Benchmarking costs against the suppliers’ competitors is a recognised method of avoiding cost ‘creep’ and ensuring best value.
Benchmarking should be undertaken prior to and throughout the life of the contract. It can be used for:
Decide which spend category(s) you wish to perform the benchmarking exercise for.
This 80 percent will normally be no more than 20 percent of the number of line items. You now have a manageable amount of data to go out into the market place with.
This does not cover every aspect of the potential scope of supply. In certain circumstances additional items may need to be added, such as bottle-neck and specialised items. The aim is to gain an estimation of the market rates.
The incumbent supplier should be made aware that you are planning to perform a benchmarking exercise before you go out to the market place.
Having selected the items you want to benchmark, you can now approach the market to understand the current prevailing costs.
Benchmarking is generally an informal process and the Management Information Hub is a good source of information, as is the internet. You can also contact a number of suppliers directly. However it is important to ensure that these suppliers who receive requests for information understand that you are conducting a benchmarking exercise and that this is not a business opportunity. The request should be simple enough for the suppliers to provide the information without having to spend a great deal of time doing so.
You are now ready to compare the results of your benchmarking exercise. To compare the results you could, for example, enter all prices into a spreadsheet and determine the price difference between the incumbent supplier's prices and the prevailing market rates. By doing this you can determine where the incumbent supplier(s) sit against the best, worst and average market rates.
If you are happy with where the incumbent supplier’s pricing sits then the supplier is competitive and no further action needs be taken.
If you are not comfortable with where the incumbent supplier’s pricing fits, invite them to a meeting. Give them the opportunity to explain why they are not competitive against the current market rates. On no account should you divulge the competitors' names or pricing information.
If the supplier is willing to accept their prices are not in line with the market rate, this will be a relatively pain free cost reduction for you. If the supplier is unwilling to negotiate a reduction, you should initiate the escalation process. Include this as an agenda item at the next Review Meeting.
Where benchmarking indicates that a supplier’s pricing is not aligned with prevailing market rates, this presents an opportunity to seek a cost adjustment in a transparent and constructive manner. Where the supplier is open to this discussion, an agreed price realignment may be achieved with minimal disruption. Where agreement cannot be reached, you may be able to work with the supplier in some way to reach an agreed price realignment, using methods such as open book costing, for example.
If price realignment cannot be achieved, the matter may be be progressed in line with the contract’s escalation and governance arrangements and tabled as an agenda item at the next scheduled contract review meeting.
Demand Management can be defined as:
“the alignment of a business’ consumption with its business requirements”
It is applicable to all goods and services where internal demand and consumption can be influenced to reduce costs.
Demand Management is a key aspect of effectively aligning external resources to meet requirements. When Demand Management is considered, it is often seen as a simple matter of stopping people spending money. However there are ways to look at Demand Management without completely preventing spend. These can provide notable savings and have a less drastic impact on the business.
Demand often results from internal practices and processes rather than from addressing a real need of the Organisation. The approach is about addressing change ‘in’ an Organisation. Therefore the starting point will be the culture, policy and behaviours of your Organisation.
Your Organisation can also participate by sharing best practice, benchmarking behaviour, creating policy guidance and undertaking peer review.
Demand Management can come at different points in the procurement process. For example, during the initial purchase point e.g. that software licences are purchased for the correct number of users at a single point in time. Demand Management can also occur in situations where costs are recurring as an ongoing activity such as in a category where spend is ongoing and regular (e.g stationery or postal services).
Demand Management, including behaviour change, represents a significant and untapped opportunity.
| In the short term | changing expectations |
| in the medium term | changing participation |
| in the long term | in the long term |
There are 3 main principles of demand management:
1. Each business unit should have exactly what it needs in order to deliver its business objectives;
2. Any resources consumed above this level represents a waste to the Organisation;
3. There may be many and very different ways of meeting a user's needs. Each way represents a different level of resource to achieve the same outcome.
