Contract Management in Procurement

What is contract management in procurement?

Contract management in procurement is the process of overseeing and administering contracts throughout their lifecycle, ensuring that all terms and conditions are met by the buyer and the supplier.

This process specifically encompasses a number of different stages, from negotiation and execution, right through to compliance monitoring and performance evaluation.

Below, we’ve detailed exactly why contract management plays such a crucial role in the overall procurement process, along with best practices for achieving effective contract management, and the benefits of partnering with an outsourced procurement provider.

The importance of contract management in procurement

Effective contract management should be a core focus for any procurement lead, for the simple reason that it directly impacts cost control, supplier performance, and risk mitigation.

But despite these contracts playing a critical role in governing the relationship between both parties, the process of tracking and managing contract renewals, obligations, and performance is no easy feat – especially when it comes to SaaS contracts.

Why?

Because the average organization now uses 130 software applications, with each one requiring an average of 21 days to negotiate.

The bottom line is, without a streamlined, automated approach to contract management, procurement teams simply don’t have the time to keep on top of renewal dates and termination windows, track compliance and performance metrics, or obtain the necessary leverage needed to rightsize contracts and drive down costs at the point of renegotiation.

‍See how one company was able to save as much as $155,000 on a single SaaS contract

Key components of contract management in procurement

For procurement to effectively manage contracts, there are a number of key components that must be addressed throughout the entire lifecycle of a contract.

These components ultimately ensure that agreements are optimized, risks are mitigated, and supplier relationships are maximized.  

1. Contract creation and negotiation

The foundation of successful contract management starts with well-crafted agreements. The negotiation phase of any purchase is therefore instrumental in ensuring that the terms align with organizational goals, that the agreement is designed to deliver maximum value, and that the contract itself is legally sound.

This phase specifically sets the stage for a successful supplier relationship by:

• Ensuring fair pricing – Data from Vertice indicates that 90% of buyers overpay for software by an average of 26%. When companies take a strategic approach to SaaS contract negotiations and obtain the leverage needed to gain more purchasing power, procurement teams are better equipped to negotiate more favorable terms that secure the best value for the organization.

Don’t have the resources internally to negotiate more favorable deals? Find out how an outsourced procurement partner can deliver maximum time and cost savings

• Defining clear deliverables and performance standards – It’s important to establish measurable criteria for quality, service levels and uptime guarantees, data security and privacy standards, customer support response times, and timelines to ensure that both parties fulfill their commitments.
• Incorporating risk mitigation strategies – This is essential for protecting your organization from unforeseen challenges, liabilities, and potential losses. A well-crafted procurement contract should anticipate potential risks and outline measures to minimize or address them before they become an issue. This includes defining clear SLAs, including confidentiality and data protection provisions, and establishing dispute resolution mechanisms. In addition to this, it’s crucial to include an exit clause, which specifies the conditions under which a contract can be terminated early, such as failure to meet performance standards.

• Aligning with long-term objectives – The terms of any procurement contract should not only support the organization’s current needs, but also factor in the future direction of the organization. It’s therefore beneficial to ensure the contract can accommodate growth without the need for extensive renegotiations – even more so for multi-year agreements. This might include negotiating a pricing model that can automatically scale to accommodate additional users or increased service usage at predefined rates.

2. Execution and implementation

The execution and implementation phase of contract management in procurement is critical to ensuring that the terms and conditions agreed upon during the negotiation phase are effectively put into practice.

This can involve coordinating the activities of both parties to ensure all deliverables, timelines, and obligations are met as outlined in the contract. It often includes setting key performance indicators (KPIs), monitoring service levels, and maintaining clear communication with the vendor or supplier to address any issues.

It’s also essential to ensure that proper resources are allocated and that both internal and external stakeholders are aligned to ensure smooth execution. Proactive oversight, regular status updates, and documentation of progress are key to achieving successful contract outcomes and maintaining compliance throughout the contract's lifecycle.

3. Compliance monitoring

The compliance monitoring stage is essential for ensuring that both parties adhere to the terms and conditions outlined in the contract. This stage specifically involves regularly tracking the performance of the contract to ensure that all obligations – such as service levels, deadlines, and quality standards – are being met.

By maintaining a strong compliance monitoring process, organizations can reduce the likelihood of disputes, avoid penalties, and ensure the contract continues to align with the company's strategic objectives and regulatory requirements.

4. Renewal or termination

With 89% of all SaaS contracts containing auto-renewal clauses, it’s crucial that companies are not only tracking these renewal dates, but are also allowing enough time to make informed decisions on whether to:

• Continue using the application
• Make changes based on the tool’s utilization data
• Terminate the contract.

