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A major finding of a recent McKinsey1research paper Contracting for Performance – unlocking additional value reveals that most contracts lack basic elements that could enable better vendor performance and cost savings.

 Researchers Roman Belotserkovskiy, Britta Lietke, Jayant Sewak, Adina Teodorian cite specific failures of organizations throughout all industries, but they also describe tested methods that really do work to fix them.  Examples of performance issues discovered in the research include these: 

 

  • Organizations are underinvesting in contract development and vendor management.
  • Procurement awareness of competitive terms and contract structure is frequently weak or missing.
  • Contracting processes too often fail to accurately align contracts with industry standards.
  • Procurement’s view of business value is often too narrow when setting terms and conditions, resulting in value leakage.
  • Practitioners create suboptimal contract terms, perform poor contract management and underspend for procurement operations.

 

Pulling out value

 Authors suggest that a good place to start is to focus on linking performance requirements to clear objectives and quantitative metrics. Given the size of the potential cost savings, procurement leaders cannot ignore the opportunity.  That’s why closely reading Contracting for Performance – unlocking additional value is worth the time. 

END NOTE:

  1. McKinsey & Company

 

ABOUT THE AUTHORS

Roman Belotserkovskiy has extensive experience in the energy sector and leads McKinsey’s global procurement and supply-management work within the Electric Power & Natural Gas Practice. He has led multiple purchasing and supply-management transformations for both regulated utilities and merchant power producers addressing all categories of direct and indirect spend, including major capital projects and services as well as building new functional and organizational capabilities.

Britta Lietke advises clients globally on indirect procurement issues, including procurement capability building, advanced sourcing methodologies, demand management, contracts, and procurement policy optimization. She has deep indirect procurement-spend experience and has served more than 50 clients worldwide on strategic-sourcing issues.

Adina Teodorian deploys global procurement and technology programs with high dependencies on supplier performance and supplier partnerships for continuous improvement and innovation. She supports clients in global operating model transformations powered by technology and automation, leads operational efficiency studies to improve technology utilization and reduce overall operating expenses.

 Jayant Sewak advises clients in North American on indirect procurement issues, including advanced sourcing methodologies, post-merger synergy identification, contracts, and category strategy redesign. He has served numerous clients worldwide on strategic-sourcing issues and advices clients on approaches to reduce overall operating expenses.

 

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