Contract Lifecycle Management – The Value Adding Function

In today’s business environment, the reliance on third-party providers has become the norm, significantly influencing how companies conduct their operations and deliver services. Consider outsourcing which has evolved into a mainstream delivery model over time, offering a broad range of services that may not be viable or practical to delivery internally.

IT outsourcing, which has been a common practice for over three decades, enabling businesses to access specialised expertise and resources beyond their own organisation. Beyond IT, functions such as finance, procurement, HR, marketing, research, and legal also form common outsourcing services, known as business process outsourcing (BPO). Customer facing operations such as the use of contact centres (inbound and outbound calling), chatbots and the use of AI to provide customer advice are also common.

Over the last 5 – 7 years, there has been a rapid expansion of IT Infrastructure as a Service (IaaS), Software as a Service (SaaS) and Platform as a Service (PaaS) models, offering scalable solutions through subscription-based services. While these solutions provide substantial value, many companies struggle with effectively managing their licenses, often resulting in underutilisation or overspending.

How much does your organisation spend with external suppliers? Removing employee salaries and on-costs and property, most organisations will be spending in excess of 60% of their cost base with external parties. Most companies interact with hundreds of suppliers, and larger corporations, like banks, engage with thousands. Despite substantial spending on external parties, investment in the supplier management function to ensure proper governance, accountability, and risk management is often insufficient and not prioritised as a core capability. This frequently results in issues such as value erosion (contracts failing to meet financial expectations), failure to honour contractual obligations and deliverables, exposure to regulatory breaches, and unnecessary scope expansions.

To provide context, imagine being posed the following questions by the CEO or Board. How many could you realistically answer?

1. Do we possess a comprehensive list of all our third-party suppliers and their respective expenditure?
2. How can we ascertain whether suppliers are fulfilling contractual obligations, and what measures are in place to quantify any value loss?
3. Where are the contracts stored, and who is responsible for their management?
4. Are the contracts easily accessible if needed?
5. Is there a centralised repository for contracts?
6. Do we have instances of duplicated supplier services or inconsistent pricing within supplier agreements or work orders?
7. Who oversees supplier management, and is there adequate governance and enterprise oversight given the significant external expenditure?
8. What portion of spending falls outside the original contract scope (e.g., variations), and is the contract still suitable for our needs?
9. Who monitors contract consumption across the organisation?
10. Are there frequent legal or commercial disputes with suppliers, and if so, what are the underlying reasons?
11. When was each contract last reviewed, and when is its renewal date?

These questions pose significant challenges, highlighting potential deficiencies supplier management function which is a sub-function of the end-to-end Contract Lifecycle Management (CLM) function. CLM focusses on both pre-contract activities such as negotiations, contracting and contract signing versus post signature activities which cover the supplier management function to ensure the suppliers deliver on contractual obligations.

An efficient CLM function to manage suppliers is crucial for maximising performance, managing costs, and mitigating risks. Companies must develop comprehensive CLM strategies encompassing, negotiation, contracting, monitoring, and compliance or suppliers. The evolution of CLM has resulted in a rise in CLM software solutions that use sophisticated AI assist with contract authoring, contract negotiations, performance management, contract analytics and management of supplier relationships.

However, CLM technology represents just one facet of the overall CLM function. Achieving effective CLM requires adopting a holistic approach to the CLM operating model. This encompasses end-to-end processes, organisational roles and responsibilities, service delivery models, governance structures, technology integration, and data strategies. By holistically addressing these elements, organisations can maximise the value derived from their CLM initiatives and enhance overall supplier management capabilities.

For a confidential discussion on how EvolveCLM can help your organisation please email us on: inquiry@evolveclm.com.au or visit our website on www.evolveclm.com.au.

*Note For the purpose of this article, Supplier Management and Vendor Management are used interchangeably. Whilst having many similarities there are subtle differences in their definitions.