Generating Real Value from your Contracts

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Slides from the Real World Sourcing Presentation delivered by Peter Smith on 17 April 2013

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Generating Real Value from your Contracts

  1. 1. Generating Real Value from Your Contracts Contract Management – Generating Real Value from Your Contracts Peter Smith, April 2013 Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  2. 2. Generating Real Value from Your Contracts Agenda 1. Introduction and the context for contract management 2. Why should procurement take an interest? 3. What is contract management – risks and opportunities 4. Key business case / improvement opportunities Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  3. 3. Generating Real Value from Your Contracts Contract Management • Far too big a topic to pretend we can cover everything! • We’ll focus on positioning its importance and getting into the reasons why it is so vital; that helps define the business case for investment in contract management. • Then we’ll give you some useful models to help implement and drive contract management improvement Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  4. 4. Generating Real Value from Your Contracts Part 1 - Introduction The Real World Sourcing Series is a series of 6 sessions covering hot topics for procurement professionals. The Real World Sourcing Series is promoted and supported by BravoSolution, and developed by Peter Smith (Spend Matters) and Guy Allen (Real World Sourcing Ltd.) Peter Smith started his procurement career with Mars Confectionery, then was CPO for Dun & Bradstreet Europe, the Department of Social Security and the NatWest Group. He is now a consultant, author, non-executive director and editor of the Spend Matters website. He was President of CIPS in 2002/3. Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  5. 5. Generating Real Value from Your Contracts Context - where does contract management fit? GOVERNANCE Transactional Management – P2P RESULTS / OUTCOMES STRATEGY & LEADERSHIP Category / Sourcing Management Contract & Supplier Management PEOPLE Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential • Value / savings • Stakeholder satisfaction • Efficiency • Risk Management TECHNOLOGY & TOOLS Real World Sourcing
  6. 6. Generating Real Value from Your Contracts Definition All activities post-contract award carried out by the buying organisation, and associated with the execution of the contracted deliverables ( goods, services or works), through to the termination or conclusion of the contract Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  7. 7. Generating Real Value from Your Contracts Contract management can be an after-thought to the Category Management process Develop, implement and embed category management Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Stage 6 Stage 7 Define scope and category structure Understand internal requirements & stakeholders Understand market and suppliers Develop category strategy and plan Select supplier(s) Implement contracts Contract and supplier management Iterative process Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  8. 8. Generating Real Value from Your Contracts Contract management can be an after-thought to the Category Management process Develop, implement and embed category management Stage 1 Stage 2 Stage 3 Define scope and category structure Understand internal requirements & stakeholders Understand market and suppliers Stage 4 Stage 5 BUT IT Develop category Select SHOULDN’T BE! strategy and supplier(s) plan Stage 6 Stage 7 Implement contracts Contract and supplier management Iterative process Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  9. 9. Generating Real Value from Your Contracts Part 2 – Why should procurement take an interest? There’s been an ongoing debate in the procurement profession for many years – • Should we take the lead on contract management? • Should we be involved but without trying to lead? • Should we let others get on with it –contract management is just too big or ugly for us! Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  10. 10. Generating Real Value from Your Contracts The Current State of Contract Management Not very healthy in most organisations! • Poor basic administration • Limited visibility into key contracts, understanding of key terms • Contract management not considered during procurement phase • Data overload for managers • Central / local conflicts and confusion; who is in charge? Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  11. 11. Generating Real Value from Your Contracts The New CPO Who Asked To See The Contracts Database Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  12. 12. Generating Real Value from Your Contracts Why should CPOs take an interest? • Good contract management is essential for end to end successful procurement delivery and performance • It’s hard to see how procurement can succeed if contracts are not managed well post award • “Let and forget” is guaranteed to end up in at best adequate results and at worst, disaster • CPOs and procurement executives cannot “own” contract management of every major contract in the organisation - but no-one else can either. • Functional executives are only interested in their own contracts, Legal may be interested when things go wrong! • So Procurement needs to take an overall leadership role here. Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  13. 13. Generating Real Value from Your Contracts Why is Contract Management Important? good CONTRACT MANAGEMENT PERFORMANCE RESULTS? bad bad good PROCUREMENT PERFORMANCE Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  14. 14. Generating Real Value from Your Contracts Why is Contract Management Important? good CONTRACT MANAGEMENT PERFORMANCE ? (CAN GO EITHER WAY!) bad ALWAYS FAILURE bad ALWAYS SUCCESS USUALLY FAILURE good PROCUREMENT PERFORMANCE Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  15. 15. Generating Real Value from Your Contracts Contract Management - why bother? • So good contract management can actually recover a poor initial contract, or a weak procurement process • A contract can be re-negotiated, or weaknesses addressed by a positive approach by both parties post contract award • However, even if a strong supplier selection and negotiation process has led to success at the point of contract award, poor contract management can – and usually will – lead to poor performance / results later Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  16. 16. Generating Real Value from Your Contracts Contract Management - why bother? • That seems to be a strong enough reason in itself for procurement to take an interest •Allowing others to determine whether “our” contracts are perceived as successful is a high risk strategy for procurement people and functions! •And users will base their view of that success on the contract delivery Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  17. 17. Generating Real Value from Your Contracts Part 3 – What is Contract Management? • Contract management is really part of the sourcing cycle continuum, even if it does have a clear start and end point •We can define it as separate to Supplier Management or SRM although there are clear linkages •And we would suggest that SRM is virtually impossible to do well without good contract management as a basis and foundation Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  18. 