Profits from Contract Management

Contract agreements within organisations are often limited and fragmented. "It is then limited to the start and end dates and the details of the person responsible for that supplier," Leppers said. The end date is only a small piece of the puzzle, he continued.

"Contract Management encompasses much more. At least, it should." He points first to finding and selecting the right suppliers, also known as Sourcing. This is followed by steps such as drafting the contract, approving it internally, signing it (digitally) and then monitoring its use.

Contract monitoring obviously includes financial terms, such as agreements on price and the conditions under which the price can change, as well as any price indexations and bonuses. If you miss agreed bonuses, it costs money. Unclear indexations lead to unpleasant financial surprises. Having multiple suppliers for the same product or service is inefficient for the entire chain, including on the finance side. In addition, performance matters, such as quality and delivery times, and so do the necessary certifications. "There is often a lot of focus on establishing a contract, which is a process that can take months. But that's just where it starts. An average contract lasts as long as three to five years. And the execution of a contract is really all that matters. So that deserves more attention." 

For example, notice periods. "If you cancel a contract once in a timely manner, you avoid tacitly renewing it. You then don't have to pay unnecessarily for services, and you've already recouped the investment for a Contract Management solution right away."

Leppers adds that understanding all of the organisation's expenses is a necessary condition for good contract management. "You want people in the organisation to use the existing contracts. These must be known to everyone. At the same time, all sorts of things are being procured outside of contracts. This item, which we call off contract, sometimes comprises as much as 40% of all expenses. There's a lot to be saved on that." 

Usually a negative event triggers action, Leppers observes. "For example, if an audit reveals that agreements are inadequately recorded or by order of a regulator." To illustrate, he points to the financial sector. "There, compliance is a very important issue. Banks and insurers must be able to demonstrate that all suppliers are compliant with laws and regulations. All dangers to one's own services must be covered." 

Delivery uncertainties are also a trigger for action. "Take the bicycle industry. Many parts are produced in Southeast Asia and assembled in Eastern Europe. During the pandemic, demand for bicycles increased while production stagnated. You have a big problem if it turns out that there are no clear agreements on deliveries and prices." 

"But something doesn't have to go wrong first," Leppers stressed. “You can do without the mistake in this case, because you'll be too late." The first benefit of active contract management lies in selecting suppliers. "From a sourcing system, you can simultaneously query different market participants on various aspects. Based on the answers, you make a choice." 

The contract can then also be created digitally. "No more complicated reviews or versions, just everything in one system. When an employee changes jobs, not all information is lost. Mutual agreements are not in all sorts of loose Word documents and email messages but are simply in your system."

Once contract creation is fully digital, signing it digitally is a natural next step. "Lawyers often still value a wet ink signature, though digital signing is widely accepted and legally valid in Europe," Leppers stated. "The digital verification of the persons signing is actually more secure than the old-fashioned signature." 

The advantages of digital contract signing are many: independent of time and place, more efficient and faster. "Take, for example, contracts with health care providers, which must be periodically renegotiated. In a recent example, of 1,800 contracts, 90% had already been signed in one week. That would have taken a lot longer had it been done physically, not to mention the (postage) costs and environmental impact of printing."

This article was produced in collaboration with Executive Finance.