Mid-contract 2017 indirect spend assessment

Optimizing vendor contracts based on procurement patterns

The midway point of the calendar year is when many finance executives assess their business’s financial fundamentals and review various performance indicators. At the same time, we also recommend a check on indirect spend. While contract renewals for products and services like office products and small parcel shipping can occur any time, the summer season lends itself to reviews, to make sure contracts negotiated many months ago are still working in your favor.

The sooner you spot contract compliance discrepancies or significant changes in consumption and utilization, the more time you will have to adjust and respond. Waiting until contract renewal could mean the loss of meaningful savings opportunities in the meantime.

While it’s not possible to make contract adjustments across all indirect spend categories or with all vendors, where it is an option and utilization changes are substantial, it may be worth updating to optimize the contract based on new patterns.

Changing terms before contract expiration

Procurement categories that may allow contract term updates include those that are unit-driven or based on discount models, such as:

  • Office products and supplies
  • Small parcel shipping like FedEx and UPS
  • Telecommunication services like voice and data
  • Drug screening and background checks
  • Packaging and MRO

For example, we frequently see voice and data utilization differ from year-to-year. If you’re paying for 50GB but using only 70% of that amount, it may be worth revising or checking what new plans are being offered, taking advantage of changes in usage patterns and market offers. Finding these areas of underutilization can add up over months and years. Cancelling services, adding years to a contract, or making other revisions might make financial sense.

The office product category is another area that can experience wide variances. As office products are SKU-driven, regular monitoring can help determine if changes are warranted sooner rather than later.

Vendors and spend categories that typically don’t allow mid-contract changes are primarily service-based, including:

  • Information services and fee-based subscriptions from providers like LexisNexis, Westlaw and Bloomberg.
  • Payroll and other HR services from providers like ADP.
  • Equipment leases and service agreements, like Cannon and Flo-Tech.

For these categories, the strategy is to monitor utilization and note usage variations with enough advance time to use the data for contract renegotiations or creating RFPs. We recommend contract reviews 12–18 months prior to renewal to:

  • Identify where utilization patterns have changed significantly and understand the cause.
  • Determine if it’s worth it to negotiate terms or services.

For categories where pattern changes are insignificant or contract changes are not possible, ongoing monitoring will give you greater leeway to assess options.

Assess “maverick spend” or “dark purchasing” outlays

Business spend

Another area to assess during a review is purchasing made off-contract. Finance executives often view this type of spending as minor purchasing, yet the aggregate can be significant. The larger and more dispersed and decentralized the organization is, the greater the potential for savings.

Even with initiatives to knock down silos and coordinate indirect procurement, many enterprises continue to struggle with isolated, independent departments and divisions that cripple efforts to maximize purchasing volumes.

This purchasing drain is called “maverick spend” or “dark purchasing” and it can result in tens or even hundreds of thousands of dollars left on the bargaining table. It becomes a problem due to a variety of contributing factors, including the following:

  • Fragmented buying and purchasing off-contract
  • Perception that the savings potential is insignificant and not worth the effort
  • Poor purchasing data visibility
  • Poor contract management

We help clients in business and law monitor their contract spending, and we also have insights to shine a light on dark purchasing drain.

Consider the time-saving guidance of CCM contract specialists

Reviewing contracts

We deliver two key benefits to finance and procurement executives:

  1. Category-specific expertise and current market pricing metrics to evaluate every vendor contract.
  2.  Relief from some of the time-consuming, uncomfortable contract negotiation and management tasks.

Beyond typical spend management tactics like invoice auditing and refund recovery, our work is guided by an overarching plan to control indirect spend that encompasses analytics and contract management. As an experienced, objective 3rd party, we have been able to strengthen and enhance key vendor relationships.

Add indirect spend to your mid-year financial assessments

These dog days of summer can be a good time to review utilization and consumption patterns for major indirect spend categories. Determining if consideration should be made to accommodate changing requirements and make contract adjustments will be useful during the upcoming budget season.

Feel free to contact us to discuss your mid-contract review situation.

Natalya Berdzeni

Natalya Berdzeni

Natalya Berdzeni is Executive Vice President for spend management services at LAC Group. She oversees operations and client development, including the execution of spend programs and their operational support, with responsibility for the company’s financial growth and profitability.
Natalya Berdzeni
Natalya Berdzeni

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