The three strategies listed below could be independently or jointly applied.
| Eliminate | Is the requirement really needed? Can the consumption be stopped? e.g. cancel non-essential meetings, or stop the use of mobile phones for non-business calls. |
| Replace | Can we use lower cost or more effective alternatives? e.g. use video-conferencing for meetings or ensure non-confidential papers are not treated as confidential waste |
| Reduce | Can we use less of a product / service? e.g. don’t order a monitor with every PC purchase or, schedule meetings for the same day |
With Demand Management you should consider:
There are a number of benefits to an effective Demand Management strategy. Many benefits are driven by:
When robustly implemented across all goods and services Demand Management drives public sector Organisations’ efficiency and effectiveness. The Organisation uses all the external resources it procures to meet operational requirements.
The Demand Management process challenges the norms, standards, customs and practices of an Organisation. This is done to a degree not usually found in other processes.
Using Demand Management to prepare Strategic Sourcing, you can establish that the Organisation's requirements are sourced to a very specific level. This can avoid the development of a sourcing strategy for over-specified operational requirements.
Used routinely Demand Management can ensure the highest possible resource levels are directed at front line services. This is especially important in the public sector.
Consideration as to how the demand will be forecasted and fluctuations managed should be initially undertaken at the ‘Shaping the Requirement’ stage. This should be subsequently monitored and managed throughout the lifetime of the contract. Failure to do so could result in:
Effective Demand Management forecasts also give the supply base the opportunity to manage their costs. This can be achieved by positioning resource and materials in line with demand.
Demand forecasting should be based on considerations such as:
Where practical, you should look to reduce future demand and costs by using strategies such as:
For any supplier to operate effectively, it must understand and manage its demand. They can use this knowledge to tailor its resources and processes proportionately. This will ensure they deliver their service in the most efficient and cost effective manner. By understanding historical demand, an organisation can work with its suppliers to realise mutual cost and efficiency gains.
The most effective way to forecast future demand is to consider a combination of:
Forecasting is not an exact science and will never be 100% accurate. However these elements should provide sufficient information to allow the Organisation to develop forecasts. These forecasts should be accurate enough to accommodate demand fluctuations during the lifetime of the contract(s) with minimal cost.
The Organisation should ensure the supplier stays in regular contact with all key stakeholders (including other suppliers). This will ensure that all parties are aware of the supply/demand position, especially during periods of fluctuation.
Good Contract and Supplier Management processes should encourage both supplier and organisational innovation. It should be recognised that suppliers often have innovative ideas to improve their own and their customer’s service. However suppliers can be blocked in their attempts to put these ideas forward.
You should want to be a customer of choice i.e. suppliers will invest and bring innovation to the contract. You should adopt these behaviours and allow supplier innovation and added value activity to flourish:
Quickfire Guide
Innovation is a two way process. Your organisation should be equally active in exploring innovative ideas which will help your suppliers improve their performance and service delivery.
Contract management activities must include sufficient checks to ensure suppliers are meeting their Data Protection Legislation obligations as the Processor. These checks may include audits undertaken by the controller or a third party auditor.
If obligations are not being met, organisations should take urgent remedial action with the supplier to address issues and risks.
More detailed information can be found in Additional Resources.
Weak interactions between an Organisation’s finance, commercial, and contract management functions provide an opportunity for fraud and overbilling. This could be as a result of error and inefficiency, or by deliberate intent.
Without basic scrutiny of payments and performance an Organisation’s departments may rely on the supplier to interpret the contract correctly which may result in errors . Better scrutiny of payments and improved contract knowledge within your Organisation will identify any possible overbilling and fraudulent activities Organisations can then take appropriate action.
Guidance on fraud can be found in the Additional Resources section of the Procurement Journey
A key element of Contract and Supplier Management is the proactive identification and management of risk. Guidance can be accessed on the Risk Management page.
Blacklisting refers to the practice of systematically denying individuals employment who would otherwise be able to be employed. This can be on the basis of information, accurate or not, held in some type of database.
The Scottish Government regards blacklisting or the compiling of a blacklist as unacceptable.
Effective contract management ensures the practice of blacklisting does not occur in public contracts.
The Employment Relations Act 1999 (Blacklists) Regulations 2010 provide rights for individuals if blacklisting results in refusal of employment, detriment, dismissal or redundancy.
Any bidder which has been found to have breached, or has admitted breaching, these Regulations must be excluded from the procurement process for a period of three years. This is unless it can demonstrate to you that it has taken appropriate remedial steps. The Scottish Government regards blacklisting or the compiling of a blacklist as totally unacceptable. Blacklisting refers to the practice of systematically denying individuals employment, who would otherwise be able to be employed, on the basis of information, accurate or not, held in some type of database.
