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Contract, Performance and the Relationship in SRM

Analyst Insight: There needs to be a clear line of sight between what is in the contract (and the contractual obligations of both parties), the performance metrics or KPIs, and the relationship, including a 360º perception of the relationship. However in practice this is rarely the case. – Alan Day, Chairman & Founder, State of Flux

Contract, Performance and the Relationship in SRM

State of Flux’s five years of global studies on supplier relationship management (SRM) show organisations lack a strong foundation upon which to build their SRM programme. Such a foundation incorporates three elements: contracts management, risk management and supplier performance management.

Technology is a powerful tool to achieve a “clear line of sight” among these three elements, enabling teams to view supplier contractual obligations, create appropriate KPIs and provide a link into the overall view of the relationship.

Our research shows adoption of technology (use of tools and systems) has consistently lagged behind the other five “pillars” of SRM (business drivers and value; stakeholder engagement; governance and process; people and skills; and relationship development and culture). To have a strong SRM programme, organisations should be strong on all six pillars.

Many organisations struggle with the behavioural change needed for SRM. There is increased evidence that implementing systems to capture, collate and manage the relationship is an effective catalyst to change behaviour; supporting the argument to implement technology in the early stages of SRM.

We have seen benefits from a technology-led approach for SRM because it:

• Provides a tangible focal point for the programme.

• Ensures SRM is definable (not relying on individual stakeholder perception).

• Provides structure; the system is used as framework by the SRM lead to track tasks, leaving the team to focus on value-add activities, including relationship development and coaching of the business and suppliers on how to best work together.

• Drives consistency on measuring, managing and treatment of suppliers.

• Allows measurement of progress at a supplier and programme level.

• Gives a clear line of sight among contract, risk, performance and relationship management activities.

It is not procurement technology; we believe procurement should own the technology, process and governance and provide a framework for the day-to-day managers of the relationships. The users or audience are the operational business owners.

Not all suppliers warrant SRM or even performance management. Prioritisation through segmentation and a scalable approach should be adopted.

Despite clear benefits, barriers to technology adoption remain:

• Supplier segmentation, associated treatment strategies and supporting technology is difficult.

• Difficulty linking contracts to performance and the relationship. The contract management system may be unpopulated or out of date; KPIs may not reflect the contract or relationship dynamics may have changed.

• Contract management systems are linked to Purchase2Pay, ERP or sourcing rather than SRM and SPM, reducing visibility for operational users.

• Training on the value of linking contract, risk, performance and relationship management has not occurred.

• Confusion on the use of performance management, including hard versus soft metrics.

                                                            The Outlook

Effort, resource and technology are spent on a buying process that may take three to six months when the consequence of that decision may last three to six years or even longer.  Without proper management, upfront sourcing efforts may be eroded.  To capture and increase value, leading organisations are assessing the allocation of resource and technology to focus more on post-contract signature activity.

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