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Proactis Holdings Plc

Proactis Boardroom Chatter: Cost Reduction (Part 3 – Contract Management)

Over lunch, the CEO, CFO & CPO of a large corporation were having a discussion about how to reduce costs.
CEO (to the CPO): “You said the other day that we could further reduce costs with better contract management – what do you figure we could save?”

The CPO outlines the current position and targeted savings they are working towards:

  • $1.7M savings by increasing on-contract buying from 65% to 85% (20 percentage points) by making them fully visible to all buyers at purchase time
  • $400,000 savings by using improved contract visibility to consolidate duplicate contracts and gain higher volume discounts
  • $200,000 savings by preventing incorrect prices on POs (e.g. failure to use quantity price breaks)
That’s over $2.3M in annual savings.

CFO: “Based on a review of current contract activity we’ve done together, we’ve identified additional ways we can save as well…”

CFO: “Here’s our estimate of avoidable expenses we could achieve:”

  • $250,000 approximate savings by avoiding automatic renewal of contracts without re-negotiation, and in some cases, contracts we don’t even want to continue (e.g. maintenance agreements)
  • $50,000 approximate savings from reduced manpower required to handle contracts (e.g. manual authoring, filing, creating time-based payments, monitoring for review, etc.)

That’s another $300,000 savings a year from better, more efficient management of contracts within Procurement.

CEO: “So let’s recap what you’ve told me…”

CPO & CFO: “Here’s the summary:”

  • $2.3M through increased on-contract buying and better compliance with contract terms
  • $300,000 through avoidance of unwanted automatic contract renewals and elimination of non value-added manual contract administrative manpower – 1 FTE.

That’s a total of about $2.6M a year.

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Disclaimer: Statements in this article should not be considered investment advice, which is best sought directly from a qualified professional.