What does the term "contract leakage" refer to in procurement KPIs?

The term "contract leakage" in procurement KPIs primarily refers to the situation where contract funds or discounts are not fully utilized. This means that even though a company has negotiated favorable terms, including discounts or allowances, these benefits are not realized in practice. For instance, if a business has a contract that offers a volume discount but fails to meet the purchasing quantity specified in the contract, the potential savings are effectively "leaked." This highlights inefficiencies in spending and contract management, as the organization misses out on opportunities to maximize value from its agreements.

Understanding contract leakage is essential for organizations as it informs them where they could improve their procurement practices, ensuring that negotiated advantages are fully leveraged to enhance overall cost efficiency. By addressing contract leakage, businesses can enhance their procurement strategies, avoid wastage of financial resources, and ultimately improve their bottom line.