18. Generating Real Value from Your Contracts RISK and OPPORTUNITY • Contract Management starts with ensuring suppliers deliver against their commitments as defined in the contract. • It also includes ensuring we play our defined role as per the contract e.g. payment terms • But that’s not enough to capture the full picture. • We believe the basic and key principles of contract management are RISK and OPPORTUNITY Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  19. 19. Generating Real Value from Your Contracts RISK and OPPORTUNITY Why do we bother with Contract Management? •If there were no risk and no opportunity inherent in a contract, we wouldn't put any resource into managing it (no matter how big it was). • So the Business Case for investment should be positioned around these two factors. Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  20. 20. Generating Real Value from Your Contracts Putting Contract and Supplier Management (SRM) in Context Market management Planning & ownership Resources SRM Administration Supplier development GOOD PRACTICE Relationships Contract development Delivery Risk Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Payment Real World Sourcing
  21. 21. Generating Real Value from Your Contracts Putting Contract and Supplier Management (SRM) in Context Market management Planning & ownership Resources Not Contract SRM Management Administration Supplier development GOOD PRACTICE Relationships Contract development Delivery Risk Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Payment Real World Sourcing
  22. 22. Generating Real Value from Your Contracts The Elements of Contract Management Planning and Ownership • Is responsibility for contract management at a corporate level clearly defined? • Similarly, is it clear who owns individual contracts? Resources • Is contract management adequately resourced? • Do contract managers have the right skills and experience? • Are specialists available when required (legal, technical, procurement etc)? Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  23. 23. Generating Real Value from Your Contracts The Elements of Contract Management Administration • Are contracts organised and documented? • Is the basic information captured and accessible, with use of systems where appropriate? • Are key contract trigger points identified and closure mechanisms defined? Relationships • Staff on both sides understand their roles and responsibilities • Communication routes – formal and informal – are clear • Problem resolution is approached professionally Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  24. 24. Generating Real Value from Your Contracts The Elements of Contract Management Delivery • Are suppliers monitored and performance measured? • Is reporting appropriate and proportionate? • Are the right actions taken to address failures? • Are incentives used to drive the right delivery performance? Payment • Are invoices and payments checked and verified? • Are incentive or penalty payments made in line with the contract? • Are mechanisms for adjusting payment fair and effective? Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  25. 25. Generating Real Value from Your Contracts The Elements of Contract Management Risk • Are risks assessed and mitigated when the contract starts? • Are risks updated with a two way dialogue between supplier and contract manager? Contract Development • Are the inevitable changes managed in an effective, fair and positive manner? • Are changes recorded and documented properly? • Are new supplier capabilities / products utilised where appropriate? Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  26. 26. Generating Real Value from Your Contracts Part 4 - Key business case / improvement opportunities Opportunity elements include: • Financial and Pricing – driving savings and value improvements through the contract term • Full value extraction – ensuring that terms negotiated are actually delivered e.g. discounts, rebates • Development and flexibility – can we improve delivery and meet changing needs through the contract term? • Mergers and Acquisitions – opportunities to harmonize and identify best terms post M&A Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  27. 27. Generating Real Value from Your Contracts The Procurement Role Procurement cannot own every contract in a detailed hands-on manner. But there are 5 key areas of overarching responsibility around contract management where a CPO can take ownership to drive better performance. • Governance and programme management • Defining best practices and processes • Developing appropriate organizational skills and capabilities • Driving initial and constant visibility • Tools and technology Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  28. 28. Generating Real Value from Your Contracts How do you get started? How should CPOs take initial steps to improve contract management performance? • Get insight and visibility into your current contract population • Consider tools to get the basic administration of contract management under control • Identify any contract-based red-flags that require immediate attention, involvement, and remedy • Contract review – look at the top 10 or 20 largest/most critical contracts in detail • Develop the business case (risk and opportunity) for further effort based on this review • Implement ongoing management and governance processes and develop contract management capability Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  29. 29. Generating Real Value from Your Contracts Conclusions and Key Messages • Contract management is vital to the success of most of the key contracts procurement negotiates •That makes it worth having on the procurement agenda • Risk and opportunity are the drivers and justification for contract management investment and effort • We can consider and define a range of activities that form the contract management space • Procurement leaders can’t “do everything” in terms of contract management, but can play a lead role in key areas to improve performance Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  30. 30. Generating Real Value from Your Contracts Discussion Consider a large IT contract with a “strategic partner” to your organisation. It includes some regular services – maintenance of current systems for instance – which are priced on a annual fee basis for an agreed schedule of services, plus a rate card for other ad hoc services. It is a five year contract, with an option to extend on an annual basis after that if appropriate notice is given. The supplier performs much of the routine work offshore, the development / ad hoc work is carried out usually in or close to your locations ( spread around Europe and USA mainly). What are the major risks and opportunities that might arise from this contract during the delivery phase ? How might effective contract management help? Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing
  31. 31. Generating Real Value from Your Contracts THANK YOU! Please feel free to contact me on psmith@spendmatters.com Spend Matters UK/Europe ©ALL RIGHTS RESERVED - Confidential Real World Sourcing

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