Using Contract Management Software to Turn Captured Savings Into Realized Savings
Rep. Michael McCaul (R-Kan.), the chairman of the Homeland Security Subcommittee on Oversight, Investigations, and Management, recently charged at a subcommittee hearing that the Homeland Security Department is losing money because of poor contract management.
McCaul’s comments were detailed in a Sept. 28 article on the website of The Contracting Education Academy of Georgia Tech. McCaul told the subcommittee that parts of the $167 billion equipment and software purchasing budgets have repeatedly been exposed to unnecessary high risk because Homeland Security managers aren’t following a 2008 policy to require a “knowledge-based” system of evaluating the risks and costs of the contracts in the department’s procurement program.
Enterprises Often Leave Savings on the Table
The Homeland Security’s problems are not at all uncommon. When it comes to contract management, many organizations fail to effectively assess the ongoing risk and expense of their procurement contracts in order to make better decisions moving forward.
Charles S. Clark, a senior correspondent for Government Executive, delved into just this issue in a recent blog. He points out the critical role of contract management in negotiating price, terms, and conditions in procurement. But he also concludes that, even when contracts are suitably negotiated, “without an effective contract management program (including the right organization, processes, and supporting technology) these savings will remain captured savings only, as opposed to realized savings. Some studies have even shown that organizations only save approximately 60% of the potential savings that they have captured (a phenomenon commonly known as savings leakage).”
In the case of Homeland Security, Rep. McCaul cited a report from the Government Accountability Office that found the vast majority of procurement programs were not adequately reviewed as required by policy, and that costs in 16 Homeland Security programs not surprisingly spiraled by 166 percent in only three years.
Basic Steps Can Improve Contract Management
Through all cycles of supply-chain contract management, software to manage the process can provide value. This value begins with negotiation, continues through realization of penalty revenue allowed by unfulfilled contract terms, and returns full circle in decisions about contract renewal.
Ultimately, contract management software isn’t just about direct, immediate cost savings – it provides valuable data support in long-term strategic decision making. It is a crucial part of any enterprise’s business intelligence.
“In short, effective contract management can reduce savings leakage, mitigate supply chain risks, and serve as a competitive advantage for companies,” Clark writes. “However, although most companies are aware of what it takes to have a best-in-class contract management program, many companies lack the resources and/or the expertise to develop a program that can address the high number and complexity of the contracts that they maintain.”
Clark proposes a sensible way to begin managing contracts more efficiently. All contracts should be evaluated based on whether they are low spend or high spend and whether they are low complexity or high complexity – thereby creating four types of contracts, each of which should be managed with appropriate strategies.
Software Cost Doesn’t Have to Be a Barrier
This basic identification is only an initial step, however, and many enterprises will still be hard-pressed to capture all potential savings from contract management. A solution is SaaS contract management, which allows an enterprise to begin taking advantage of the value of contract management software without the upfront costs of investing in the software.
The key point for enterprises to appreciate is that – whether they are large government agencies like Homeland Security or a SMB on a relatively small budget – insufficient attention to maximizing revenue and minimizing costs associated with contract procurement and fulfillment will almost always decrease profitability.