Driving Collaboration with Contract Management — Part 1

The contracting process has always been a major point of discontent between procurement and legal functions within an organization. Part 1 of this 2 part series provides a brief overview into the reasons for the collaboration challenges between procurement and legal departments. Part 2 of the series look into the technology and process initiatives that enable a collaborative relationship between the two functionaries.

A recent study by IACCM throws up several results that suggest that the relationship between procurement and legal teams are less than cordial in most organizations. Nearly 70% of the study respondents felt that the relationship between the two functions needed to improve. It is not surprising that the primary reason for discontent between the two functions was the contracting process.

Contract Collaboration

Legal teams look at contracts as tools to streamline processes and establish strict controls while procurement looks at it as the first step in establishing cost savings and supplier relationships. With the economy becoming vastly different — with supply chains becoming growingly interconnected and vast- these disparate perspectives of the contracting process have brought their own unique challenges for both the departments. Legal teams now have to handle a much larger number of contracts in multiple languages and with a wide variety of, at times very specific and unique contracting terms and conditions.

Procurement, no longer a tactical function, needs to develop long term strategic relationships with suppliers and add more value to the company’s bottom line. This needs contracting to be more flexible to generate additional savings and contribute in value creation. This may include insertion of necessary clauses that help them take advantage of dynamic marketing conditions — say for e.g. escalation and DE-escalation clauses for highly volatile commodities.

So on the one hand as legal looks into standardizing the contracting process, procurement on the other hand needs more flexibility. This is one major reason of discord between the two functionaries. The other area of concern includes the contract creation process. Procurement with its need to take advantages of prevalent market conditions and the supplier’s disposition to discounts at the time of negotiation needs the contract creation and execution cycles to be as short as possible. Legal teams on the other hand have a primary responsibility to ensure every contract is free of risk to the organization and hence may take frustratingly long periods to go through minute details in all clauses within the contract. This may result in procurement missing out on additional savings based on time discounts or market variations.