Building an Effective Contracting Process — What are the challenges? Part 1
In the previous blog we discussed the significance of contract governance and the need to have an effective contracting process that monitors the contract throughout its entire life cycle.
In this blog we will focus on the challenges faced by organizations following a decentralized paper based approach for maintaining contracts. The most common issues are;
1. Lack of visibility
Disparate data spread across the offices of the organizations obstructs visibility into the following areas:
- Renewals — Evergreen contracts stand the risk of auto renewal without having the supplier evaluated.
- Key contract terms — Manual method of maintaining contracts causes discrepancy in the usage of contract terms like- no. of days for payment etc.
- Contract ownership — More often than not negotiated contracts often lie in silos in the organization with no ownership and thus no regulatory checks on contract compliance.
- Contract hierarchies — Contracts generally follow a hierarchy — Master Contract > Sub Contract > Agreement > Sub Agreement. Many a times since the hierarchy is not visible, sub contract can be mistaken as master contract, thus amendments get incorporated in the wrong contract.
2. Issue with compliance
Lack of visibility often makes it difficult to track contract utilization. This results in following compliance issues:
- Purchase price compliance — Lost contract, lack of contract ownership often results in a difference between the actual price paid and the negotiated price mentioned in the contract.
- Control maverick spend–Often purchases are done outside the scope of agreed contracts from a different vendor.
- Visibility into existing contracts — Procurement function may enter into a new contract in spite of an existing contract, as the original contract is misplaced.
In the next blog we will discuss 2 more challenges plaguing the organizations.
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