Immediate simplistic ways to add value to your bottom line
With challenging political and economic back drops the norm for the foreseeable future, cost management has never been higher on the list of priorities for many businesses across multiple sectors.
Often, this plays out as a kneejerk reaction with little focus given to costs/process and is treated as a one-off exercise. Cue budgets being reviewed and reduced, countless management meetings, a nominal savings number being forecast, a revised FY budget and, in most cases, an actual savings miss at the end of the year.
In certain circumstances this is a vital exercise to run, but there are also other exercises that can be conducted which will absolutely add value both in the short term and longer term.
Get control of your contracts, understand your position – it’s worth it!
In recent years, we have worked with a large number of businesses of varying size with turnovers ranging from £20m to £4bn. We talk to numerous businesses on a daily basis and regularly see common issues and misconceptions relating to contracts – such as types of contracts signed, the terms agreed and the resulting commitments with suppliers. These issues often occur even if a business is perceived as being a leader on process, strategy and governance, regardless of whether an inhouse procurement team is in place.
So why are contracts important, what value is available and ultimately, is it worth your time doing anything differently?
Most companies want to be seen to be managing their spend effectively. Some will tell us that they don’t necessarily see the point in issuing or signing up to contracts – we will come on to that point later. For those that do understand the importance of contracts, often the perception of what should be happening in their business does not match up to reality in the vast majority of cases.
So, firstly let us tell you how we go about understanding a company’s position – please note it’s written in this manner so that you can do exactly the same internally!
Some sobering numbers for you… how do you compare?
When we look at a company’s relationships with its Top 100 suppliers, we see a huge disjoin around their assumptions vs the actual reality.
Most companies would tell us that, in their opinion, they are managing at least 45% of those Top 100 suppliers effectively, have contracts in place and have a solid understanding of their commitments and positioning.
However, in reality, on average less than 25% of suppliers are managed effectively.
Typically for those Top 100 suppliers we would see:
- 10 contracts that are live, in date and in place.
- A further 10 contracts that are out of date.
- 5 to 10 contracts that are unsigned, incomplete or with confusion around contract completion status.
- Approximately 50% to 65% of suppliers where no contract can be found.
- For those contracts found, 70% are contracts issued by the supplier on their terms and only 30% are issued by the business to those suppliers.
How to complete your own exercise in days/weeks not months
- Get a spend extract from Accounts Payable showing the Top 100 suppliers by spend value for the last 12 months (or 24 months is even better).
- Categorise those suppliers (if not already categorised by the AP report) into your own internal spend departments, e.g Marketing, IT, Logistics etc.
- Find out if you have any form of contract/commitment for those suppliers – contracts are likely to be held internally by Legal or Stakeholders or filed away. At this stage please note that the number of contracts found is likely to be much lower than expected.
- Qualify those suppliers you do have contracts for as follows:
Was the contract created by your business or by the supplier?
Section A – Current live contract in place which ends in X months.
Section B – Contract in place but has expired and has rolled on or been extended further.
Section C – Contract not clear on end dates or unsigned – query this internally.
Section D – No contract can be found.
If you don’t know whether you have a contract in place, if you have no access to it or if you can’t find one, it’s a simple exercise to produce a standard letter of authority that can be sent out to those suppliers asking for information.
So – once you have the answers to the above, what do you do with the information and why even bother completing the exercise?
- For those contracts that are live and in date –
- Check to see that you are being charged the right rate.
- Were any volume assumptions or spend value rebates built in to the agreement?
- Have you or will you hit these volume assumptions or spend value rebates?
- Have rebates been paid that should have been paid?
- Do you have a plan with regards to retendering ahead of the contract end date?
- For the expired contracts –
- Are you still being charged the same rate as per the original contract?
- Are you now being charged a higher rate due to auto RPI/CPI being built into that contract that quite simply you were not aware of?
- Have your volumes/spend significantly changed – e.g. if the contract was taken out in 2014 based on £500k forecast spend, are you now spending £2m but still being charged the same rates? Or are you being charged more now than when you were 4 times smaller?
