Here we discuss the new approaches are needed to ensure that organizations can effectively adapt to the new procurement and contract management environment.
Procurement and contract management have been dramatically changing, reflecting wider changes in the business environment and public sector. Some of the main trends include strategic sourcing, business process outsourcing, knowledge process outsourcing, various changes in public sector procurement practices, outcomes-based contracts, multi-sourcing, and the use of trusted partnership arrangements.
These developments are giving rise to a number of new challenges for procurement and contract management specialists and their organizations. Among others, these include the challenges of cultivating relationships with internal stakeholders and with trusted suppliers, managing multiple and widely dispersed suppliers, specifying outcomes-based requirements, and understanding and managing a wide range of risks associated with the new developments.
New approaches are needed to ensure that organizations can effectively adapt to the new procurement and contract management environment. The following three models are recommended in particular for use in transforming an organization’s procurement and contract management functions:
Contract Lifecycle Management Model: This builds on strategic sourcing, but is characterized by a number of distinct end to end stages involved in preparing for, implementing, and managing procurement programs and individual contracts, all of which are designed to add maximum value to the organization and are fully integrated with the organization’s business planning process. Typically, several distinct functions are also delineated within the procurement and contract management roles: administrative, consultative, strategic management and governance.
Capability Maturity Model: An emerging best practice for the assessment of an organization’s procurement and contract management functions, and development of a roadmap for improvement. Using this Model, an organization can assess its current maturity level and develop specific plans for improvement to achieve subsequent levels and ultimately the “best practice” or “world class” level of maturity in procurement and contract management.
The Art and Science of Transformation® for Contract Lifecycle Management: An Art and Science of Transformation® approach is important to ensure that the organization has the right skills and expertise in place for CLM and that its culture, systems and processes are properly realigned, so that the ultimate stage of the defined procurement and contract management maturity model can be achieved.
Developments and Trends in Procurement and Contract Management
Procurement and contract management have been dramatically changing, reflecting wider changes in the business environment and public sector. Some of the main trends include:
Strategic Sourcing: The goal of strategic sourcing is to ensure that procurement activities ultimately enable the organization to achieve its top-level strategic goals. In this approach, procurement specialists help shape their organization’s purchasing activity through their understanding of core business goals and knowledge of the supply market. They develop contractual arrangements with key suppliers that will benefit the organization and its ability to innovate. They monitor contract performance and analyse the outcomes of procurement to ensure that the intended benefits are achieved and the return on investment understood.
Business Process Outsourcing: Outsourcing of non-core business processes, such as catering, cleaning, and payroll is often adopted with the objective of achieving cost savings and reducing “waste” in internal processes. Particularly in the public sector, this often takes the form of a shared service model. Offshore outsourcing is widely used, though there is now a trend in “on-shoring” or bringing some outsourced services back to domestic markets.
Knowledge Process Outsourcing: A more recent trend is the outsourcing of “knowledge processes”, or those core activities that require more specialist knowledge, analytical thinking and judgment, such as business intelligence, risk management, and project management.
Changes in Public Sector Procurement: Governments are increasingly adopting new business models in which responsibility for the design and delivery of public services is shared with private sector and non-governmental organizations. Other public sector developments include the increasing use of e-procurement and online portals, which improve transparency of procurement activity and provide direct opportunities for vendors to communicate with government buyers.
Outcomes-based Contracts: Under outcomes-based contracts, payments are dependent on the achievement of pre-agreed outcomes and deliverables, rather than the execution of specified tasks. The “Request for Solution” is replacing the traditional “Request for Services”.
Multi-sourcing: Globally, there are increasing volumes of procurement activity, but also a rise in the use of smaller contracts with average lower values than in the past. Small outsourcing arrangements using multiple providers are becoming the norm in many sectors.
Trusted Partnerships: In a concurrent trend, many organizations are now using a smaller number of trusted suppliers in long-term or multiple contracts over time. The trend is driven by and in turn facilitates the involvement of suppliers at the early stages of defining desired solutions. Many organizations are now using preferred supplier lists to identify suitable vendors to meet their procurement needs.
New Challenges in Procurement and Contract Management
These developments are giving rise to a number of new challenges for procurement and contract management specialists and their organizations. Among others, these include:
• How to integrate procurement and contract management with core business planning
• The need to cultivate collaborative arrangements with internal stakeholders
• Developing detailed knowledge of relevant markets and cultivating relationships with trusted or preferred suppliers
• Developing win-win contractual arrangements that benefit the buyer and supplier
• Managing multiple suppliers, which may be geographically and culturally widespread
• Specifying outcomes-based requirements and effectively measuring progress
• Being able to identify, interpret and address a wider range of internal and external risks
• Being able to measure and evaluate the overall value and ROI of procurement and contract management
Transforming an Organization for New Procurement and Contract Management
New approaches are needed to ensure that organizations can effectively adapt to the new procurement and contract management environment. The following three models are recommended for use in transforming an organization’s procurement and contract management functions:
Contract Lifecycle Management Model (CLM)
CLM builds on strategic sourcing but is characterized by a number of distinct end-to-end stages involved in preparing for, implementing and managing procurement programs and individual contracts. All of these are designed to add maximum value to the organization and are fully integrated with the organization’s business planning process. Typically, several distinct functions are delineated within procurement and contract management, as follows:
Administrative: focuses on transaction processing and works and providing “shared services” to internal clients on the most cost effective basis.
Consultative: focuses on assisting internal clients with the resolution of their procurement needs, and helps the overall organization achieve its strategic and performance objectives.
Strategic Management: focuses on assisting in the development of top-level strategies and plans for ensuring the success of this. It also takes granular information and converts it into meta-data suitable for strategic decision-making.
Governance: includes all the activities involved in managing procurement-related risks, including developing an overall procurement risk management approach and techniques.
Capability Maturity Model
The Capability Maturity Model is an emerging best practice for the assessment of an organization’s procurement and contract management functions, and development of a roadmap for improvement.
Using this Model, an organization can assess its current maturity level and develop specific plans for improvement to achieve subsequent levels and ultimately the “best practice” or “world class” level of maturity. A number of researchers have developed versions of the Capability Maturity Model that are specifically tailored to procurement and contract management.
The Art and Science of Transformation® for Contract Lifecycle Management
An Art and Science of Transformation® approach is important to ensure that an organization has the right skills and expertise in place for CLM and that its culture, systems and processes are properly realigned so that the ultimate stage of the defined procurement and contract management maturity model can be achieved.
Procurement and contract management training and standards have traditionally been heavily “science”-based; focused on conventional methods and tools relating for example to the legal, budgetary and project management aspects of this areas of work. There is a growing requirement for procurement and contract management specialists to apply the “art” of their profession, such as the skills needed to effectively manage people and culture, understand business strategy, build trust-based business relationships and draw on other intangible attributes such as political acumen, strategic awareness and emotional intelligence. There is also an increased requirement for more advanced “science” skills such as performance monitoring and analytics. Overall, an expanded need for both “art” and “science” skills is a key feature of Contract Lifecycle Management.
The recommended Art and Science of Transformation® approach is a holistic approach to change that ensures the organization has the right combination of art and science skills in place, but also that its culture, systems and processes are aligned with the desired new approach and not likely to hinder its adoption. This requires communicating with and directly involving all stakeholders in the changes, but also redesigning the performance management system, competencies systems and the compensation structure, among others, to help promote new ways of thinking and acting in relation to procurement and contract management.