Stop leaking money – start analysing your contracts

Drip Leak image credit: Freeimages.com/Vivek ChughYour organisation is wasting money. Hard-earned money that could be spent on other things. Money that’s rightfully yours. A little strong? I don’t think so. Here’s why.

Your procurement and commercial teams spend hours negotiating the pricing components of your supplier contracts. However, once those contracts are signed, where do they go? You might proactively manage your top 20 suppliers pretty tightly, but the rest of these contracts probably languish in your “repository”. This is often called the “long tail”.

Managing the “long tail”

Many businesses have a “long tail’ of suppliers, that are too small to warrant the cost of management or onboarding. These are usually businesses that are sending a handful of invoices a year. Once negotiated, their contracts are filed away and unlikely to see the light of day, until they are up for renewal, or are questioned in some way.

Put simply, this means you could be losing money every time a number of different common scenarios occur. Companies often make purchases under a master agreement without checking whether they have reached an agreed discount level. Many contracts are allowed to auto-renew, without an internal review of the actual volumes being used, as opposed to the amounts that were originally negotiated.

Each time a payment term remains unchallenged, or a benchmark is not applied, your business leaks revenue. The same goes for situations where you are buying from two suppliers at different prices and specifications. Or two parts of your organisation are purchasing from the same supplier on different terms.

As well as stopping inappropriate spend going out of the door, it is probably a very good idea to go back and review your existing contracts and past spend. Not least, identifying where the wrong amounts were paid out, but also putting measures in place to stop it happening again.

So far, so obvious. But it’s also obvious why many businesses find themselves in this situation. Many businesses have too many contracts to manage. Many businesses are growing too and don’t have the man-power to review any contracts they inherit.

It is also difficult to identify which contracts or suppliers you should be looking at, when there are too many contracts coming in. It’s a matter of survival. Finding the needle in the haystack is tomorrow’s problem.

The Holy Grail

The good news is that advanced technologies, particularly artificial intelligence (AI), are being applied to contract discovery and analytics. AI can now be relied upon to do the expensive, time-consuming manual work; that is often the deciding factor in the decision to look for lost revenue, in the first place.

Any contract analysis and ratification usually begins with a scan of all contracts, followed by the extraction of relevant clauses. Then you can make an efficient evaluation and identify which contracts are worth looking into further. Typically, this includes categories where you know governance is light, or variability is high. Telecoms or services, for example.

Contracts that warrant a deeper look may also include any agreements that are renewing in the next 3 to 6 months. Or those where you are spending revenue on things your business no longer needs. Perhaps because the volume is inappropriate or the need itself has changed. Moreover, any contracts with non-standard payment terms, or where there is benchmarking or most favoured nation (MFN) clauses, usually warrant greater scrutiny.

Has anyone checked how many different suppliers of paper your business has, for example. Organisations with multiple offices often leave some purchasing to their local offices. In some cases that may not have a significant effect on revenue. If you have 5 offices, any leakage is probably inconsequential, but if you have 100 offices, significant economies of scale come into play.

While it may seem daunting. You really don’t have to assemble an army of people to look at all your contracts. By drilling into the contracts where you are most likely to be leaking money. Focused, targeted and effective management of your “long tail’ — the Holy Grail comes within reach.

Imagine, if none of your contracts expired or auto renewed without you knowing it. Or you had the ability to review what anyone’s buying across your business. Imagine Imagine taking advantage of standardised pricing, and only paying for delivery when you should. Or taking advantage of the benchmarks and volume discounts that were negotiated at the time your contracts were agreed, in the first place.

There is still going to be some leakage, but you’ve got a handle on it. You know where to look and where to most profitably apply your time. Best of all, you are spending less money, the project has had a greater rate of return and it grows year on year.

What does this mean for your bottom line?

IACCM figures indicate that waste is typically between 4 percent and 9 percent of total spend[1]. So, if your annual spend is £1 billion, and we work on the lower percentage alone, you’re losing £40 million. Let’s also say that we can identify 50 percent of that loss – that’s £20 million. If we estimate that only 50 percent of that figure is actually recoverable, that’s a £10 million savings. How many other projects are you working on this year with that kind of ROI?

Procurement has always been seen to be about acquiring products and services for the best price. That remains broadly true today. However, procurement professionals are now under more pressure than ever to drive out cost and they are acutely aware of their need to add value to the business.

A clear view of your contracts will provide you with the analytics and guidance needed to make better business decisions. AI-driven contract analytics and discovery systems commonly uncover hidden opportunities to rationalize suppliers, negotiate better deals, and take advantage of incentives.

Another benefit of utilising the latest technology, is better risk management assessment. From a more comprehensive understanding of service-level agreements and uptimes, non-standard conditions and terms, and whether or not liabilities are covered by insurance.

Contract management and analysis has emerged as, perhaps, the most important shift in the work undertaken by commercial and procurement teams in a modern business. Historically manual contract reviews took months or even years to complete, if it was done at all. This new role demands that they look to technology to automate the process.

Isn’t it time to give your team the tools they need to do that?

1] https://www.iaccm.com/resources/?id=8200


Seal Software Logo (Image credit Seal Software)

Seal Software is the leading provider of contract discovery, data extraction, and analytics. With Seal’s machine learning and natural language processing technologies, companies can find contracts of any file type across their networks, quickly understand what risks or opportunities are hidden in their contracts, and place them in a centralized repository. Based in San Francisco, Seal empowers enterprises around the world to maximize revenue opportunities, reduce costs, and mitigate risks associated with contractual documents, systems, and processes. For more information, visit Seal Software at www.seal-software.com

 

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