Procurement Contract Risk Management
As pointed out by JP Massin in his Strategic Sourcing Europe blog, APICS and Protiviti recently released a study on Procurement Contract Risk Management.
As noted by JP Massin, the conclusion is that a large proportion of organizations need to improve the management of their procurement contract risks and opportunities. And this seems to hold true across the board, for direct and indirect procurement alike.
The study does a great job of pointing out many types of procurement contracts management risks you should be aware of:
- End-customer satisfaction risk
- Authority limit risk
- Regulatory non-compliance risk
- Information security, access, and privacy risk
- Terms and Conditions risk
- Reputation risk
- Environment, health, and safety risk
- Inventory and obsolescence risk
- Off-balance sheet inventory liability risk
- Automatic renewals risk
- Contractual and legal risk
- Employee/third-party fraud risk
- Outsourcing risk
- Efficiency risk
It also does a great job of pointing out some key capabilities a company will need to tackle these risks:
- Strategy and Policy
- Processes, Practices, and Procedures
- Organization and People
- Contracts Management Process
- Information Methodologies / Tools
- Systems and Data
And provides some great recommendations, including:
- Never underestimate the importance of having a clear process vision, and well-designed and defined objectives, strategies, and plans for the process.
- No matter how well the process is designed, it cannot be effective without the right people and structure.
- It is essential that technology be leveraged.
I would highly recommend downloading a copy of the Procurement Contract Risk Management study and reviewing it at your leisure to make sure you understand what the contract risks are, what the key capabilities you will need to mitigate the risks are, and where the major problem areas are in most companies so that you can insure they are not in yours.
The greatest challenge organizations face is that they attempt to take corrective action "after" a strategy has been implemented. Research consistently indicates that 75% to 85% of all e-procurement initiatives, of which a significant number are based upon a contract creation-compliance management approach, fail to achieve the expected results.
What is also interesting to note is that the majority of initiatives are ERP/IT-centric, and as a result often do not include the input of the very people the "solution" is designed to help - the procurement professional.
While contract purchasing has a definite place in the procurement practice, the broad application of this strategy is where the problems highlighted in the study originate. The question organizations must ask themselves is if and where a contract strategy makes sense beforehand.
Here are links t two recently published articles I have written on the subject.
Article 1 (Technology's Diminishing Role - Pags. 18, 19)
http://www.nigp.org/member/Source200610.pdf
Article 2 (How Not to Abandon your e-Procurement Initiative - Pgs. 15, 16)
http://www.nigp.org/member/Source200701.pdf
This is the second time I've heard the term "contract risk" and I continue to think it's pretty silly. To me, the risk is choosing the wrong supplier (or wrong customer if you are in sales.) The "Procurement Contract Risk" study talks of "managing the contract" as a separate task than "managing the supplier relationship" and even states that different people should perform the task. To me, a procurement professional should do both. The alternative is bureaucracy and chaos.
The paper also dismisses sourcing as a "related process" to contracting. To me, sourcing is the key process and contracts are only one tool to help manage the process of sourcing and supplier management.
In my days at HP we frequently did business with major suppliers for years with no signed contracts other than the back of purchase orders, and I think we did quite all right.
There's a good book "A Short Course in International Contracts" by Karla Shippey. In it she has words to the effect that if you pick the wrong business partner it doesn't matter how good your contract is and if you pick the right business partner, it doesn't matter how bad your contract is. And she's a lawyer, no less.
Dick Locke
www.globalpg.com
Dick: I love that (paraphrased) contract quote. That's a keeper.