Contract Management Best Practices for Procurement

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We’ve all seen the headlines of what happens when procurement goes wrong at a very large company. Stocks dive, trust disappears, and in the worst cases, CEOs are carted away in handcuffs. With procurement contracts worth tens or hundreds of thousands of dollars, the stakes are high and you can’t afford to leave your procurement contract management processes to chance.

Any corporate lawyer will tell you that “oops” is not a viable defense to a procurement compliance headache. Here, we outline some of the common pitfalls in procurement and how companies can create watertight processes for managing their contracts.

Common Problems in Procurement Contracts

International business law firm Osler says when drawing up procurement contracts, it’s best to aim for clarity instead of bloated language and overly specific requirements. “The more criteria a selection process uses, the less likely that winning bidders will be 100 percent compliant with them, and the more likely that that selection will be challenged,” Roger Gillott and Paul Ivanoff wrote.

Litigation risk comes from both errors in bids and the procurement process itself, they said, but many buyers find themselves in trouble when they are too prescriptive. They recommended companies use language requiring “substantial” compliance, which gives you the flexibility to ignore a bid’s minor technical flaws while still considering it fairly. Considering bids when one partner already had the contract was especially fraught, they said. 

“Purchasers wishing to ensure that they do not breach their duty of fairness to bidders – and that they receive the benefit of being able to choose the best vendor – should consider how to redesign their processes and train their staff so that the incumbent’s advantage of holding information that no one else has is minimized.”

A contract lifecycle management (CLM) platform helps ward against procurement contract mistakes. It supports supplier management, invoice approval, purchase requests, orders, spend reporting, and integrations with other systems. Having a CLM with built-in workflow rules will ensure clauses are consistent, the legal team has control over all the language used, and that contract production and redlining are governed by clear, one-way workflows.

Contract Management Lifecycle Tools Limit Procurement Liability

Business advisory behemoth Gartner says understanding an automating a CLM can limit a company’s liability and increase its legal compliance. In its first comprehensive report about the benefits of contract lifecycle management tools, Gartner said the workflows enforced by the platforms had virtuous flow-on impacts like better governance and deeper insight into contracts and the work they governed. 

“Organizations without CLM struggle to manage their contracts effectively. The risks associated with poor contract management include overlooked penalties, lost revenue, damaged brands, and lost savings. Even poor contract administration can lead to lost contracts, unexpected renewals and expirations, and hidden clauses that leave a company open to liabilities.”

The Forrester Wave’s Contract Lifecycle Management For All Contracts sets out the key benefits of this kind of software:

  • Contracts are stored in a single electronic repository with consistent clause tagging. This means the organization can easily access contracts for management, comparison, audit, and governance needs.
  • Once they’re tagged with metadata and in one location, contract requirements can be integrated with other systems. For instance, purchasing, order management, distribution, and invoicing systems, which can increase the efficiency of the entire company.
  • Reporting is possible over the entire portfolio, allowing for the discovery of risks, obligations, and unreasonable costs, as well as the ability to pull everyday useful data like all contracts relating to a single supplier or customer, and all those due for renewal in a particular quarter or month.
  • Having a CLM clause library democratizes the contract production and redlining process. It allows the legal team to control the language in each clause and how they are used while facilitating other team members to manage the contract workflow. With legal teams frequently representing the highest cost per hour for many businesses, company leaders are incentivized to develop a one-way contract workflow.

How to Implement the Right CLM

It should be plain now that a contract lifecycle management tool has huge benefits for your business. So where do you start? Here are a few tips, based on our experience:

Articulate Your Procurement Goals

What are your top priorities for improving procurement? Is it compliance, speed, cost? Do you have a contract leakage problem or a retention issue? Figure out what you’re solving for and develop goals.

Streamline Contract Creation

Audit your existing contract production, negotiation, fulfillment, financial, and renewal processes. Look for double handling, error-prone processes, and handoffs. Find areas you can improve workflows.

Identify the CLM Features You Need

Of the benefits listed above, rank your requirements in order of importance. Consider security – does the software have role-based permissions to facilitate a more secure one-way contracting process? Is it built with procurement in mind? Is it committed to your kind of business? Does it have the automated reporting, communications, and renewal initiation tools you need to empower your team to understand what’s really happening with your procurement processes and improve them?

Once you have defined clear goals, spotted the gaps in your existing process, and figured out how CLM software can help streamline and protect your procurement process, you’re ready for a CLM. And when you are, give us a call.

Anapact is an elastic contract lifecycle management platform that is designed to work across the entire organization. It has a robust set of tools designed for helping you develop procurement workflows that simplify contract development, integrate seamlessly, increase insight, and protect your company from liability. 

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- About the Author

Louis Balla
Louis Balla
Louis is the Co-Founder of Anapact and partner at Nuage, a top rated ERP consulting firm based in Venice Beach, California.