Effective Procurement Strategies in Reducing the Total Cost of Commercial Contracts

1. Effective Procurement Strategies in Reducing the Total Cost of Commercial Contracts

2. A key take-away “The basis of a good relationship is forged by having a good contract in place”

3. 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

4. Procurement Approval Procurement Approach Contract Management Sample Organisational Procurement Process • 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. • 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

5. Managing Supplier Performance Approach Managing Supplier Performance

6. Managing Supplier Performance - Rebates Managing Supplier Performance

7. Definition Tips Managing Supplier Relationships • 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

8. Potential Performance Variations Performance Management • 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

9. High Effort Effective Contract High Effort Less Effective Contract Low Effort Low Effort Contract Start Contract End TIME Effective Contract Management EFFORT Effective Contract Graph [Source: Sara Cullen]

10. Invoicing Duplication Issue Lessons Learned Tricky Supplier Situations • 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.

11. Managing Supplier Relations Signs of Contract Management Risks Managing Contract and Supplier Relations • 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 • 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

12. Gotcha’sHow 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

13. Gotcha’sHow 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

14. Gotcha’sHow 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

15. Questions?