Linking contracts, purchase requisitions, and risk management: a strategic approach

Have you ever wondered how successful companies seamlessly manage their procurement processes? It's not just about buying goods and services ; it's about the strategic interplay between contracts, purchase requisitions, and risk management. Let's explore how they connect and why mastering this relationship can transform your business:

Contracts: the foundation

• Contracts are legally binding agreements that define the terms of business relationships.
• They set expectations, deliverables, and penalties for non-compliance, serving as a roadmap for successful partnerships.

Think of contracts as a roadmap, guiding both parties toward a successful partnership by clearly outlining each party's responsibilities and protections.

Purchase requisitions: the trigger

• Purchase requisitions initiate the procurement process, signaling the need for goods or services.
• They ensure that purchases align with company needs and budget constraints, acting as a preliminary checkpoint.

For instance, an IT department might submit a purchase requisition for new laptops, specifying the required specifications and budget. This ensures that the procurement team buys equipment that meets the company's technical needs and financial limits.

Risk Management: the safeguard

• ·Risk management involves identifying, assessing, and mitigating risks associated with contractual agreements and purchases as well as the nature and identity of the supplier.
• It ensures that potential issues are addressed proactively, minimizing legal and financial exposure of the procuring company.

For example, before entering a contract with a new supplier, the risk management team might assess the supplier's financial stability, compliance with regulations, and history of performance issues.

The connection

• Contracts?provide the terms that guide?purchase requisitions, ensuring that procurement aligns with agreed-upon conditions.
• Purchase requisitions?trigger the need for?risk management?to evaluate the implications of the proposed purchase.
• Risk management?informs the selection of the appropriate pre-vetted supplier (following a pre-scribed risk assessment) as well as drafting and negotiation of?contracts?to mitigate identified risks upfront.

The process flow

To ensure smooth operations, it’s crucial to enable seamless interaction between all stakeholders in the process lifecycle, including buyers, contract professionals, risk managers, and others. Establishing a single source of truth is key. This central repository should be accessible from various perspectives to meet different informational needs. Additionally, continuously monitoring the status of each activity, contract, and risk assessment is essential for maintaining oversight and control.

The outcome

Adopting a synergistic, lifecycle-oriented approach to contracts, purchase requisitions, and risk management can lead to several significant benefits:

• Enhanced compliance: Ensuring all purchases are made within the scope of legal agreements and an appropriate supplier landscape.
• Improved process efficiency: Aligning multiple tasks by multiple interactions in one single, monitored process lifecycle
• Optimized spending: Aligning procurement with business and risk objectives as well as contractual terms.
• Reduced risk: Proactively managing potential risks associated with new contracts and purchases.

By understanding and leveraging the connections between these elements, organisations can create a robust source-to-pay governance and process that supports strategic decision-making and sustainable growth.

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At smartvokat, we specialize in guiding corporate Legal, Risk & Compliance teams through their digital transformation journey. From crafting service portfolio strategies and improving processes to selecting the right software and implementation, our end-to-end transformation advice empowers clients to achieve their strategic objectives with confidence.

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