Maximizing Benefits Through Effective Contract Management

Contracting is a process where two parties enter into a legal agreement, where needs are defined and commitments and capabilities are aligned to meet those needs. It involves a legally binding document that clearly sets  the expectations, rights and obligations, terms and conditions, rules for ensuring compliance and a process to manage any adjustments or provide resolution.

Undertaking the contracting process involves going through several stages beginning from the initial invitation by one party to another party to enter an agreement (pre-award) through the point of award, implementation or execution of the agreement, delivery, and renewal.

A research found that on the average, companies incur approximately 9-15% of its annual revenue due to poor contract management.

To realize the purpose of the contract and capture the intended business benefits, the different stages of the contracting process must be managed effectively. Contract Management is a critical aspect of business that requires a systematic approach to manage the various stages in the contracting process. This is an area where Procurement function can increase its contribution to the organization and make a difference.

In the past, Procurement’s involvement has been limited only in the early stage of the contracting process – get the right provider at the right price. After the award, the execution phase has been typically managed by the business, where the burden of managing supplier relationships comes hand in hand with ensuring supplier performance and compliance. This is usually the stage where realization of the negotiated terms is not consistently enforced, leading to erosions of the contract value and benefits.

To maximize the benefits of a contract, there are four key elements in the contract life cycle that require to be managed efficiently and effectively

1) Control and Compliance

The process to measure, monitor and review performance, quality and process compliance is agreed and effectively enforced.

Billings are reviewed and ensure delivery performance meets the expectations. Spending is tracked and a deep understanding of the total cost of ownership.

Ensure data and reports are collected and recorded as these will serve as evidence of performance success, discussions and changes. These are valuable tools to understand operational indices and identify areas to improve.

2) Relationship Management

Understand the interaction and dynamics of the players involved in the contract management. Ensure that each player has a deep understanding of the areas under their domain,  and have the foresight about the implications of their actions or decisions. Although contracts facilitate the interaction of all parties, it is also important to build and nurture relationships. Aim for alignment of values and exhibit constructive behaviors.

3) Manage Variations

Market conditions are always evolving, and organizations continue to adapt to these changes. These changes can bring opportunities or pose risks to the success of the contract execution and compliance. A robust process to identify risks and issues and how to resolve them must be put to place. As such, an important element of the contract is a mechanism to deal with variations.  If variations to the contract is necessary to permanently fix issues or mitigate risks, discussions, analysis through to the final decision being made must be documented and clearly agreed by both parties.

4) Facilitate Continuous Improvement

Understanding the dynamics of demand and supply as well as anticipating future developments is a key to staying relevant as a business.

Procurement and the business must allot some effort to gain market intelligence such as trends,  changes in regulations, emerging technologies, best practices and even what is happening in the organization of the supplier. Continuous benchmarking can drive continuous improvement.

Similar to managing variations, a mechanism to implement continuous improvements during the contract life cycle, especially for long-term, multi-year contracts must be an essential part of the contract. And even if these improved changes cannot be implemented during the contract, these will be valuable improvements for the renewal or for the next contract.

There is an increasing evidence that extending and deepening Procurement’s involvement in the contract management cycle beyond the award phase has a direct impact to the organization’s bottom line. An efficient, effective and proactive contract management process can increase the  rate of success in realizing business benefits, promote partnership between business and procurement and between the organization and the supplier, and facilitate continuous improvement.