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Effective Procurement Strategies in Reducing the Total Cost of Commercial Contracts

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A key take-away

“The basis of a good relationship is forged by having a good contract in place”

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Procurement Considerations

Cost should not be the single deciding factor when selecting a supplier?

Should Consider:•Business and Contract Risks •Product/Services •Deliverables•Measures and Controls (KPI’s)•Service Breach•Rewards•Performance

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• Each Department is responsible to follow the Business Procurement Policy process.

• Departments deal with approved vendors direct and procure goods and services required upon approval

• VGPB• Finance Dept responsible; to pay a/c upon approval and P/O

raised, business financial management/reporting.

Procurement Approach

Contract Management

Procurement Approval

Sample Organisational Procurement Process

All procurements that involve a formal Contract need to follow Contract Requirements:•Legal Templates to be used•Specification development•Commercial Requirements and Performance Measures•Public Tender if spend >$200k

•Delegation of Authority Policy•Hierarchy Based GM-$50K , EGM-$250K, MD upto $2.5M, Board >$2.5M

•Business Case or quote (s) to be presented to generate approval•Approval Requirements incl. -upto $25k 1 written quote-$25,001-$200k 3 written quotes or Tender->$200k Tender- Contract management plans if > $100K and high risk

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Managing Supplier Performance

Managing Supplier Performance Approach

KPI Core Measures Minimum Standard to be met

Month 1 Met MonthlyTarget

Core Measure 1 On call support services

100% within specified timelines for response and resolution times

All incidents met within specified timelines

Core Measure 2 Housekeeping and

system maintenance

>=80% within 10 business days

<=20% residual must be completed within 2 business days from due date (after 10 business days has lapsed)

Completed all agreed tasks within 10 business days

Core Measure 3 Scheduled tasks

>=85% within 10 business days

<=15% residual must be completed within 2 business days from due date (after 10 business days has lapsed)

Completed 90% of agreed tasks within 10 business days

10% of residual not completed within 2 business days from original due date

Does not

comply as the residual uncompleted tasks were not completed within the required time.

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Managing Supplier Performance

Managing Supplier Performance - Rebates

Category of Services (see Table in Section

5.0)

Minimum Standard Rebate for failing to meet the KPI in the Section 5.0 Table Category of Services

Rebate Percentage(based on monthly

baseline cost)

Rebate amount Calculation(excluding GST)

Core Measure 1 On call support services

100% within specified timeframe

80% 80% x $9,860 = $7,890

Core Measure 2 Housekeeping and system maintenance

Update of tasks within 10 business days of a change occurring

10% 80% x $9,860 = $986

Core Measure 3 Scheduled tasks

Update of tasks within 10 business days of a change occurring

10% 80% x $9,860 = $986

Total monthly fee payable 100% 100% x $9,860 = $9,860

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Managing Supplier Relationships

Definition

Supplier relationship management is a discipline of working collaboratively with those suppliers that are vital to the success of your organisation, to maximise the potential value of those relationships.

•Focus on continuous improvement to service levels/performance and cost to provide value add to both organisations

•Consider business risks and critical factors are addressed –Set KPI’s

•Performance Metrics in place to ensure Vendors takes contract seriously.

•Aim for an collaborative partnering engagement with shared benefits “win-win” for both parties to strengthen the relationship

Tips

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Performance Management

Potential Performance Variations

To minimise suppliers performance variation it is important to:

•Have clear deliverables documented in a Contract

•KPI and Core measures

•Rebates and Incentives

•Variations process in place

•Performance Management Reporting & Monitoring

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Effective Contract Management

TIMEContract Start Contract End

High Effort

Low Effort

Low Effort

High EffortEffective Contract

Less Effective Contract

EFFORTEffective Contract Graph

[Source: Sara Cullen]

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Tricky Supplier Situations

Invoicing Duplication Issue

One supplier was incorporating a service cost into a monthly support fee as well as sending an individual cost for the service.

Through contract review and auditing l was able to detect this duplication. Supplier was approached in good faith and a payment plan was established to return monies owed.

•Stresses the importance of having effective Contract Management processes in place.•Clearly itemise all cost components in Contract – easier to manage and identify exactly what individual components are cost.

Lessons Learned

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Managing Contract and Supplier Relations

Signs of Contract Management Risks

• Contract deliverables not aligned with business Business Requirements/KPI’S• Cost of delivering services goes up in cost everytime you renew contract• Poor Service delivery• Business and Contract Risks not addressed or managed – no controls in place• Contracts sit in the bottom of Filing cabinet once signed- not a living document• No contract management controls in place• If no contract in place – not legally binding – Suppliers do not take deliverables seriously

and become complacent

Managing Supplier Relations

• Contract terms and deliverables need to be realistic- a win-win approach works best

• Open and Honest relationship • Be flexible when possible don’t set deliverables in stone• Ensure you have clear deliverables in place

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Gotcha’s How vendors can get an advantage over purchasers

•Best Endeavours no Performance Metrics KPI’s in place•Charging for giving quotations•Automatic contract renewals•Exit fee if purchaser wants to exit contract •Charging for rework when the rework was due to poor vendor performance•Don’t just accept when the vendor says they can do the work – get evidence before engaging

•Use suppliers contracts rather than your own- reduces their risk not yours

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Gotcha’s How vendors can get an advantage over purchasers

•Response and Resolution times:– Resolution often forgotten– No periodic resolution updates

•Residual

95% of work to be completed in say 10 days, but what about the other 5% ?

•Probity always needs to be considered

-Cannot accept go to the footy for a boozy afternoon with a Vendor?

-Need a probity plan – to ensure fair, open and transparent process

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Gotcha’s How vendors can get an advantage over purchasers

Vendor services and costs not itemised so if there is a change/variation the Vendor can:•do alot less;•with a small or no drop in their fees

Never let the client only do their own performance reporting – important to have your own QA processes in place

Do not automatically renew agreements without checking out the pricing and implications – don’t assume everything is the same as the previous term

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Questions?