Generating Real Value from your Contracts

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


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


Real World Sourcing


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


Real World Sourcing


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.

Real World Sourcing


Context - where does contract management fit?
GOVERNANCE

Transactional Management – P2P
RESULTS / OUTCOMES
STRATEGY &
LEADERSHIP

Category / Sourcing Management

Contract & Supplier Management

PEOPLE


• Value / savings
• Stakeholder satisfaction
• Efficiency
• Risk Management

TECHNOLOGY &
TOOLS

Real World Sourcing


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


Real World Sourcing


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


Real World Sourcing


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


Real World Sourcing


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!


Real World Sourcing


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?


Real World Sourcing


The New CPO Who Asked To See The Contracts
Database


Real World Sourcing


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.

Real World Sourcing


Why is Contract Management Important?

good
CONTRACT
MANAGEMENT
PERFORMANCE

RESULTS?
bad

bad

good

PROCUREMENT PERFORMANCE


Real World Sourcing


Why is Contract Management Important?

good
CONTRACT
MANAGEMENT
PERFORMANCE

?
(CAN GO
EITHER WAY!)

bad

ALWAYS
FAILURE

bad

ALWAYS
SUCCESS

USUALLY
FAILURE

good

PROCUREMENT PERFORMANCE


Real World Sourcing


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


Real World Sourcing


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


Real World Sourcing


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


Real World Sourcing


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


Real World Sourcing


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.


Real World Sourcing


Putting Contract and Supplier Management (SRM)
in Context
Market
management

Planning &
ownership
Resources

SRM

Administration
Supplier
development

GOOD
PRACTICE

Relationships

Contract
development

Delivery
Risk


Payment

Real World Sourcing


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


Payment

Real World Sourcing


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)?


Real World Sourcing


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

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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?

Real World Sourcing


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?

Real World Sourcing


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


Real World Sourcing


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

Real World Sourcing


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


Real World Sourcing


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

Real World Sourcing


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?


Real World Sourcing


THANK YOU!
Please feel free to contact me on
psmith@spendmatters.com


Real World Sourcing

Generating Real Value from your Contracts

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