The Role of Contracts in the Procurement Cycle
The procurement cycle is an integral part of how you do business. It is an ongoing process for obtaining necessary goods and services. Ideally, it should reduce costs and help you manage risk throughout the process. The role of contracts in this cycle is often overlooked, which can harm your company.
Effective contract management software makes contracts work for you, and you can streamline your procurement processes with template agreements and enhanced negotiation.
What is the procurement cycle?
The procurement cycle refers to the process of choosing a vendor, purchasing goods or services, and managing performance moving forward. This cycle is also commonly referred to as:
- Purchasing cycle
- Sourcing cycle
- Procurement life cycle
The procurement cycle is named appropriately, as it is always continuing. To keep your business going, you must purchase the services and goods you need. This is where contracts play a critical role. They outline and bind the parties to the terms of the agreement for those goods or services.
The steps of the procurement cycle
The basic steps of the procurement cycle include:
- Need or challenge identification
- Purchase approval by appropriate stakeholders
- Request for bid or request for information about goods and services
- Selection of an appropriate vendor
- Contract negotiation
- Fulfillment and delivery
- Review of vendor performance
Contracts play a crucial role in each stage of the procurement cycle. The problem is that many companies fail to get the full value of what their contracts can offer.
Contract management software can help you take advantage of the full benefits of your contracts. They not only put the agreement in writing, but data from them can also inform future purchases and negotiations.
Contracts in the negotiation stage
While contracts are helpful in each stage of the procurement process, they are especially important in the negotiation stage. Many companies face significant delays in the procurement process while they wait on contract negotiations and approval from legal. Digital contracting technology streamlines the negotiation process to make it more efficient and effective.
Automating contract negotiation
Delays in procurement can affect your entire business and derail a project. This can be costly and disrupt production. Older methods required manual approval of each contract which caused serious delays and lost revenue.
Modern technology makes it easy to automate the contract approval process without loss of fidelity. It uses contract workflows and specific limits to manage contracts and approval. You can control who approves a contract and who may edit standard agreements, preventing employees from having free reign but speeding up your contract approval processes.
Self-serve contract workflows in the procurement cycle
Self-serve workflows are the first step in automation. They let procurement engage with vendors and properly notify legal of any edits or reviews.
For example, a purchasing policy helps make it easy for procurement to do their job. They know purchasing limits, approved vendors, standardized documents, and much more. These limitations allow employees to make decisions without certain constraints. Many companies set specific purchasing limits before an agreement requires separate review by legal, for example.
Streamline redlining and contract negotiation processes
Too many companies still use email back and forth to handle contract negotiations. They make changes to a Word or PDF document and send it to their counterparty, and that counterparty then must manually review the entire document again and send back suggestions.
This process is painfully slow and one that costs your company money. It doesn’t have to be this way. Contract management software and a built-in editor make it easy to negotiate contracts within a single platform or across multiple platforms. It also permits:
- In-app contract redlining
- Acceptance and rejection of tracked changes
- @mentions and in-app comments
- Counterparties can utilize a contract management platform or continue to utilize their own preferred platform
Using templates and standardized terms
Template contracts and standardized legal clauses save your procurement team a great deal of time. A contract that is pre-vetted by legal is often reusable for multiple vendors. These often require little to no changes besides basic information like vendor details and specific fulfillment dates. The rest of the language remains the same.
Where some negotiation is still required of otherwise standard terms, this lets procurement and legal focus on only those provisions rather than renegotiation of the entire contract.
Contract management in the procurement cycle
Once the agreement is negotiated and finalized, contract management steps take over. Many companies simply file the contract away and rarely consult it again. This can be legally risky as it can create missed obligations, renewal dates, and much more. It also deprives you of valuable data; if you can’t find the contract, how can you use its data to your advantage?
Contract storage in a dynamic repository
You need a place to store your finalized procurement agreements. Many companies keep them in Excel spreadsheets, physical filing cabinets, or basic cloud storage. These systems make it challenging to find the specific agreement you need, especially if you deal with thousands of contracts for your business.
A dynamic repository lets you create a single source of truth for all of your contracts. It securely stores these agreements but also allows you to:
- Use intelligent search features and filters to find specific contracts or a single contract
- Access metadata contained in the agreements
- Measure and assess project metrics
- Use smart contract ingestion technology for third-party paper or legacy agreements
- Answer questions quickly, like “What is the renewal date on Contract X?”
The repository plays a major role in the procurement life cycle by making it easy to manage and store all of your agreements.
Renewal date reminders
Many vendor and procurement contracts have renewal dates. Whether this date is automatic or requires some type of notice will depend on the individual contract. This can be hard to track with older systems, and many companies find themselves in trouble because they failed to renew a contract (or renewed one they didn’t want).
Contract management software can create automatic renewal reminders. These include not only a reminder but easy access to the specific terms of the agreement. You can answer renewal requirements instantly rather than through a painstaking search.
Procurement contract and data security
Your contracts often contain sensitive or proprietary information. Even when they don’t, you want to protect your data. Contract management software should offer you robust security protections like:
Risk management in the procurement life cycle
The procurement team plays an integral role in risk management. Contract risk management refers to software, personnel, and procedures that reduce potential business and legal risks associated with procurement contracts. Some of these risks include:
- Rogue contracting, where departments make costly and unauthorized decisions
- Lack of contract visibility and minimal access to contract metadata
- Wrong versions of contracts
- Lack of consistency among vendors and legal agreements
Integrated tools in the contract management software help reduce legal risk. These include automatic contract renewals, notifications, and even compliance assistance. Each of these tools and many others help you minimize legal risk and decrease costs associated with the procurement cycle.
Contract data and auditing cycle performance
It isn’t enough to simply enter into contracts and let them run their course. You also need to review how those agreements and vendors performed over time. You need to know whether your contract was a good return on investment. You may also ask questions such as:
- Do I want to work with this vendor again?
- Did the vendor meet their contractual obligations timely and accurately?
- Should we have included certain terms in the agreement that we want in the future?
- Do we want to renegotiate terms or simply renew the contract?
- Should we pick a different vendor?
A digital contracting platform gives you access to the contract data you need to answer these important questions.
Sophisticated contract lifecycle management software gives you access to metadata through the contract repository. These stored contracts are full of data you can view and analyze with insights tools built into the software. It empowers you to:
- Create, customize, and filter charts using any contract metadata
- Focus on specific workflows in the procurement cycle
- Monitor performance of each vendor or certain types of contracts
- Visualize contract data in various types of charts in real-time
- Export underlying data and charts
This information is critical to making informed future decisions. Without real-time data, you can’t know whether your procurement contracts are yielding positive results. Blind procurement teams make bad renewals and can’t see ways to improve their bottom line. Contract management software gives your procurement team what they need to make better choices.
Enhance your contracts' role in the procurement cycle
You already know that contracts are critical to the success of your procurement cycle. What you may lack are the tools to handle them more efficiently. Effective contract management and negotiation tools make it easy to make positive changes in your system, and you can utilize these tools and many more to streamline your procurement cycle at each stage.
- What is the procurement cycle?
- The steps of the procurement cycle
- Contracts in the negotiation stage
- Contract management in the procurement cycle
- Risk management in the procurement life cycle
- Contract data and auditing cycle performance
- Enhance your contracts' role in the procurement cycle
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Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney. Use of and access to any of the resources contained within Ironclad’s site do not create an attorney-client relationship between the user and Ironclad.