Businesses work through effective collaborations. No organization can survive without the cooperation of others. So, whenever an organization collaborates with another, some underlying principles govern their relationship. Without those principles, business relationships and their ultimate goals will have to suffer. Contracts are legally binding documents between two or more parties that define their obligations to each other.
Procurement is inextricably related to contracting as procurement concerns the negotiation and fulfillment of certain obligations. Thus, an effective contract management strategy is crucial for ensuring the profitability of an organization. Sometimes, a single loophole in a procurement contract can cost a huge price for the company. Let's look deeper into the significance of contract management in procurement.
What is contract management?
Contract management is the process of managing contract creation, execution and analysis to improve operational and financial performance while reducing financial risk. It comprises negotiating terms and conditions in the contract as well as ensuring compliance with the mentioned terms. In procurement, a contract is a written agreement between a buyer and seller in which the buyer agrees to purchase the goods/services on a payment basis. A procurement contract will define the obligations of both parties, payment lists and terms, the mode of delivery and other legal terms and conditions.
What is the importance of contract management in procurement?
Earlier, we didn't see procurement as a separate function. We consider it as a part of the role called purchasing where a company buys products/services from a supplier. However, companies have realized the significance of procurement in enhancing overall business performance and profitability. Procurement teams are expected to build long-term relationships with suppliers for mutually beneficial outcomes.
Business relationships will be simpler and more transparent when contract management supports all the transactions efficiently. The procurement team must have the right contract management strategy to attain the goals without any obstacles. The following are the main ways in which a flawless contract management strategy improves the procurement function:
Improves business functioning
Efficient contract management will improve business functioning by identifying the needs, implementing the strategies to fulfill the requirements and analyzing if the organizations have met the objectives.
Contracts provide better spending visibility and help organizations to monitor financial transactions. With this, organizations can also identify maverick spending and opportunities for cost savings in the future.
Helps in evaluating suppliers
The procurement team must constantly monitor the suppliers and their performance to evaluate the supplier risk. Contract management will help them to ensure the suppliers are abiding by the criteria and build long-term relationships with them.
Organizations that have an efficient contract management strategy in place can mitigate risks to a great extent. When there are written rules and procedures, it will be easier to ensure compliance.
What are the main objectives of contract management?
Contract management will help to make the transactions hassle-free, maintain healthy relationships with the suppliers, reduce risks in the transactions and find quick solutions for conflicts.
However, the key objectives of contract management are to ensure:
The product/service delivers on time, at the right place and in the right quantity
The product/service conforms to the specified standards/quality
The product/service is sold at the agreed price
Skills required for a contract manager
The procurement department of organizations will have contract managers to exclusively deal with contracts. A contract manager must have the multitasking ability to maintain positive relationships with the suppliers, monitor operations, and prioritize risk management. It also ensures compliance with the contract terms. They require a set of hard skills and soft skills to perform these complex tasks effectively. Hard skills include knowledge about procurement, legal terms, financial management as well as project management. Soft skills include leadership, decision making, negotiation, time management, interpersonal communication and conflict resolution.
How to become a contract manager
Contract management is a specialized field that requires specific skills and knowledge about procurement principles and also the legal terms. Training and practical experience can increase your chances of getting hired or advancing your career in the existing organization. Training in contract management can give you an overview of best practices, ways to build stronger relationships with suppliers and manage risks in procurement to ensure long-term benefits for your organization.