The standard depiction for Contract Lifecycle Management is a circle with various stages showing contract creation, signature, management and then termination, expiry or renewal, or other synonyms. A lot of attention is put into contract creation and management but the end of the lifecycle is often taken for granted and not thought of as a stage where value can be found. I am here to challenge that notion and give you the existential thought that there is just as much value in contract death as in life. Maybe that is a little dramatic, but I want to make the point that companies are finding real value in managing their supplier base and culling the number of suppliers they manage.
This is a real issue that comes up more and more in the conversations I have with clients, particularly in large organizations with multiple business units is that software is purchased based upon an immediate local need without considering the opportunity at a global level. This can lead to two types of problems:
- Inefficient Buying: If six friends go to the store and each buy an individual can of soda, they’re paying a higher price per unit than if they bought a 6-pack together. This is also true of software licenses. There is a distinct need to invest in the license, but lack of coordination, or lack of visibility by global sourcing will likely result in an inefficient purchase.
- Duplicative Buying: In this example, let’s assume there is a need to supply coffee for the office. If one person buys a coffee machine that comes with free coffee for a year and another subscribes to a coffee bean supply service that offers a free coffee machine, from a procurement perspective there are 2 distinct contracts: 1 for coffee and 1 for a coffee machine. So unless someone checked everything that came with the contract, there would be duplicate purchases and wasted money. I see this happen with software and services contracts all the time. Platform X has a core functionality that drove the purchase, but it also has other functions which are underutilized or not even known. And then someone else in the organization buys Platform Y without checking.
So asset management systems are supposed to help with this, but they don’t always deep dive in the contracts and scopes available. The result is a larger than necessary supplier base and carrying cost. The solution? Contract Management, of course. The common exercise is to optimize the supplier base. This is sometimes called “tail” management (as in manage the tail end of your spend). But what should happen is a more comprehensive exercise:
- Assess the supplier base and stratify it into strategic, business and commodity partners;
- Compare “like for like” and identify the overlaps and opportunities for consolidation; and
- Choose the suppliers you want to retain and let the others either expire or exercise their termination rights.
Now while this is a very simplistic view of the process, the devil is in the details. The effort to go from 300 suppliers to 150 should not be underestimated, but the key takeaway is that just as there is value in managing contracts when they are alive, there is also value and money to be found in letting contracts die.