Smarter contract management has the potential to reduce non-payroll operating costs by up to 5%. Mark Harding explains how AI can play a vital role in realising the opportunity
Current cost pressures mean business leaders across sectors are putting costs under the spotlight and looking for opportunities to reduce outlays. One area that demands closer inspection is in-progress contracts for business-critical services – everything from IT and logistics services to marketing and HR. Together, these contracts often account for over half of non-payroll operating costs. Yet our experience shows that overbilling or under-delivery means many businesses are wasting up to 5% of their spend. Tightening up contract management to prevent future overpayments, as well as reclaiming past overpayments, can deliver immediate, and often significant, returns.
Contract complexity means opportunities lie hidden
The challenge, of course, lies in the practicalities:
- In many organisations, contracting is not centralised or, where it is, there may be legacy contracts with bespoke terms. Keeping oversight of detailed contractual compliance can therefore feel like a moving target
- Ensuring contracts are compliant and that suppliers are being correctly paid is a core corporate control – but most in-house teams are stretched, with multiple demands on their time. With so many contracts and such variation in terms, it is almost impossible to keep on top of the challenge
- Some errors may be flagged by ERP systems or spotted manually, but many are impossible to identify through systems or manual oversight alone
AI technology shines a powerful spotlight
This is where powerful AI technology can help. At KPMG, for example, we deploy technology components such as machine learning techniques and natural language processing and configure them specifically to track down potential commercial leakage. Our AI-based tools can scan and intelligently analyse thousands of lines of information in contracts, invoices and supporting documents such as timesheets or materials inventories, to identify overpayments and under-delivery. These tools dramatically expand the capabilities of human teams.
One big advantage of this approach is that it enables businesses to review contracts without disrupting the relationship with suppliers. Existing documentation is usually sufficient to enable the review. Another point to note is that, because AI makes this approach so efficient, the cost of applying the tools is often self-funding through savings made.
The top 5 categories of spend where we have found significant savings have been:
- IT outsourcing
- Temporary labour
- Facilities management
- Plant hire
Plugging commercial leakage can deliver rapid returns
Cost pressures are set to continue and, going forward, many businesses will be reviewing their cost base and looking to develop a long-term strategy across the full range of cost levers. In the meantime, using AI to uncover opportunities to plug commercial leakage from contracts can deliver welcome quick wins.
To discover other opportunities for reducing costs, explore our new guide, ‘Cost optimisation opportunities for the year ahead.’