- For those suppliers/contracts you were unsure about (unsigned or contract not clear) – follow the same process as for expired contracts as listed above.
- Where no contracts exist –
- Ask the supplier to confirm a terms sheet, rate card or other pricing sheet.
- Compare that to recent invoicing.
- Produce a tender plan and prioritise it over a defined period, e.g. we have 40 tenders to complete – let’s get this done in a 3–6 month period with a target saving of anything from 5% to 25%.
So, what’s the benefit of carrying out the above process?
Typically a 5% to 10% cost reduction, which is not insignificant!
More importantly, whilst this is a great initial one-off benefit, the ongoing benefit remains constant and, in some cases, even more beneficial. For example, a contract with an auto RPI increase would have been a further 2% or 3% more expensive again next year. You also start to gain full visibility for what you have signed up to, when your supplier agreement ends and you can plan ahead for the future.
Contracts – we manage fine as we are, do I really need them?
Believe it or not in the 21st Century we do hear this from time to time…
The perceived benefit of not having contracts in place tends to be (and we quote!) “it gives me flexibility and I can change at short notice if I need to”.
The reality in most cases is that if you are buying from a supplier without any form of commitment then is that supplier likely to offer you the best possible terms? In short no, any form of written guarantee creates a more meaningful basis to offer reductions.
Are you getting what you pay for? Without any form of contract in place you are unlikely to have detailed specifications, service levels or minimum performance criteria. We often see products that are not as described, not fit for purpose and with no robust method of having a Plan B for when things go wrong.
“I’ve never had a problem”. Really? Why then do we constantly find products not as described or not to specification, rates not being charged correctly or issues with supply/performance?
Contracts – what should you sign up to and why?
On average companies sign up to the supplier’s proposed T&C’s and contracts 70% of the time. Why?
Convenience, time, lack of internal legal function – the list goes on. However, this has a dramatic effect when not managed correctly going forward.
Contracts provided by suppliers will often contain clauses, tie-ins, lack of specifications, lack of remedies that are not in your own best interest. Even the most basic contract that you issue to suppliers is a far better place to start from.
Things to be aware of:
- Auto renewal – often found in IT contracts, support contracts, utilities, mobile and telephony agreements, copier agreements, facilities management agreements, leases etc. Put simply, if you miss the termination or end date you are committing to a minimum further term whether you like it or not. Often there will be an additional clause to tell you that as well as being extended you will also switch to “out of contract default rates” – we have seen this time and time again. These rates can be as high as 100% above what you had previously signed up to.
- Returns clauses – these are often missed or not understood properly. For now, we will use a typical example from the “copier world” – at the end of the lease you will arrange for the equipment to be returned within 7 days. It will be inspected and then, unless it can be rented out to a new party without the need for any further maintenance or repairs, you will face further charges – well OK, how much?
- Lack of performance criteria, lack of break clauses – so after a lengthy exercise you appoint a supplier that everyone really likes – fantastic. The relationship starts OK and then people change and things become more difficult. Things start to become really You then find out that you have signed up to a contract that provides no real protection or clear answers as to how this is remedied, no clear answers as to how issues could be escalated and no clear answers as to how you can exit the agreement or what your liability is likely to be – we see this so often and it can be easily avoided at the outset.
- Lack of specifications – so the tender exercise is completed and a 1 or 2 pager agreement provided by the supplier is signed and everyone is happy. What you are buying, the volume of what you’re buying and the price of your purchase is clear – everything is great for weeks or months and then there is an issue (or sometimes actually there isn’t!). If you now conduct a random check, are you still receiving what you thought you were…? Often, I’m afraid you won’t be. You will find that specifications may be slightly different, thinner, smaller or slower. Unless clearly defined in the contract, what do you refer back to? Again, this is a situation that we see this time and again.
A good, sound contract is the basis for a healthy strong working relationship for both parties. It is not difficult to build an initial set of templates that save time in the future for everyone within the business to use – it will absolutely save time and money, improve governance and service, as well as reduce risk in the future.