How Much are Automatic Renewals of Purchase Agreements Costing Your Organization?
CFOs and CPOs would love to know the real impact on the bottom line of purchase agreements that renew automatically without review.
Unfortunately, this isn’t an analysis that most procurement teams are going to voluntarily produce. In addition, any analysis would be a guestimate at best. I would suggest that fixing the problem will be a much better use of resources.
Why do purchase agreements renew automatically without review? For most organizations it comes down to several key issues:
- There isn’t enough time to review them in advance of the renewal date
- Common key terms are not easily accessible in an organized database
- A central repository of agreements for all divisions, profit centers or entities doesn’t exist
If this is your company, your suppliers and service providers love doing business with you.
To get an idea of the cost let me share some points:
If the average contract includes a 1% increase and your yearly spend on agreements with automatic renewals is $50 Million then the potential lost profit or additional cost is $500,000. For some of my readers this may be chump change for your organization. Wouldn’t it be great if you had those savings in your pocket to offset some of the inevitable negative financial issues that happen every year?
Now consider the savings that could be achieved if you were to implement a cloud-based RFP platform for these agreements so you get competitive bids for each renewal. One of the organizations I represent has been able to save many of their clients between 5% and 10% on almost all sourcing events. Now if you do the math there could be $2.5 to $5 Million or more of lost profits. The savings can be much higher than that. In a recent reverse auction, a company in the medical industry saved in excess of 30% on a major equipment purchase.
What if you had a cloud-based vendor and contract management platform that alerted all key parties of upcoming renewals so the reviews could be easily scheduled? This central repository could determine every agreement that was up for renewal for the entire period. This alone would allow for scheduling and allocation of the needed internal resources to complete the reviews.
What if this same system allowed for the accumulation and summary of key contract terms? This would certainly make it much easier to determine if a new agreement had problematic terms.
This is all about time and efficiencies in utilizing resources.
Action Step: What would be the next step?
If your procurement team is still using Excel, Word and Email or they are working around a more cumbersome solution call me to set up a demo. In 30 to 60 minutes you will know if the solution I represent will work for your team. The benefits go way beyond cost. Your team will be smiling because they will know they are making a significant contribution to the profitability of your organization.
The best time to plant a tree was 20 years ago. The next best time is today.
Next week I will continue on this same theme so your organization can improve your bottom line.
If you would like to know more ways to reduce costs without changing the way you do business simply give me a call or send me an email with your contact information and the best time to reach you.
You Won’t Drift to Success©
Think about it.
Until Next Time, I Wish You Great Success in Your Business and in Your Life