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Getting the optimal value for expenses related to contracts with third parties is an ongoing challenge for most businesses. This is especially true when services/products and contractual charging regimes are complex, difficult to understand, and lack transparency. This often leads to a lack of commercial control and a loss of value.
Scope creep, delivery and quality failures, poor or perverse incentives, bad planning and demand management, ill-informed buying, deliberate contract manipulation, miscommunication can all relate to a decrease in service value.
|Issues you are facing
- Emerging trends of costs increasing;
- Inefficiency of the internal policies due to lack of a comprehensive approach to managing the contract life cycle;
- Difficulties related to business combinations (mergers or acquisitions of companies with different contract management approaches);
- Duplication of activities and operations within the contract management process;
- Lack of clear requirements, policies and procedures for interaction with business partners at the corporate level. Low level of corporate culture and the environment.
- Contract diagnostics and analysis;
- Pricing effectiveness evaluation and benchmarking;
- Independent review of how contract conditions are followed;
- Value leakage identification;
- Implementation of the contract life cycle management system;
- Gathering of information useful for negotiation with contractor for contract prolongation;
- Detection of violations by commercial department employees.
An engineering company was experiencing cost growth in excess of its competitors and the market over a number of years. Management was concerned that this could not be clearly explained and that their efforts at cost control seemed misdirected and ineffective. We performed deep-dive commercial diagnostic “audits” on 20 contracts and identified agreed annual savings of 11% across their subcontracted operations. Examples of some of our findings on specific contracts included:
- Over billing (errors) of $1.5m (16%) on an engineering services contract;
- 62% of spend on tools fell outside the contracted terms, resulting in inflated “spot market” non-negotiated pricing;
- Conservative and un-prioritised risk management decisions driving 56% of total spend in the form of back-up and standby;
- Excess margins (up to 50%) were being paid on commodity chemicals;
- Logistics and transport contract was misunderstood by management as a value deal at cost plus 8%. However we identified elements within the contract structure that showed the real return to the supplier was in excess of 20%;
- Significant performance-related bonuses had been paid which fell outside the original intent of the contract and did not deliver commercial value.
We will help you get better value from contracts and transactions with third parties. Our approach is bottom-up, first understanding the commercial realities at the day to day detailed transaction level. We talk to the people who operate the contract and analyse real operational and cost data to build a picture of how the contract is actually utilised. This diagnostic allows us to draw the real picture of what is happening in your business, how effective commercial processes and controls are in reality, and how contracts and services are functioning. We identify where value is being lost and provide pragmatic advice on how to capture additional value and savings.