Procurement Contract Risk Management

In partnership with APICS, Protiviti Inc. recently published two major surveys and whitepapers. One addressed the topic 'understanding supply risk areas, solutions and plans'* while the other was titled 'managing the risks of outsourcing'**. The findings from these papers, extensive additional research on related topics, and our risk consulting experience at our clients prompted us to carry out this focused and extensive study of procurement contracting and related contracts management practices and risks.  These are very big dollars and these are very big risks! The survey evidenced that about three-fifths of organizations spend from 30 percent to as much as 80 percent of their revenues on goods and services from third parties. Astonishingly, almost 20 percent of respondents spend more than 60 percent of annual revenues on third party goods and services. This further reinforced data from other surveys that suggested that very many organizations spend 50 percent or more of earned revenues with suppliers. It would be reasonable to expect that board members, senior executives, and other business leaders and stakeholders demand that strategies, policies, processes, organizational skills, management and control mechanisms, and tools governing and supporting the management of contractual arrangements for this level of expenditure be effective and efficient. Also, those stakeholders would expect that the array and magnitude of inherent and significant risks, potential exposures and regulatory demands, and opportunities in these arrangements be managed and controlled effectively.  Our research reinforces the immediate need to quickly increase the focus and investment in procurement contracting and contract risk management capabilities at many organizations. These weaknesses were somewhat predictable in the areas of non-inventory/indirect procurement. By 'indirect' we mean the purchases of products and services not planned/used directly in product manufacturing and distribution processes. However, there were also a very large number of organizations that reported unacceptable contracting capabilities in the 'direct' procurement domain. The above referenced 2004 survey and paper on 'understanding supply chain risk areas, solutions and plans'* showed that 47 percent of respondents identified the organization's inability to manage and control supplier and contract performance effectively as a major area of concern. Now, as you read through this latest whitepaper you will find that this study bears out and heightens those concerns. These issues are clearly quantified and qualified in the form of the alarmingly high percentage of contract management capabilities at a maturity level of 'less-than-satisfactory.'*** Key:\r
* Understanding Supply Chain Risk Areas, Solutions and Plans - A Five-Part Series\r
** Managing the Risks of Outsourcing - Current Practice Effectiveness\r
*** 'Less than satisfactory' is defined as 'initial' and/or 'repeatable' in Protiviti Inc's