US Fortune 100 companies waste $5 billion per year creating formal contracts when purchase orders could be used instead for 80% of contracts. Formal contracts are 25 times more expensive to create and manage than purchase orders. While critical contracts still require formal agreements, focusing procurement efforts on the remaining 20% through improved contract management systems could save significant costs and deliver better performance and value.

1. US Fortune 100 Companies Waste
5 Billion a Year Creating Formal Contracts
Bill Kohnen CPO Notes Aug 2014

2. Summary
• Creating and Managing formal contracts is
conservatively 25X more expensive as creating a
purchase order.
• 80% of Companies formal contracts could be
replaced with purchase orders: which are
contracts.
• Currently few organizations manage their formal
contracts well. Focusing on the critical 20% will
result in better performance and value.
Bill Kohnen CPO Notes Aug 2014

3. Comparison PO and Formal Contract
PO
• Standard Terms
• Performance Agreements
spelled out on PO
• Defined purchase request
and PO process
• Cost per PO $100
• Covers 80% of corporate
spend
• Can be used for multiyear
complex purchase
Formal Contract
• Negotiated terms
• Long time to get in place
• Often no defined process
and difficult to audit
• Cost per Contract $2,500*
• Reserve effort for high risk
items
• Need Closer Management
• Needs specialized
technology solution
*A very low estimate at some organizations contract for simple agreement are $5K with $100K for complex
Bill Kohnen CPO Notes Aug 2014

4. Cost of Processing 1000 Contract/Purchase Orders
$2,500,000
$1,300,000
$580,000
$220,000
$100,000
Contract Only Contract 50% PO 80% PO 95% PO Only
Bill Kohnen CPO Notes Aug 2014

5. Discussion
• US Based Fortune 100 Company can each
have more than 25,000 Formal Contracts
• At all organizations formal contracts are
typically not well managed resulting in:
– Missed Negotiation Opportunities
– Control and Compliance Risk
– Up to 50% loss of potential value of contract
Bill Kohnen CPO Notes Aug 2014

6. Discussion
• 80% or more of what is done with a formal
contracts could be more effectively managed
at a lower cost with a robust Purchase order
process
• What remains as the focus of a more formal
contract process can then be better managed
Bill Kohnen CPO Notes Aug 2014

7. Discussion
• Typically a robust purchase order process is
relatively easy to manage and gain visibility to.
• Formal Contracts typically are created and
reside in a mixture of email, individual
computers, shared files or file cabinets.
Bill Kohnen CPO Notes Aug 2014

8. Discussion
• Whatever the level of formal contracts remain there
are many options for reasonably price technology
solutions
• For best value a contract management process that
integrates with the request to pay process is best
• Beware of legacy ERP vendors solutions as they often
are cumbersome to use and have a high per user cost
which constrain full benefits
• Best options which are reaching are in the ‘early
majority” phase are cloud based SaaS solutions
Bill Kohnen CPO Notes Aug 2014

9. Summary
• Companies can significantly reduce real costs
by replacing 80% of their formal contracts
with purchase orders
• With help of reasonably priced solutions
remaining formal contracts will be better
managed and result in great value
Bill Kohnen CPO Notes Aug 2014