It’s not just the renewal date you should be aware of though, it’s also the termination window – in other words, the amount of notice you have to provide to make any changes to a contract.
With SaaS prices rising by an average of 11.4% per year, we’d also recommend obtaining leverage in the form of pricing benchmarks, to fully understand how much other similar companies are paying for the same solutions. This can help to secure far more lucrative deals.

Best practices for effective contract management

Have a centralized contract repository

One of the most important practices for effective procurement contract management is maintaining a centralized, easily accessible repository for all contracts. This not only allows for fast retrieval of contract documents, terms, and renewal dates, but it also prevents delays and reduces the risk of missing key obligations.

Create audit trails

Managing contract revisions and ensuring that the most current version of any SaaS contract is being used is vital for accuracy. Taking a manual approach to contract management just isn’t feasible as your tech stack grows and becomes more complex.

This is where investing in procurement contract management software becomes essential.

Software of this kind will specifically allow you to create audit trails, ensuring complete transparency throughout the lifecycle of the contract. Each change made is logged and all versions are easily accessible, allowing you to track who made what changes and when. This feature minimizes the risk of using outdated or incorrect contract terms, reducing the likelihood of mistakes that could lead to disputes or even legal issues.

Enable collaboration and workflow automation

In many companies, contract management involves multiple stakeholders from various departments, such as legal, finance, procurement, and IT.

The problem is, coordinating input from all these teams can be both complex and time-consuming – at least without the right tools in place.

With a contract management system, you can centralize communication and automate workflows to ensure that all stakeholders are on the same page throughout the contract lifecycle. By providing a platform where contracts are easily shared, reviewed, and approved by relevant teams, you eliminate common bottlenecks and delays.

Plus, with automated workflows, you can ensure that the relevant stakeholders are being notified at the right time, reducing manual tasks and ensuring nothing falls through the cracks.

Make use of data-driven insights

Data-driven insights are a powerful tool during contract negotiations and renewals, enabling procurement teams to make more informed decisions for optimizing costs and driving efficiency.

By analyzing usage rates and pricing trends, teams can specifically identify opportunities for cost savings and negotiate more favorable terms. Data can also be used at the point of renewal, helping to determine whether a contract should be renewed, rightsized, consolidated, or even terminated.

Leverage technology

Technology is key to improving the efficiency, accuracy, and scalability of contract management processes. With the right tools, procurement teams can streamline previously manual tasks, such as renewal management and the approvals process.

More specifically, automated alerts and notifications can proactively remind teams about impending contract renewals, while also prompting stakeholders to review specific parts of a contract ahead. This reduces the risk of missing important timelines and helps ensure that contracts remain aligned with business goals.

See how one company accelerated their procurement cycles by as much as 50%

Outsourcing contract management: When and how to leverage external procurement expertise

As tech stacks grow, it becomes virtually impossible to manage every contract effectively, ensuring that each one provides optimal value and is being properly tracked to avoid unwanted renewals or missed opportunities.

At least, not without the support of external procurement experts.

Facing procurement challenges that you can’t overcome alone?

Do you often find yourself struggling to secure the best price on every deal? Is tracking and managing tail spend becoming increasingly complex? Or perhaps you're spending countless hours in meetings just to keep renewals and purchases on track?

On that latter point alone, Vertice’s data reveals that companies lose 385 hours annually to meetings for renewals and purchases, which can significantly impact your ability to demonstrate procurement value and efficiency.

If this sounds familiar, outsourcing all – or parts – of your procurement function could be the solution you need.

Outsourced procurement providers can specifically:

• Negotiate on your behalf – Outsourced procurement providers not only have access to unparalleled leverage in the form of pricing benchmarks, they also have extensive vendor knowledge that allow them to secure far better pricing and deals on any deal. Cost savings aside, external procurement companies can also deliver substantial time savings, enabling you to focus your efforts on more strategic procurement initiatives.
• Streamline processes – The right procurement provider will have the capabilities to implement robust renewal tracking systems, optimize your entire procurement process, and create approval workflows that minimize manual intervention, saving time and ensuring efficiency.
• Ensure compliance and mitigate risks – Managing contract compliance becomes easier when experts are involved. They help identify and mitigate potential risks, ensuring that all contracts are compliant with relevant regulations and company policies.
• Identify cost-saving opportunities – Procurement providers excel at uncovering cost-saving opportunities across your tech stack, including within your tail spend. By gaining visibility into all areas of procurement, they can identify and address areas where savings can be achieved.
• Provide visibility – Procurement outsourcing ensures transparency across the entire procurement process, offering insights that empower you to make data-driven decisions, optimize spending, and track performance.

Why not see for yourself how a procurement orchestration provider such as Vertice can help you overcome your most pertinent challenges, while helping you deliver strategic value across your organization, by taking a self-guided tour of the platform.

Alternatively, take a look at how we helped one company save 115 hours on contract negotiations in the space of a few months, or how we helped another organization achieve average contract savings of 30%.