If entering a joint procurement exercise with one or more public sector organisations you must have already agreed the legal status and requirements of such an exercise.
A “lead” authority may have been agreed at strategy stage. Legally they are responsible for forming the contract with the awarded supplier(s.
Alternatively a truly “joint” exercise may be initiated. Here procurement conduct is carried out in the joint name(s) of the participating organisations.
In either case, the organisations each remain responsible for meeting their contractual obligations.
Where you have determined only part of the procurement will operate as a joint exercise, the organisations will be jointly responsible for those activity areas declared as joint. Each organisation will retain sole responsibility for the activities carried out on its own behalf.
All of above factors determine the subsequent approach to contract management. Although considered at Strategy Development stage when deciding subsequent practical considerations these must remain a factor when determining the operational approach such as:
Supplier segmentation is the process of categorising suppliers based on their strategic importance, risk, spend, and relationship value to the organisation.
It helps determine how much attention, management effort, and governance each supplier should receive.
In Contract and Supplier Management (CSM), supplier segmentation ensures that resources are allocated appropriately — high-value or high-risk suppliers receive more oversight and collaboration, while low-value suppliers are managed more efficiently.
| Benefit | Description |
|---|---|
| Improved Governance | Helps prioritise contract performance reviews, audits, and renewals. |
| Risk Mitigation | Identifies critical suppliers where failures could disrupt operations. |
| Performance Management | Enables differentiated Key Performance Indicators (KPIs) and Service Level Agreements (SLAs), based on supplier tier. |
| Relationship Management | Supports collaboration and innovation with strategic suppliers. |
| Efficiency | Prevents over-managing low-value suppliers. |
A Kraljic Matrix is a tool commonly used in procurement teams to segment suppliers based on supply risk and profit impact:
| Quadrant | Example | Contract Management Approach |
|---|---|---|
| Strategic (High risk / High impact) | Critical IT | Partnership model, detailed performance reviews, joint development |
| Leverage (Low risk / High impact) | Major office supplies | Competitive sourcing, standardised SLAs |
| Bottleneck (High risk / Minimal impact) | Specialised maintenance supplier | Risk mitigation, dual sourcing, contingency planning |
| Routine (Low risk / Low impact) | Cleaning services | Simplified contracts, efficiency focus |
There is a Kraljic Matrix tool available for you to use which can be found at the bottom of this page.
There are tools to support you when performing contract and supplier segmentation e.g. Kraljic Matrix , risk assessment, spend analysis etc.
When defining segmentation criteria, Organisations should consider a combination of financial, operational, risk, and policy-related factors:
Purpose: Supports prioritisation of high-value contracts for enhanced oversight and benchmarking.
Purpose: Identifies contracts requiring robust performance and continuity management.
Purpose: Aligns with risk-based governance and internal control requirements.
Purpose: Informs engagement strategy and contingency planning.
Purpose: Enables differentiation between stable suppliers and those requiring closer management.
Purpose: Ensures alignment with Scottish Government policy priorities and Scottish Procurement Policy Notes (SPPNs).
Purpose: Identifies contracts requiring specialist commercial or legal oversight.
Use the Kraljic Matrix to assign each supplier to a category (e.g. Strategic, Leverage, Bottleneck and Routine)
Align contract management intensity to supplier category:
The Kraljic Matrix – Supply Management Positions Template, which can be found at the bottom of the page, allows you to record all CSM activities for each segment. There are some examples pre-populated in this document which can be deleted/amended as required and to suit your organisation.
The output from the Resource Planning Tool can be input into this tool. This document helps you segment your contract portfolio into four categories (Leverage, Strategic, Bottleneck, Routine). This will allow your organisation to record the extent of work involved in managing each category. This includes frequency of performance review meetings and frequency of Management Information, etc.
There is a natural tendency to over-estimate the work required and it is important to avoid this by being as pragmatic as possible. It is worthwhile comparing/collaborating with a similar organisation which has a more mature CSM operation. Especially where an organisation lacks the experienced managerial staff required to make informed judgements. This collaboration will allow your organisation to benefit from the mature organisation’s experience You should factor in distortions such as the learning curve they experienced on the journey towards maturity.
Checklist
(file type: xlsx)
(file type: docx)