In today’s global economy, companies hoping to reduce costs, enhance organizational agility, and accelerate innovation typically rely on an ever-expanding network of suppliers. But this supply chain complexity brings its own set of challenges—not the least of which is the obsolescence of traditional contract management processes. To maximize value and avoid cost leakage, organizations must move away from the manual processes of the past and leverage automation and artificial intelligence (AI).
Automation: A case study for preventing third party contract leakage
When an organization spends hundreds of millions of dollars per year on third-party contracts, 5% contract related cost leakage rate can add up. And yet, countless companies face this exact challenge.
There are numerous reasons for this leakage—almost all of which can be traced back to manual contract management processes and inadequate technology. Even organizations with strong ERP controls can miss countless invoicing issues—either because the software isn’t integrated with other organizational tools and technologies, it can’t map contracts to vendor categories or spend data, or poor data quality is interfering with the performance of meaningful trend analysis.
While engaging in a cost-recovery project is one way to identify invoicing errors—and recoup associated losses—there are limitations with this approach. For one, it takes time to manually conduct these assessments, limiting the volume of reviews that can be conducted. Additionally, efforts to recover lost money don’t always prove fruitful. In fact, only 25% to 75% of “recoverable” supplier costs are actually collected.
Fortunately, automated tools and technology are now advanced enough to meet the needs of today’s burgeoning supply chain—and help organizations better understand their contract risk, digitize supplier agreements, and capture relevant information.
“By using a system that can both automate contractual terms and confirm that suppliers are adhering to their service level agreements, organizations can potentially reduce their contract compliance efforts by 30%,” says Laura Joudrie, Senior Manager in Deloitte’s Risk Advisory practice.
Automation and AI allow companies to proactively identify potential issues and rectify them before an overpayment is made—avoiding cost leakage in the first place. These tools also let organizations pay closer attention to their strategic suppliers, positioning them to realize the full value of their contracts.
“It can get really granular. If a supplier is trying to bill for eight hours, but the system shows the contractor only worked for two hours, we can ask about those extra six hours,” Laura explains. “This allows us to resolve potential disputes in advance, giving organizations assurance that their supplier payments are accurate because they’re validated before the invoices are ever processed.”
While it may sound simple, this type of solution requires a level of automation that has only recently become commercially viable. That’s because the issue is exceptionally far-reaching. Companies with operations in numerous countries often have tens of thousands of suppliers working for them on a global basis at any given time. Each of these suppliers may be filling out manual time sheets to indicate how long they worked and in what location—and the rate each supplier charges likely varies as well. To further complicate matters, many suppliers continue to render their invoices on paper or through PDFs that don’t link to any backend tracking systems. As a result, until recently companies simply couldn’t verify if their supplier payments aligned to their original contract terms.
“Automation and AI are changing the game, empowering companies to dramatically reduce invoicing errors,” Laura asserts.
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