A consultant’s guide to contractual optimisation and creative cost cutting

29 November 2024 Consultancy.uk

From supermarkets to the NHS, the UK’s business landscape is under pressure to reduce costs without sacrificing the quality and efficiency of its products and services. Entec Si CEO Eman Al-Hillawi explains the key to finding solutions that are not only impactful but sustainable and welcomed by employees.

Before shrinking the talent pool or drastically overhauling essential operations, organisations can initially focus on less disruptive approaches to making efficiencies, and one place to start is with a review of all long-term supplier contracts.

One of the main issues with longstanding (legacy) supplier contracts, for organisations of all sizes and industries, is that after a while the agreed terms may become unsuited to evolved requirements and  operations. Frustratingly, longstanding arrangements also often mean that, despite long-term loyalty, businesses can be paying more for a service than newer customers, in a phenomenon known as the “loyalty-penalty”. Honest and transparent conversations with suppliers can help.

Forging great relationships with suppliers is always desirable, but with many organisations having a complex web of departments, needs and stakeholders, ensuring they remain value for money, is no easy feat. Even clarifying whose responsibility this is can often be difficult as this can also be a time consuming activity.

To remediate such situations, savvy businesses should take stock of all outgoing expenditures, even consider implementing an automated contract management tool, and regularly review against market alternatives. Carefully researching not only the service market but also industry averages can provide a strong position for the potential renegotiation of contracts. Looking holistically and carefully comparing different options means that there will also be a greater chance for consolidating services.

By grouping together goods and services, and thereby working with fewer suppliers, businesses can not only reduce supplier costs but are able to streamline the administrative load required to manage contracts and free up resources for future value-added activities.

Having a full overview of contracts will also identify different types of contracts in place. Performance-based contracts may provide a suitable strategic alternative to standardised fixed-fee agreements. Tying compensation to specific key performance indicators can ensure that goods and services are delivered at a consistent high quality and provide greater budget control.

While businesses looking to cut costs may be tempted to switch to the cheapest provider on the market, it’s important for decision-makers to understand that lower costs don’t always lead to effective cost-cutting strategies. When reconsidering contracts, it’s important to balance the quality of contracted goods and services – measured by business need and effectiveness – with cost.

More often than not, the cheapest solution is usually not the most flexible and badly considered choices could incur unexpected costs down the line. Consider options such as switching off unused elements, negotiating volume/bundle discounts, early payment discounts, sourcing locally to reduce shipping and handling costs. Using an RFP approach or frameworks can encourage competitive pricing whilst retaining quality.

For modern businesses in the current tumultuous economic landscape, flexibility and adaptability are paramount to contractual negotiations. Legacy contracts are often rigid and fail to address upcoming legal and regulatory frameworks. One way of combatting this during renegotiation is to consider building an agile framework into future contractual negotiations. For example, breaking down contracts into standalone clauses or introducing flexible and scalable terms that can accommodate for changing business needs.

Moving to a new supplier is change. As people are at the centre of all organisational change programmes, it’s important to consider how to best utilise and protect the workforce when reconsidering supplier contract negotiations. It’s important to remember that changing suppliers can have ramifications for the workforce – especially long-term workers who have grown used to certain systems, contacts or processes and may feel apprehensive towards the “unknown”.

To help foster employee advocacy, decision makers should ensure that any change comes with transparent engagement and communication and implement a space for employees to have their concerns and questions addressed. By ensuring that employees feel supported through the changes, there is a greater likelihood of long-term programme success.

In the current climate it’s important for change makers to focus on high-impact, strategic approaches for managing costs. Focusing on performance-based contracts, consolidation and compliance can help to drive substantial savings while simultaneously maintaining operational efficiency and strong internal relationships.

Eman Al-Hillawi is the CEO of change consultancy Entec Si.

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