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Contracts can pay you dividends


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Contracts can pay you dividends

  1. 1. Contracts can pay you dividendsGregg BarrettTHE contracting policies and practices at most companies are resulting in lost revenueand profit. Few organisations have successfully established a link between their contractsand their financial performance. As a result, they have a limited insight of theopportunities being missed or the trading relationships being mismanaged.The reasons are there is typically no-one accountable for contract outcomes and “theprocess” is usually a series of disjointed activities with unclear or competing ownership.These conclusions were reached after extensive research and benchmarking by theInternational Association for Contract & Commercial Management (IACCM). They aresupported by a wide range of case studies from the IACCM and academia and show thatmost contracting processes are driven by narrow perspectives of risk.These perspectives result in terms and conditions that protect against certain types of riskbut take no account of the counter-risks they generate. The current collapse in financialservices is the most recent example of this failure in contract governance.Why do we have contracts?The purpose of a contract is to establish and safeguard economic interests. While theultimate protection of these interests may be a resort to law, the reasons for having acontract are not exclusively legal. Our networked world and the shift to a service-orientedeconomy have arguably reduced the importance of many traditional legal imperativeswhile increasing the significance of others.An effective contracting process – from which the contract is an output – ensures amutual understanding between the parties involved. The “contract” is a formalisedapproach that provides a record of key expectations and obligations to guide performanceand consequences if there is a failure by one or both parties.“Contracting excellence” expands on these basics by selectively creating a forum inwhich the parties can optimise the value of their relationship – at inception and over time.This means that economic interests are protected and enhanced. To achieve this greatervalue, the parties must commit themselves to a wider and more open appraisal of theirrespective needs and capabilities. They must also embed ongoing review and changemechanisms to ensure a response to shifting needs or opportunities.Best practice in post-award contract managementThroughout 2008, the IACCM conducted a research study to identify the top-performingorganisations in contract management. The study identified 25 top-performing companiesincluding Procter & Gamble, Hewlett Packard, Intel, Boeing and Capgemini. A full list isavailable at makes these companies stand out from the rest?At a glance, all but one of the best in these top-class firms have a defined career path forcontract management professionals. All those interviewed have defined processes for
  2. 2. contract review, knowledge management and information exchange. Three of the top fiveuse IACCM training and development programmes, 11 of the top 25 have adoptedIACCM professional certification. Most have clearly defined team interfaces, regularreporting to executive management and visible executive commitment to contractmanagement discipline. Transition is also viewed as a key period in the performance life-cycle. However, the handover/continuity of personnel is a target for improvement.The top-performing organisations in the study had these six traits:1. Developing an effective working relationshipThe top-performing organisations view contract management as a process adoptedconsistently across regions. There is a strong focus on consistency and integration withexecution taking place as a team effort with consistent roles and authorities in contractmanagement and across other groups and functions. These organisations are alsoincreasing investment in assisting knowledge transfer to partners.2. Definition of requirementsTop-performing organisations set up post-award teams to:- Review requirements during transition; and- Ensure responsive mechanisms for continuing review and update throughout thecontract life-cycle.There is also the creation of checklists/guidebooks to help contract managers obtain adetailed and precise definition of requirements to ensure that everyone is on the samepage. There is also regular reporting and review to ensure that needs and deliverablesremain aligned.3. TransitionA standardised approach is followed when interpreting the signed agreement andcommunicating it to the group.Critically, there are also reviews to ensure clear integration between strategy,procurement, contracting and contract management before the final approval of thecontract. The use of tools, like enterprise contract management systems, identify resourcerequirements to support perceived workload.4. Measurements, service levels and performance agreementsImportantly, there is a constant monitoring of contracts with high criticality andcomplexity, a broad scope and longer duration to ensure they are delivering value asintended.There is the periodical review of the health of each account against objectives through astructured contract audit process. Executive reports are formulated with a regular reviewof performance and improvements ensuring the oversight of “troubled” contracts.5. Change Management“Lessons learnt” or other repositories of past contracting experiences are established topromote best-practice sharing and transfer of knowledge across teams and relationships.This helps to foster better decision-making and reduce the chance of “the same mistake”being repeated. The use of embedded systems that support data access and transfer
  3. 3. between customer and provider are also in place and help to foster collaboration. Contractcategorisation is based on levels of future uncertainty and the likelihood of change andvariability.6. Career developmentThere are clearly designated job roles in the contract management function. There arealso specific career paths in this structured group. This provides staff with the confidencethat they have a future and encourages higher levels of performance.Not surprisingly, top-performing organisations make substantial investments in skillsdevelopment and training. More importantly, contract managers in these organisations -also have a visibility and status in their organisation.