How to manage supplier contracts, so you don’t lose money?

In companies with a well-functioning procurement mechanism a distinction is usually made between sourcing and operational (follow-up or contract execution) activities.

However, this approach is mainly used for major procurement categories (raw materials, packaging, auxiliaries), when sourcing processes (market analysis, negotiations, contracting, supplier development) are dealt with by the category manager, and orders are placed by the supply specialist.

With indirect categories, this kind of specialist role is almost always fulfilled by an internal business function – an employee of the business unit which is the budget holder and/or the consumer of the products /services in question. For example, taxi services are ordered by an administrative specialist, while recruitment of personnel is done by an HR specialist, and tire storage services are handled by the car fleet manager. Who else, but an internal client knows better than anyone, what needs to be ordered and how and when it should be done?

There are, however, categories which are entrusted to special companies to be managed. For example, processing business travel applications is often given to travel agencies. It should be noted that services acquisition through agents is more expensive, since the agency gets extra remuneration from the supplier (in this case, hotel or airline company), which affects the cost of the service. An agency (TMC) is interested in increasing rather than reducing costs, because they get their commission as a percentage of the price of a transaction between the airline company or hotel and the customer.

But an operational management category which is transferred to independent outsourcing company often results not only in savings, but also in additional benefits. Earlier, Anton Trunin, Head of the Autoglass Procurement Department for the Russia and Eastern Europe division of the JSC “AGC Glass Russia” plant in Bor city, shared his experience in procurement processes outsourcing.

As an illustration, let’s look at a PrECA case study. When implementing sourcing projects for our clients, we always estimate and agree upon savings implemented on new business terms for the entire duration of the contract. It is beneficial for us to make a precise calculation, since, first of all, our remuneration depends on it and, secondly, because we’re earning a reputation and building a foundation for further work with the client.

In 2014, we successfully completed projects for optimizing mobile communication costs for two international companies, having reduced expenditure volume by approximately 55-60%.  A year later, we decided to calculate how much every customer actually saved.

It’s emerged that at the end of the contract one of the clients achieved 68% of savings from a total amount of 8.4 million rubles, while the second client saved 75% of 5.9 million rubles:

Figure 1. Comparison of the actual savings of the first client.

Figure 2. Comparison of the actual savings of the second client.

After reviewing the details, we concluded that the losses were associated with weak operational support during the term of the contract. In particular, a late disconnection of dismissed employees’ numbers was recorded, in addition to delayed connection of roaming options and incorrect distribution of TPs between company employees. At the final meeting with one of the companies’ senior management, the CEO stunned us with the phrase: “But we’ve already swallowed the savings you brought to us”. It turned out that mobile communication management was assigned to an administrative assistant. She didn’t review provider’s reports in much detail, and “category management” was reduced to issuing SIM cards and signing powers of attorney in the event of transferring the subscriber’s number from a legal entity over to an individual. Eventually, when the employee went on maternity leave, this task was handed over to her colleague, for whom it became a second priority which led to savings being “eaten up”.

Although the errors weren’t in themselves due to sourcing, these were negative cases in our practise, and we asked ourselves: how could these savings be achieved anyway?

As a result, we proposed that our clients hand mobile communication management over to us. As users’ operational support didn’t require 100% FTE allocation, we had the opportunity to split our operational resources among several clients and provide the service at a lower cost than the company’s internal resources. Having agreed upon a service delivery procedure, we arranged communications for the clients’ mobile users and launched the process. From that moment on, our specialist:

  • follows up on supplier contract fulfilment (tariffs, SLA);
  • controls the accounts and details for compliance with the tariffs specified in the contract;
  • analyses provider’s reports as of each month;
  • makes recommendations for changing tariff plans;
  • settles claims with the supplier;
  • stays in contact with the provider regarding service connection/disconnection, blocking numbers, and other services;
  • monitors GPRS / 3G / LTE-traffic and roaming costs;
  • makes calculations of the savings achieved;
  • arranges user training, informs them of new services and cost reduction options;
  • prepares a cost breakdown per cost centre to be entered into the SAP ERP system
  • enables compliance with the company’s mobile service policy

Having delved into the process at an operational level, we found more opportunities for savings to be made. For example, we uncovered provider errors when it came to billing the client, and billable services not part of the contract which was being used by the employees, in addition to late disconnection of phones from employees who were long-departed. In addition, incorrect use of the tariff options for roaming services resulted in communication services bills amounting to tens of thousands per month per subscriber. The procurement manager of one of our client companies commented on it in a manner characteristic of expats: “This shouldn’t be happening!” But such “shouldn’t be happening” scenarios enabled us to save an additional 5% costs on top of the previously achieved savings at the end of the sourcing project.

Another 12 months later, we reviewed service delivery outcomes and got the following results:

Figure 3. Business case study of mobile communication management of the second client.

The graph shows that the client received a service, the cost of which was covered by the savings achieved, at the same time reducing labour costs of the administrative accounting and procurement departments. And it’s not only a matter of direct savings, but of cost avoidance also: for example, through timely connecting and disconnecting options, users no longer rack up huge bills for roaming costs on business trips.

The administrative director had to admit: it was much easier for her to work with the outsourcer rather than to hiring special staff on a full-time basis. Mobile users are also satisfied, because all the issues are now resolved expeditiously, according to the SLA. They have clear instructions on where and when to apply, and the application templates are configured in a quick and easy-to-use format for the client.

The CFO is happy, because the costs got more predictable, falling within budget and in accordance with the contract (compliance). Accounting spends less time on monitoring and payment of bills, since thanks to the template that we developed costs are posted per cost centre automatically and loaded into the SAP ERP.

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