Friday Rant: Is the Contracting Process the Biggest Stealth Inhibitor to Realized Savings?

Earlier in the week, I dodged snowstorms and headed to Philadelphia to meet with ICG Commerce. My visit included a two-hour tour of the facilities, and I also spoke with a number of specialists from sourcing, contracting, supplier management, data acquisition/MIS, continuous improvement, and procurement/sourcing execution teams. My tour started with a quick discussion and interview with two services sourcing specialists in the legal and accounting areas. The category processes they shared from a sourcing standpoint (e.g., benchmarking, direct negotiation, etc.) reminded me of my FreeMarkets days, when we'd apply a similar process and rigor. ICG Commerce is engaged in these processes at the more senior levels, garnering spend from CFOs and general counsel directly, including global audit and matters management (not categories you'd usually expect a company to trust third parties to manage on their behalf). The more interesting stop on the tour, however, came when I met with the leader of ICG Commerce's contracting team.

This team is tasked with creating contracts once sourcing tosses the supplier over the negotiation fence, so to speak. This is when sourcing services firms and outsourcers begin to distinguish themselves; after all, when it comes to implementing a BPO compensation program based on realized savings (vs. identified) as ICG Commerce does, any delays in the contracting phase can impede material cost reduction. At this point in the tour, I gleaned from those around me that contracting used to be a bottleneck in the sourcing and supplier management process. The back-and-forth between the buying organization (who must ultimately sign on the dotted line) and the supplier during the contract negotiation process has the potential to take as long, or even longer, than the sourcing phase of an engagement.

Given its focus on realized savings as a BPO provider, ICG Commerce clearly invested significant sums in revamping process, technology, and senior resources (including legal types) to support this process. This eradicated the bottlenecks and accelerated the contracting lifecycle for its customers. It built its own contract management toolset and workflow process to manage contracts (including compliance) in a multi-company BPO environment, and strove for improvement in the contracting process itself. This minimized the time it takes to solidify a contract with suppliers and actually realize savings. I'll spare the exact details, as ICG Commerce has clearly learned a few things it would rather not get into the hands of competitors. Needless to say, its experience has taught it specific tricks of the trade in facilitating and managing the contracting process as a BPO intermediary between a company's procurement and legal organization and the supply chain.

I'm sure that Tim Cummins and IACCM would agree that the contracting process is one of the most underappreciated areas of sourcing and supplier management. Over the years, I've begun to appreciate and prioritize the contracting process itself, given the fall-off in identified vs. implemented savings that companies often come to observe firsthand. Few organizations invest enough in more tightly integrating the sourcing/procurement and contracting function (not to mention vendor/supplier management) post-contract. The rewards of doing this are significant. Consider a procurement organization that identifies $100 million in annual savings. By cutting a typical contracting cycle in half, from 4-6 weeks to 2-3 weeks, this company could realize an additional $2-4 million in savings, not to mention reducing and better understanding risk and overall contract exposure.

Stay tuned for a rant next Friday about other opportunities to take advantage of the contracting process for additional savings and risk reduction.

- Jason Busch