An existing contract is about to expire. The RFP has been prepared and sent out. Responses have been received and reviewed. The contract has been negotiated and signed. Savings and improved terms and conditions have been realized. The team has done an excellent job negotiating this contract. It’s filed away with a reminder to review a few months prior to expiration. Now it’s time to negotiate another contract.
All too often, this is the typical cycle of contract negotiations. Work is done furiously for 4-6 months and then the new contract is signed and put away. What really happens during the term of the contract; after the signing and before the renewal process? Here is a case study of what can happen if contracts are not continually monitored.
In this example, the company negotiated a best in class mobile contract. The term was three years. As per usual, the contract was filed away after signature. The company expected to significantly reduce their mobile costs based upon estimated savings calculated at the time the RFP was analyzed.
In the above example, the mobile contract was not monitored monthly by the company. The graph clearly shows that the cost per device increased from $57 at the beginning of the contract and quickly escalated to $76 per device in just six months. Monthly costs increased from $29,000 to over $38,000. The cumulative cost increase was in excess of $200,000. Again, all this occurred in just six months.
A further illustration of the cost increase can be found on the next graph. This shows that while the number of mobile devices was decreasing, the cost of mobile service was increasing.
At the end of six months, the number of mobile devices decreased by 249 while the cost increased by $34,821. These numbers do not meet the expected savings negotiated in the mobile contract. Budgets and departmental costs will have to be adjusted.
How could this situation have been avoided? Monthly analysis is the key. Each month, all invoices should be analyzed and compared to the contract. Rates, late fees, rounding, minimums, etc. should be reviewed for each line item. Service levels should also be measured and evaluated against the provisions in the contract. Without monthly attention, costs can skyrocket and your company will never realize the savings anticipated at the signing of the contract.
If a company utilizes an internal procurement department, it is imperative that procurement either a) audits the line items of each invoice themselves or b) works closely with another internal department on the auditing.
If a company chooses to use a consultant, it must make certain that the consultant is capable of managing the contract process from cradle to grave. This consultant must, not only negotiate the contract, but perform monthly analysis to ensure proper rates and terms and conditions are being applied. Caution should be used when paying consultant invoices. Be wary of consultants who base their fee on “estimated” savings. Consultant’s fees should be paid on actual realized savings.
By following these rules, a company can make a real, not estimated, improvement to its bottom line, increase profitability and rate of return to its investors.