No organization wants to experience contract leakage, but without the proper utilization of resources, it can happen. Contract leakage occurs when actions go against contractual agreements and obligations. These can include buying from a non-contract source or buying non-contract items. If the incident in question is serious enough, it can cost the involved parties thousands of dollars in penalties, lost discounts or in reparations.
Need for Contract Awareness Tools
Most of the time, this has nothing to do with a particular employee intentionally operating outside of the bounds of a contract, but rather a lack of tools to facilitate contractual awareness. Perhaps buyers aren't aware of which products they need to buy or where they need to buy them from, so they simply do what they think is right. While one might conclude that buyers, by definition, are expected to know what are authorized buying sources, with many contracts and obligations to understand and manage, if the required information is not readily available, assumptions will be made and shortcuts will be taken. Nonetheless, the consequences of such actions can be serious.
Need for Enforcement Mechanisms
In fact, a recent article in the online publication Supply & Demand Chain Executive called it an "epidemic," stating that accounts payable departments were approving invoices that didn't fit with contractual terms, usually because they lacked an enforcement mechanism to oversee the process and ensure nothing was being purchased or paid for that fell outside the confines of the contractual agreement. While having an individual in place to enforce these policies can certainly help, businesses that invest in the right software solutions can go a long way toward keeping everyone on the same page regarding the contractual agreement.
If procurement specialists or accounts payable professionals have access to the documents pertaining to their particular order, or at least have the ability to communicate with those who do have access to this documentation, they can alleviate the risk of buying or paying for something they shouldn't. Preventing this mistake can save organizations a significant amount of time and money and eliminate issues that can stem from it.
Alleviate the Risk of Contract Leakage with Cloud-based Contract Life-Cycle Management (CLM)
One advantage of many Contract Lifecycle Management (CLM) solutions is that some vendors offer cloud-based solutions where documents are stored in a central repository, securely accessible from any Internet connection, rather than being siloed in someone’s desk, a local hard drive or on servers or locations that may not be easily accessible. While the obvious part of this type of CLM deployment is, if you have a question as to whether a particular item on an invoice was contractually eligible to be purchased, you wouldn't have to stop and spend time searching for the proper document containing that information, another element is perhaps as important. Using a CLM solution, key contract information, such as approved suppliers, special pricing and a host of contract details, can be recorded as a part a contract’s term sheet meta data. This allows contracts and their contractual details to be quickly and easily searched, without having to read through and interpret the actual contract.
Improved Collaboration Needed
The article also suggests additional ways of managing contract leakage. If businesses and their providers collaborate on purchase order and invoice processing, there will be less of a chance of confusion regarding what should be sold and what should be paid for. This is easily facilitated via a cloud-based system.
"Today, trading partners that have embraced purchase order (PO) and invoice automation over a business network can ensure the perfect payable," wrote Chris Rauen, the article's author. "Buyers can deliver an electronic PO that the supplier can flip into an electronic invoice, guaranteeing the two-way match. Better yet, the same level of control can be extended to non-PO invoices by matching the invoice against—or creating an invoice from—a contract." Rauen listed several types of contracts this can be applied to. They include:
A supplier-level contract.
A commodity-level contract.
A catalog-level contract.
An item-level contract, a subset of the catalog-level contract.
Ultimately, contract leakage can be a concern at just about any organization, but using CLM solutions to keep contracts organized can help limit this risk.
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