Foundations to Deliver Procurement Success

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In this article we explore the foundations used to build successful procurement capabilities and ask if the balance of business investment is correctly aligned for its long term success?

The foundations for creating successful procurement capabilities can typically be placed into one of three categories:

  1. People
  2. Process
  3. Technology

Organisations around the world invest huge sums of time and money to ensure their businesses optimise Procurements value within these three areas. Yet, there is a fourth foundation which for many organisations remains overlooked from an investment and focus perspective.

  1. The Contract

To ensure we don’t confuse The Contract with Contract Management, we need to differentiate the two. If we consider Contract Management the creation and ongoing management of the contract, then The Contract would be the written word.

When The Contract is inappropriately used it can impact the business are arise to complaints such as:

  • Protracted negotiations: Negotiating elements not relevant to the requirement, typically caused by using the same contract regardless of the requirement. Resulting in delays and higher business costs.
  • Contracts lack flexibility: The business requirement has not been aligned to the correct contract type, contracts can offer significant flexibility when used correctly.
  • Failure to engage Procurement early: Because no value is identified by the business for engaging with procurement earlier. This can be the root issue for many within procurement. The question is, what has Procurement done to demonstrate it’s value?

Is The Contract’s value overlooked?

To identify if/why The Contract might be overlooked; we should review the value a Contract can offer the buying organisation;

  1. Provides the legal framework and manages failure
    For many businesses this is the only value The Contract offers. In the event the supplier fails to deliver the contract, the process for remediation and/or termination is defined.
  2. Maximises business flexibility and/or savings
    The type of contract used in the engagement can have a direct impact on the buyers business, for example a Commitment Contract can be used to maximise business savings where as an Uncommitted Contract could maximise the businesses flexibility. Ensuring the right contracting structure is applied could be a key element in delivering a successful outcome for the business and maximising the potential business value.
  3. Encourages supply chain collaboration
    Contracts have a direct impact on how the supply chain engage with the buyer. For example a Framework Contract would drive a different supply chain response than a Fixed Price contract. Collaboration is based on trust, transparency and achieving mutual financial benefit, this can be managed through The Contract. Applying a contract model to maximise collaboration opportunities may sometimes offer greater value for the buying organisation than achieving a lower price.
  4. Drives culture between Buyers and Suppliers
    Many people believe culture between buyer and supplier is based on human interaction but that is only half of the relationship. The second part is established between the two organisations which is influenced by the contract, not just the terms used within the contract but also the type of contract. How does the contract address aspects such as managing market volatility, encouraging collaboration, building trust and respect. The type of contract used can influence the culture at the business level, which impacts the culture at the human level.

We have just listed 4 business benefits of the contract and that is not an exhaustive list, but it services to remind us that The Contract is more than just a piece of legal documentation.

Does it matter?

We started by talking about People, Process and Technology, and whilst organisations continue to invest in these areas, it is important to consider The Contracts influence.

People: Ensuring the right talent is attracted and retained can be influenced by the value the individual feels the business places on them. Using the same contracts regardless of the requirement mitigates one of the key values of Procurement “Advice”. We talk about Procurement becoming a trusted advisor to the business but to achieve it Procurement needs to demonstrate Value. When Procurement has the skills and capabilities to articulate the different business values that can be achieved from the different contract types, it can increases an individual’s value and the value placed upon procurement.

Process: Procurement is a process that can be done a thousand different ways. Institutions such as NIGP and CIPS provide “best practice” guidance, enabling adoption of common procurement principles. However, the process may still alter depending on the type of contract used. Let’s not confuse this with the type of procurement engagement used i.e. a competitive dialogue or auction, instead we are talking about the process undertaken to reflect implementing different contract types. For example a Framework Agreement is different to a Piggyback Agreement and the procurement process alters accordingly.

Technology: There has been a surge of new technologies implemented within procurement over recent years, they may be used to automate an aspect of the process and/or drive new value. For example Contract Modules can speed up the contract negotiation process and eAuction modules offer new levels of saving opportunities. However, technology is designed around optomising and automating the Procurement processes which we have said can be influenced by the type of contract used.

Summary

The Contract is much more than a legal piece of paper, it not only impacts the buyers business, it can also heavily influence the supply chain and the value the business identifies from procurement.

People, Process and Technology will continue to be core areas for investment, but let’s not forget they are based on that piece of paper in front of you.There are many different types of contract and numerous commercial models that can be applied, all to drive different business outcomes.

Procurements success is based on their customers recognising procurements value and how procurement delivers success for their customers. The Contract is a tool that should be applied to maximise procurements value into the organisation.

Examples of some common contract types:

  • Committed Contract. The buyer has agreed to procure the requirements at the agreed price. When buyers use supplier contracts, this is typically the type of contract the suppliers offer.
  • Uncommitted Contract. The buyer has implemented a contract with the supplier, but there is no guarantee of the buyer procuring anything.
  • Hybrid Contract. The buyer commits to procuring a portion of the requirement with the remainder uncommitted. Typically the split is 80/20 hence it’s also known as a 80/20 contract
  • Framework Agreement. Implemented between multiple buyers and multiple suppliers, and is similar to an uncommitted contract.
  • Piggyback Contract. A committed contract model, which is also able to be re-used by other buyers to procure the same requirements.

Each of these contract types offer different business values from increased business Flexibility through to maximising Savings.

The diagram below may assist in positioning The Contract and its core benefits:

Organisations may use contracts in many different ways to drive different business value, some people may even disagree with the above diagram. The diagram is a guide, it’s to ensure you are aware there are different types available and can identify the contract types used/supported by your organisation.

The Contract is a critical asset to Procurement, it offers an opportunity to demonstrate knowledge, expertise and drive business value. The Contract is critical to a company’s success and the one area of business that should know more about it than anyone else is Procurement/Contract Management.

Becoming a trusted advisor to the business means applying knowledge to guide and advice on how to use Contracts to deliver maximum benefit for the organisation. If one ignores The Contract then you have to ask, is Procurement really building the foundations to deliver long term success for their organisation?

The Contract is a critical asset to Procurement for demonstrating knowledge, expertise and drive business value.

Further information on The POD Model:
Our book The POD Model is available on Amazon. If you require additional information please contactmike.robertson@podprocurement.com. The POD Model is protected under international Copyright.

Author: Mike Robertson
Mike created The POD Model because he believed “there has to be a better way”. He has many years experience negotiating and managing public and private sector contracts and assists organisations in maximising value from their contracts and implementing The POD Model.

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Procurement and Supply Australasia (PASA) is the leading provider of information and education to procurement and supply professionals throughout Australia and New Zealand. PASA supports the largest community of engaged procurement stakeholders in the region, through its renowned series of events, publications, awards, plus various community and network building activities. PASA is a trading name of BTTB Marketing, for many years recognised as the leading producer of conferences and events for the procurement profession in Australia and New Zealand. Whether producing under the BTTB, CIPSA Conferences or now PASA brands over the last ten years, our events have consistently led the market in terms of both educational and networking opportunities.

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