For public utilities, contract management software can play a key role in the successful procurement.
Contracts are a central tool in procurement. Procurement relies on contracts to lock in prices and secure levels of quality in goods and services.
We would argue that procurement preserves something else in the contracts it negotiates, namely, the research, technical expertise, and legal acumen that goes into acquiring goods and services on the best possible terms.
So why is contract management software important to procurement in public utilities?
Public utilities face many procurement challenges. Here are three examples where use of a contract management system can make all the difference.
Specialized Goods and Services
Public utilities run a vast infrastructure. They need goods ranging from generators, transformers, and electrical components, to line towers, water lines, and meters. The expert services that utilities use include hydraulic consulting, vegetation control, line construction, environmental analysis, transformer management, energy storage, and emergency planning. The investment in these goods and services is significant.
In creating contracts, collaboration between technical experts and contract professionals is key. The quality of the goods is measured in precise technical terms and is judged by performance over time. Replacing a transformer years earlier than expected is not a cost saving. Switch gear components must not only be reliable but actually interact with and protect other parts of the system flawlessly.
Services require even greater technical assessment by the users on a utility’s team. Contracting for scientific advice on water temperatures – whether the water is used for cooling or is released downstream of a dam – has cost and regulatory implications for the utility. Even something as straightforward as a contract for tree services needs business user input regarding seasonal timing to maximize line protection and reduce outages.
Contract management software plays a vital role in procuring special goods and services. Here’s how:
- Collection of technical requirements can be a standard feature of a contract request. The technical professionals who rely on the components know what specifications to demand in a bid and final contract. They also know which outcomes to hold vendors responsible for and what performance to expect over time. Getting that information into a contract management system as part of a contract request puts the facts in front of procurement and legal as they begin to frame a contract together.
- Collaboration in pre-approval stages makes the contract more effective. While the technical users know what constitutes quality or acceptable risk in a component or service, they often do not know how to translate that knowledge into meaningful contract language. Using a contract management system, procurement can use their commercial expertise to prioritize enforceable outcomes, realistically allocate risk, and draft KPIs with consequences. The technical users can share in this review process as a final contract is prepared so that performance goals are not lost in commercial or legal language.
A benefit is that when bidding is completed and the utility is ready for a contract, it will have its own, well prepared contract language as a starting point. Often, pressed for time, the buyer’s unfortunate fall back is to use vendor paper, send it to legal, and hope for the best. Contract management software facilitates efficient collaboration so that contracts for diverse goods and services reflect the utility’s collective technical, commercial, and legal expertise.
As noted above, most important goods purchased by a utility have operating costs. Their value is judged through years of use and maintenance. Likewise, the services provided to utilities are not cut-and-dried, but have ongoing impacts on the utility’s performance.
Utilities form crucial business relationships with vendors of goods and services, and contracts govern those business relationships. When procurement has done its job well, contracts should receive at least as much attention after execution as they do before.
Contract management software plays a vital role in evaluating vendor performance. Here’s how:
- Performance-based contracts become manageable. In a best-case scenario, utilities and vendors have agreed to targets around operating costs, service up time, and delivery. These targets have time frames and performance metrics. Contract management software provides ways to relate contract goals and obligations with the data that shows the targets are being met. Designing the evaluation criteria and the rewards or penalties for meeting or not meeting the criteria is the work of procurement. But the utility’s technicians and business users can use the same system to provide the data or the interpretation needed to monitor performance. In a single shared contract management system, with alerts and scheduled tasks around contract performance, technical and commercial professionals can use the contract’s terms as a framework for monitoring vendor performance.
- Cross-functional teams can improve the next round of contracts. Some procurement contracts stay fundamentally the same in how they describe costs, risks, and remedies. This is not the case for many of the goods and services in the utilities world. Technology evolves and the commercial landscape changes by the month. Balancing the costs and performance of a contract for energy storage, for example, especially as renewables add to demand, requires analysis of technical and commercial data. Using shared access to a contract management system, a cross-functional team of technical and procurement professionals can review a current contract’s performance and identify the provisions that have under-performed or left too much room for risk. They can work together to improve the next contract based on their analysis of the current one.
Contract management software can also help aggregate the data across contracts necessary for category management, an approach to procurement that utilities sometimes resist for lack of visibility into contracts across the organization.
Utilities are regulated. They answer to utilities commissions, energy commissions, attorneys general, and the US Department of Energy. In any transaction, they may need to demonstrate consideration of effects on consumers, environment, climate, energy security, and infrastructure safety.
Contract management software plays a vital role in a regulatory environment. Here’s how:
- Allocation of risk can be assigned and enforced according to a contract’s terms. In partnering with suppliers, as well as goods and service providers, utilities take risk into account. A construction contract must make clear how ecological risks will be managed as a dam or substation is built. Purchase of electrical components must take into account the risks associated with their transportation, storage, installation, maintenance, and disposal. A contract or sub-contract to operate any part of the electrical grid must include stringent requirements to protect the grid from cyber threats or weather events. In a contract management system, reports and recurring tasks can be assigned to be sure that counterparties are meeting their risk management responsibilities as stipulated. Documents attesting to vendor training and preparedness can be requested and stored in the same system with the vendor or contract record.
- Utilities can demonstrate a record of compliance around purchases supplies, goods, and services. While many regulatory matters fall on operations rather than procurement, the utility can still be called to answer for the actions of contractors or service providers who operate, monitor or maintain parts of the system. Even where suppliers have agreed to shoulder much or all of the regulatory burden, the utility may have ultimate responsibility. In a contract management system, technical professionals can confirm that the work of contractors is being completed in accordance with standards and regulations. These regular reports can be associated with particular contracts and scheduled as recurring obligations on the part of utility personnel. With access to the same system, the contract managers can then follow up to demand compliance or even penalties under contract. If or when regulators have questions, the utility can present answers.
Successful procurement means more than a successful bidding process. It means careful assessment of needs, balancing of costs and performance over time, and recurring evaluation of procurement decisions. A contract management system can give procurement and their technical partners at the utility a common tool to acquire goods and services with maximum efficiency.