Procurement is an essential part of any business because it encompasses the sourcing and obtaining of goods and services. Any time a business buys something, it requires a procurement process. Though the term ‘procurement’ technically refers to the point of purchase, it is the process overall that ensures quality, value and compliance through careful management. That management process is based in contract management strategies because procurement in business must always use contractual agreements, to keep everything and everybody involved accountable.
The procurement process
Just as the Contract Life Cycle is comprised of well-defined phases, so the procurement process is also broken down into seven clear steps.
Identification of need
Before any purchasing decisions can be taken, the business must first identify the need. This sounds very straightforward – for example, the need for a new office photocopier is perhaps easily identifiable – but best practice dictates that the more detail specified at this stage, the more efficient the procurement process becomes. It may be clear that a new photocopier is required, but if the identification of need also includes the photocopying functions that are needed, along with the expected costs of ongoing supply – such as paper, toner, servicing and electricity consumption – then any purchase decision is informed by as much accurate information as possible.
Research and due diligence
With highly detailed need identified, research of suppliers and due diligence is required. This is, at first, an exercise in long-listing and short-listing. In the example of the photocopier, the detail of the need is used to whittle down potential suppliers to a short-list. Due diligence is then applied to that short-list to identify the best possible photocopier supplier. This would include:
- Overall unit price
- Servicing options and costs
- Background check on the company and individuals involved
This step is designed to reduce risk by guiding decision-making to the supplier that not only provides the best value, but which is also the most likely to be reliable in quality and delivery and is least likely to cause legal disputes and issues for the business.
Once the preferred supplier has been selected, negotiation can begin. This will include price and timescales and will be impacted by the nature of the agreement. For example, a large purchase of numerous units may warrant a better deal, or the length of service may allow for flexibility.
Execution of purchase order
Once the terms have been agreed with the preferred supplier, the purchase order can be executed – that is, the agreement is authorized and the purchase process can get underway. The purchase order forms a contract between the business and supplier, which means it must clearly set out the terms, conditions, costs, and timescales for the procurement. The contract is executed once both parties have accepted and authorized the agreement.
When delivery is made, the business must implement a documented process of quality assessment, whereby acceptance of the goods or service is authorized. This is a significant step in terms of risk management, as raising issues with a received item is far more difficult and complex than refusing an inadequate delivery for failing to meet expected standards, as set out in the legal agreement.
Processing of invoice and payment
The point at which the invoice and payment is processed can be impacted by the nature of the agreement – whether it is a contract for supply over a longer term, or whether it is a one-off purchase, for example. Whichever terms apply, this is a stage that involves the Accounting or Finance Department to higher degree and requires the reconciliation of the purchase order, the delivery documentation and the vendor invoices. This reconciliation of documents is intended to surface any discrepancies before payment is made.
When a business makes a purchase, it is essential for the documentation supporting that procurement process to be stored appropriately, for accounting and auditing purposes. The documentation will need to be stored in such a way, and for such a length of time, as to comply with all internal and external data and financial regulations. These records should also be maintained for future use, as a data source for due diligence in later procurement processes.
Procurement contract management
In understanding the procurement process we can understand the need for procurement contract management. Every purchase made by a business constitutes a contract and contract management optimizes business operation through increased efficiency and productivity. Procurement contract management therefore streamlines the procurement process while supporting compliance and risk reduction across the entire operation. It is simply a sub-set of overall business contract management, and relates specifically to Third Party agreements, including customers, vendors and partners.
It is an important contract sub-set, however. The selection and maintenance of Third Party relationships can have a notable impact on revenue. Every contract represents a nexus between businesses that is also a point of vulnerability, so it is of the utmost importance to choose suppliers who will not cause damage through that connection. This includes through their own processes and procedures, their own levels of compliance, and their own risk management.
For these reasons, procurement contract management strategies should reflect the same Contract Life Cycle approach as the rest of the business. Not only does this ensure a whole-business strategy for agreements, but it also allows for the implementation of an end-to-end digital solution for contract management that encompasses the needs of an effective procurement contract management system. The Contract Management Software designed by Symfact takes these needs into account and delivers a powerful product that serves procurement specifically, and the business as a whole, with a comprehensive set of contract management tools.
- Centralized repository – Symfact’s Contract Management Software platform is built around a centralized repository, streamlining the storage of documentation in such a way as to transform it into a single data source. This means that all documentation is available for use in due diligence processes with the powerful customizable reporting tools of the system applied. Furthermore, the centralized repository allows for the creation of a template library including approved terms, conditions and clauses. This enables standardization of all contract approaches and, specifically, the standardization of expectations in terms of procurement.
- Third Party risk management – All contracts generate risk, so risk management is a central feature of Symfact’s Contract Management Software. The system incorporates tools to create intelligent questionnaires, risk assessments and risk profiles, along with links to leading databases to facilitate comprehensive background checking of businesses and the individuals involved with them. This type of insight allows for decision-making based on accurate, up-to-date information, gathered in real time.
- Permission-based access – With a platform design that utilizes cloud technology, Symfact’s Contract Management Software facilitates permission-based access. This means that authorized personnel can work securely from any location, anywhere in the world, provided there is an internet connection. In terms of procurement, this means that the purchasing function of the business can continue without disruption and in a way that reduces carbon footprint at source. It also ensures that procurement cycles are shortened, while data is kept secure.
- Electronic signatures – The electronic signatures feature of Symfact’s Contract Management Software allows for contracts – including procurement contracts – to be authorized quickly and efficiently. Not only does this speed up procurement cycles, but it also adds an extra layer of security due to the additional digital verifications required for electronic signatures to be used.
- Automated workflows – In general contract management processes, automated workflows build efficiency in the core of the operation by removing the risk of human error in the timely scheduling and assigning of contract management and project tasks. In procurement contract management, automated workflows can help to speed the procurement cycle, ensuring that the purchasing process is moved through its stages – from identification of need to record maintenance – in a highly efficient way.
- Audit trails – Compliance is an important part of procurement contract management and Symfact’s Contract Management Software supports this through automated audit trails. All activity is logged, increasing accountability and improving performance across the board. Moreover, when the procurement cycle reaches the stages of greater involvement for the Finance or Accounting Departments, all the information required for full reconciliation of documentation is available.
There is increasing emphasis on the concept of contract management throughout businesses of all types and size, and with good reason. Effective contract management strategies can boost revenue and enhance reputations in the long-term. These types of approaches can future-proof an enterprise, and ensure business continuity in times of international health crises and environmental challenge. But the importance of emphasis on procurement contract management should not be underestimated. While contract management strategies can build efficiency in the heart of the operation, ensuring that procurement contract management is specifically handled well can mean the difference between full control, and halfway measures.
Best practice calls for the development of a culture of contract management strategy that permeates the entire business and is particularly central to the operation of those business areas that connect with external contacts. This means that procurement requires as much stringent review as areas such as the Legal or Human Resources departments in order to keep full control.
Contact Symfact today to discuss how your procurement contract management can be helped with Contract Management Software.