BenchmarkingProcess Implementation

How Contracting Can Help Companies Win in a Low Prices Commodity World

The last 2 years has seen the prices of oil, gas and extracted minerals drop through the floor. The hard commercial reality is knocking on the door and companies are expected to still be viable and healthy despite the less than healthy top revenue line. Ask business leaders what their top challenge is and the likely answer is in “managing costs”.

So what help can the procurement function play? Cost levels are a consequence on how and what companies make or buy. Costs are an outcome of how and what procurement buys.

We have 5 tips about how to position your procurement to win and help manage costs;

First Tip. Not all contracts/deals are of equal importance. Look at the top 5 to 10% and focus. That means bringing the right resources and spending enough time planning your approach. Most companies usually have a small number of contracts/deals that will define and shape the impact on their business.

Second Tip. Establish a deal/contract team that is cross functional and includes all the main stakeholders. The aim is to have discussions and to look at options. Different options usually have different implications and hence the discussion will include functionality, value, quality, financial, legal, HS&E and other issues and the team get a chance to weigh up the best value.

Third Tip.   Maximizing value by managing the contract portfolio. The process steps in contracting should feel as a natural fit and staged. You should be able to answer questions like what’s the big picture the ‘strategy’ and how does a good contract ‘fit’ in the big picture. Make sure questions go beyond just unit price. Cover issues like economic value, contract terms, strategic partnership, where to use which standard contracts, promptly execution of the contract and formal contract reviews (not just at the end of life).

Fourth Tip. Get the right tools to enable a structured approach. Benefits are gained in automating administration, getting informed and manage risks exposures. The tools are also used to track the contract life cycle management where overview is provided on the contract portfolio and the state of the individual contract, seamless trigger the order to payment activities or take actions. Also tools are used to value and compare on alternative positioning and track performance if we still like to continue contract. Tools will automate the routine and allow the process to focus on the major areas of concern. Tools usually help in standardising value and making it easier to compare alternatives.

Over the next 2 months, we of will be providing some further insights into the contracting process and provide you with some ways to help your company win.

Interested in a procurement health check or have something to add to this story? Share it in the comments or contact us.