The Cost of Time

What is the cost of running out of time? The Rolling Stones once sang, “Time is on my side, yes it is!” 

Unfortunately for procurement, these song lyrics rarely hold true.

by Justin Sara, Executive Regional Manager – South Australia & Fiona Nissen, Executive Regional Manager – New Zealand

For many organisations managing a suite of contracts, it is often found they are all set to expire near the end of the financial or calendar year. This has many challenges. The end of a financial year is often hectic with finalisation of projects, financial close offs, taxation and bookkeeping requirements, human resource, and performance management activities and planning for the transition into the new year. 

There are many risks associated with expiring and not-yet-renewed contracts including increased pricing, the loss of defined service standards, poor management of key performance indicators, supply chain and business disruption, and diminished (sometimes to the point of obliteration) supplier relationships. 

Lack of contract renewal or the rushed completion of a procurement project to replace an expiring contract has a cost. Allowing a category or multiple categories to cross into the domain of unmanaged spend can have significant cost impacts, with research showing that price increases of between 5% and 20% can be incurred. Clearly, spending 20% more on identical goods or services immediately post the expiry of a contract makes no sense if it can be avoided.

Due to the rush of running a procurement process at the last minute, poor commercial outcomes can be locked into the next generation of contract. We could keep operating in a just-in-time model, but it is not great for the team or the organisation.

Regrettably, the procurement team is often tarnished with the negative impact associated with poor contract renewal process. Thankfully, it is avoidable.

So, how can organisations manage to elude the end of financial or calendar year rush with contract renewal? 

 

Planning

This may be obvious, but pre-planning does prevent poor performance!

We know that procurement sourcing is often well structured and planned to ensure streamlining of the delivery required. But once the contract is in place, we forget to carry on planning!

Do you have a month in the year when you have more family birthdays and celebrations than any other month? While it happens every year, the logistics of managing the gifts, the parties and the travel is often a nightmare. And if that month happens to be December the stress magnifies!

Spreading the contract renewal, expiry or review dates of your contracts will ensure that reviews can occur throughout the year and not have to be all at the same time. Consider the range of contracts and when renewals should occur. For example, don’t have all your strategic critical suppliers requiring intensive negotiations and renewals at the same time. 

Understand your supplier needs. Do they have a different year end date to you? Will that influence their availability and possibly their wiliness to negotiate new terms? 

It is important to note that lead times to complete a procurement process ahead of contract expiry will vary depending on factors such as the effort required to transition between suppliers, your organisations approval pathways, and how long they take to navigate and maturity and structure of the supplier market. Allow for that in your planning.

 

Technology

Technology can play a major role in managing your contract suite. A good contract management system keeps track of expiry dates, automates the contract approval and renewal process, and provides clarity of responsibility throughout the organisation.

That excel spreadsheet might have worked for a smaller list of contracts, but it doesn’t give you wide visibility to the overall status or the pain points in the year. Bringing all the information into a consolidated view is vital to be able to make the right decision at the right time. Information required includes spend analysis, contractual data (such as dates), performance measures, and results and due diligence information (such as ownership alterations and financial stability).

Using technology to provide spend analysis also helps to identify options to consolidate spend across related categories which will in turn reduce the number of contracts requiring management. 

Consider what technology support would be most valuable to you and consider how you can implement over time. Many systems are now modularised and can be flexible as your procurement function adjusts to the new ways of working. Even with the best planning and systems to manage contracts and contract expiry, resourcing can be a challenge. As part of your planning, you should consider peaks and troughs in contract reviews that will impact your team’s availability to conduct the necessary work.

Should this be an issue, deploying experienced procurement resources in a targeted way can be an effective solution to bring your contract suite under control…quickly. Another option is to engage a short term resource to work through the often many low to mid risk/complexity contracts and free up your own experienced procurement resources to focus on those contracts of greatest risk. Alternatively, for contracts requiring a high degree of technical knowledge, engaging a procurement resource that specialises in a particular category will not only save time in completing the procurement but an improved commercial outcome (in terms of both pricing and risk allocations) is also likely.

Time may not be on your side when it comes to your expiring contracts but there are options available for procurement teams to manage the risk of unmanaged contract expiry and in turn avoid the poor commercial outcomes that come with not replacing a contract on time. While time may not be on your side, the Rolling Stones have also told us:

“You can’t always get what you want, but if you try some time, you find you get what you need!”  

 

If you are calculating the cost of time in your current projects and need to chat about options for support, make sure to reach out to us by contacting Jacqui Priestly at jacqui.priestly@arcblue.com.au or check out our website to see the range of support we offer to organisations wanting to deliver more through procurement.

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