Procurement Management Vs. Contract Management

Procurement isn’t done in isolation: effective supply chain management constantly evaluates performance in terms of cost, quality and delivery speed. Procurement specialists identify needs, find suppliers who can deliver at the best price, and negotiate beneficial terms, reaching finally a point where a contract is awarded to secure value.

But this is just the beginning of the process.

Once a contract is in place, procurement’s job is often seen as done. It’s then up to the contract managers to ensure that the supplier delivers the value promised. Effective contract management complements and completes the work procurement starts.

Distinct Yet Complementary Roles in Procurement Management

Procurement managers attempt to identify and secure the right goods or services from the right supplier at the best price. Strong negotiation skills are essential to ensure that the final contract terms are favorable to the organization.

Here’s a rundown of the critical success factors in procurement:

Market Research and Supplier Identification:

Industry knowledge, market research tools and supplier relationship management (SRM) practices are used to find viable vendors.

Cost Optimization:

Negotiating skills are required to achieve the most favorable pricing and terms without sacrificing quality or supplier reliability. Understanding TCO gives a fuller view of value.

Contract Development and Risk Management:

Working with legal teams to develop clear, unambiguous terms that mitigate contractual risk while serving the organization's interests.

In contrast, contract management takes a step back, focusing on managing the overall performance of the deal throughout its lifecycle. Performance is measured against KPIs, including quality, compliance, risk management, and identifying opportunities.

Proactive management is key to addressing unforeseen changes and potential issues before they arise. Minimizing risk and maximizing long-term value are the primary goals.

Here’s what ensures successful contract management.

Performance Monitoring and Reporting:

Contract managers track key performance indicators that will measure whether the supplier is delivering against agreed delivery timelines, quality benchmarks and service levels (SLAs). They arrange for reporting at regular intervals to keep internal and external stakeholders fully informed about operations.

Agility:

Contract managers need to be flexible, handling changes unexpectedly, negotiating adjustments and ensuring all parties are in agreement on any changes that need to take effect.

Risk Management:

Identifying, planning for and mitigating potential issues at every stage of the contracting process is a core function of contract management professionals. They may use risk rating and scoring systems to minimize risks for the organization.

Also Read: Keys to Contract Management in Oil & Gas Procurement

Time is of the Essence: A Swift Start and a Steady Pace

Procurement is a one-off action, culminating in a binding contract. Efficiency and speed underpin the process, with the need for a ‘needle in a haystack’ action to land in the right spot.

Contract management, on the other hand, is the proverbial marathon, not a sprint. Contract management is an ongoing effort that one must never let go after finalizing the contract.

Centralized Expertise or Decentralized Management

The more centralized an organization, the more likely it is that there will be a centralized procurement team that works across the organization to use its specialist skills and overall buying power to negotiate the best possible deal. On the other hand, the process of contract management can be more distributed.

Centralized Procurement:

Centralized procurement teams (who may often work in the head office of large organizations) can leverage their expertise and buying power to negotiate the best deals across all units of the company, and implement consistent sourcing and contracting processes.

Decentralized Contract Management:

A smaller organization may have a single point of contact to administer procurement and contract management for simpler agreements. A larger organization, on the other hand, may have a dedicated contract management group to manage more complex contracts and adhere to established policies.

The Culmination: A Strong, Long-Term Partnership

Procurement acquires the resources your organization needs, while contract management builds and sustains a healthy and collaborative relationship with your supplier throughout the term of your contract.

Being aware of the differences, yet the interdependency, can ensure that your supply chain strategies are optimized and that you create lasting value.

Here’s how GEP can help you with complete procurement transformation.