing their full lifecycle. Meanwhile, procurement specialists work with suppliers to obtain products and services at a desired cost, and develop supply management plans detailing their approach.
However, these two critical departments may not always be on the same page due to their unique goals. While contract managers are concerned with making sure contracts are approved by their legal team, procurement specialists are more concerned with acquiring products/services efficiently. If a supplier is found to have performed illegal activities or is facing potential corruption charges, serious compliance implications can arise and introduce substantial risks to the organization.
What is contract management in procurement?
Contract management in procurement is the systematic process of managing contracts from their creation to execution, ensuring compliance with the terms and conditions agreed upon by all parties involved.
In the context of procurement, it involves overseeing the entire lifecycle of contracts related to acquiring goods, services, or works, ensuring that both the buyer and supplier fulfill their obligations effectively.
Key aspects of contract management in procurement include:
Contract Creation and Negotiation: This phase involves drafting the contract terms, negotiating with suppliers, and finalizing agreements that align with the procurement strategy. The goal is to secure favorable terms while mitigating risks.
Contract Execution: Once a contract is signed, it's essential to monitor the execution phase. This includes tracking deliverables, timelines, and performance standards to assure that suppliers meet their commitments.
Compliance and Risk Management: Procurement contracts often include clauses related to compliance with legal and regulatory requirements. contract and procurement management software confirms that these obligations are met, reducing the risk of legal disputes or non-compliance penalties.
Supplier Relationship Management: Strong contract management in procurement software promotes positive relationships with suppliers. By maintaining open communication and addressing issues proactively, procurement teams can build trust and encourage long-term partnerships.
Performance Monitoring: Regularly evaluating supplier performance against the contract's terms is vital. This involves evaluating factors such as quality, timeliness, and cost-effectiveness, and taking corrective actions when necessary.
Contract Renewal or Termination: As contracts near their expiration, procurement professionals must decide whether to renew, renegotiate, or terminate the agreement. This decision is based on the supplier's performance, changing business needs, and market conditions.
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Common Problems in Procurement Contract Management
Procurement contract management often encounters several challenges that can impact efficiency and effectiveness. Addressing these issues is key to optimizing procurement processes.
- Unclear Contract Terms: Incomplete or poorly defined contract terms can lead to misunderstandings and disputes between parties.
- Inefficient Tracking: Difficulty in monitoring contract milestones and supplier performance can result in missed deadlines and compliance issues.
- Regulatory Non-Compliance: Failure to meet legal and regulatory requirements can lead to penalties and reputational damage.
- Insufficient Risk Management: A shortage of a risk management plan can leave organizations vulnerable to unforeseen challenges.
- Poor Communication: Insufficient communication and collaboration with suppliers can cause misaligned expectations and unresolved issues.
- Manual processes: Depending on manual contract management processes increases the risk of errors and slows down decision-making.
- Contract Renewal Challenges: Managing contract renewals can be difficult, leading to missed opportunities for renegotiation or cost savings.
Why is contract management for procurement important?
At every point of the contract lifecycle, procurement contract management is essential for ensuring that businesses meet their strategic goals while lowering risks and maximizing value.
During the initial stage, procurement managers are essential in choosing suppliers with products or services that match the company's objectives. For instance, the procurement manager must ensure that suppliers follow the same environmental guidelines if the organization prioritizes sustainability.
Procurement contract management assists in the identification and mitigation of risks during the execution phase, which can range from supply chain disruptions to bigger geopolitical difficulties. To predict possible problems and put plans in place to deal with them, managers need to perform detailed risk assessments.
At the end of the contract lifecycle, procurement contract management concentrates on getting the most out of the deal. For example, while managing a concrete supply contract for a building project, the procurement manager is in charge of checking the product's quality against the requirements of the contract, corresponding with the supplier, and being ready for any necessary contract renewals or renegotiations.
Establishing a strong relationship with the help of a contract management system is imperative to align both departments and prevent third-party vendors from negatively affecting the compliance standing of an organization.
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Top 5 Best Practices for Managing Procurement Contracts
- Understanding the Procurement Landscape
Contract managers have a deep understanding of each contract with employees and partners in their organization, but gaining deeper insights into the procurement process of goods from suppliers could pay dividends.
Communicating with the contract procurement department and understanding the type of suppliers they choose to do business with and how they obtain them is crucial. The contracts in place need to accommodate procurement expectations and make sure they remain compliant.
- Collaborate on Supplier Contracts
When procurement specialists are vetting new suppliers and their business practices, contract managers should work closely with them to note specific compliance concerns. Whether the third-party vendor has a history of illegal behavior or run into issues with federal regulators, contract managers should help procurement negotiate terms to ensure the organization remains protected. Contract managers should provide procurement with key details into the compliance expectations of the organization and provide feedback when new contracts are created.
- Automate the Request Process
Contract requests are always the first items on the list when a new contract is drawn up. When procurement strikes a new deal with a supplier, manually inputting contract requests can be time consuming on their hand, and tedious on contract managers too. A centralized and automated platform for contract management can prioritize requests by dollar amount and guide managers with which they should tackle first. In turn, supplier contracts can be organized by type and funneled through automated workflows to direct them to the legal team for approval.
- Streamlining Using Contract Management Software
Once a request has been approved, negotiating contract terms with the procurement team can be accomplished on a centralized platform where all documentation can flow to the appropriate users. Greater visibility into the lifecycle of each contract provides valuable insights into the negotiation stage and the current status of a document.
By having all departments collaborate on the same platform, the procurement team has direct control over supplier contracts and the stage they are in.
Revisions and updates are simultaneously shared from one party to the other, enabling the legal team to review and approve documents without ever leaving the system. Once a contract is approved by legal, electronic signatures can be recorded within the system instead of having the document shared over fax or printed for a handwritten signature.
With the final signed document, the contract can finally be executed throughout the organization and securely stored in a central document library. Contract managers can keep tab on obligations agreed upon with their organization and supplier, and keep track of all that information in full audit trails.
Procurement and contract managers can also be aware of upcoming contracts up for renewal and undergo renegotiation if needed.
- Monitor and Optimize Contract Performance
Monitoring and optimizing contract performance is essential to secure that suppliers fulfill their obligations and deliver value. A proactive approach enables procurement and contract managers to identify potential issues early, minimizing risks.
By tracking key performance indicators (KPIs) such as delivery timelines, quality, compliance adherence, and cost savings, organizations can regularly evaluate supplier performance and make informed decisions about renegotiations if necessary. Leveraging data analytics further provides insights into performance trends, helping to spot inefficiencies and uncover opportunities for cost optimization.
Regular contract audits are also important to ensure both parties are adhering to legal and financial terms, keeping contracts aligned with business goals. Ultimately, continuous monitoring and optimization of contracts lead to stronger supplier relationships and greater procurement efficiency.
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Learn how Convergepoint contract management software can make the procurement process easy
By leveraging the power of automated procurement contract management software, like ConvergePoint’s, contract managers can speed up the contract lifecycle from new supplier agreements and track their progress in real time.
Since procurement will have worked hand-in-hand with contracts managers to draw up new contracts, they will be more connected to the compliance expectations of the organization and mitigate compliance risks across the board.
Allowing your contract procurement department to focus on strategic initiatives while enjoying the benefits of enhanced control over the contract procurement management process.
Count on ConvergePoint to enhance your contract management practices, empowering your procurement team to focus on strategic priorities while gaining improved control and efficiency in the contract management process.
Talk to a compliance specialist today to learn how our Contract Management expertise can be applied to your business by scheduling a demo now.