Contract Management - Generating Real Value from your Contracts

Contract Management – Generating Real Value from your Contracts
Spend Matters UK/Europe
©ALL RIGHTS RESERVED - Confidential
Peter Smith - Abu Dhabi , 10 September 2014

The Real World Sourcing Series is a series of 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.

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

• 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 and why procurement should take an interest
• That helps define the business case for investment in contract management
• Then we’ll give you useful models to help implement and drive contract management improvement

Definition
All activities post-contract award carried out by the buying organization, and associated with the execution of the contracted deliverables ( goods, services or works), through to the termination or conclusion of the contract

An Intelligent Customer:
• Knows what they want to buy and why
• Is market aware before and after the procurement process
• Is commercially and financially intelligent
• Acts on behalf of their organization
• Improves and drives value from existing contracts
• Manages corporate demand and specification
• Understands the future supply chain

Category / Sourcing Management
Transactional Management – P2P
Contract & Supplier Management
RESULTS / OUTCOMES
• Value / savings
• Stakeholder satisfaction
• Efficiency
• Risk Management
TECHNOLOGY & TOOLS
PEOPLE
GOVERNANCE
STRATEGY & LEADERSHIP

Internal requirements & stakeholders
Stage 1
Define scope and category structure
Stage 2
Understand market and suppliers
Stage 3
Category strategy and plan
Stage 4
Select supplier(s)
Stage 5
Implement contracts
Stage 6
Contract & supplier management
Stage 7
Develop, implement and embed category management
Iterative process
Contract management can be an after-thought to the Sourcing / Category Management process

Internal requirements & stakeholders
Stage 1
Define scope and category structure
Stage 2
Understand market and suppliers
Stage 3
Category strategy and plan
Stage 4
Select supplier(s)
Stage 5
Implement contracts
Stage 6
Contract & supplier management
Stage 7
Develop, implement and embed category management
Iterative process
Contract management can be an after-thought to the Sourcing / Category Management process
BUT IT SHOULDN’T BE!!

The Current State of Contract Management
Not very healthy in most organizations!
• Poor basic administration
• Limited visibility into key contracts, understanding of key terms
• Contract management not considered during procurement phase
• Central / local conflicts and confusion; who is in charge?

The New CPO Who Asked To See The Contracts Database

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!

• 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
• 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

Why is Contract Management Important?
PROCUREMENT PERFORMANCE
CONTRACT MANAGEMENT PERFORMANCE
good
bad
bad
good
?
?
?
?

Why is Contract Management Important?
PROCUREMENT PERFORMANCE
CONTRACT MANAGEMENT PERFORMANCE
good
bad
bad
good
ALWAYS SUCCESS
ALWAYS FAILURE
USUALLY FAILURE
? (CAN GO EITHER WAY!)

• 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

• Allowing others to determine whether “our” contracts are perceived as successful is a high risk strategy for procurement people and functions!
• Users will base their view of that success on the contract delivery
• And note - there is often more negotiation skill required at contract management stage than during the “procurement”!

Part 3 – What is Contract Management?
• Contract management is really part of the sourcing cycle, even if it does have a clear start and end point
• We 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

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

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

Consider a large outsourced IT contract with a “strategic partner” to your organisation (an Emirates based manufacturing firm ). The contract 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 such as software development.
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 service work offshore - you think some of that is India but you are not are not sure exactly where - and some development / ad hoc work is carried out offshore and some in or close to your locations.
What are the major risks and opportunities that might arise from this contract during the delivery phase ? How might effective contract management help?

BREAK – see you in 30 minutes

Consider a large IT contract with a “strategic partner” to your organization. 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 - you think some of that is India but you are not are not sure exactly where - and the development / ad hoc work is carried out usually in or close to your locations ( spread around EMEA). What are the major risks and opportunities that might arise from this contract during the delivery phase ? How might effective contract management help?

Case Study Pure “performance risk” needs to be managed. “Accidental” extension of the contract. Pricing – management of rate card usage and rates – risk of unmanaged demand and / or inflationary increases over time. Technology change –better ways of working for the supplier and reduction in basic cost of IT equipment (opportunity) or services / equipment becoming obsolete (risk). Not understanding where work is being done - risk of disruption or reputational risk (working conditions). Opportunity for Partnering, geographic expansion (India)?

Putting Contract and Supplier Management (SRM) in Context
Planning & ownership
Market management
SRM
Supplier development
Contract development
Payment
Risk
Delivery
Administration
Resources
GOOD PRACTICE
Relationships

Planning & ownership
Market management
SRM
Supplier development
Contract development
Payment
Risk
Delivery
Administration
Resources
GOOD PRACTICE
Relationships
Not Contract Management
Putting Contract and Supplier Management (SRM) in Context

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)?

Administration
• Are contracts organized 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

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?

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?

Part 4 - Key business case / improvement opportunities
The most important elements include:
•Knowing which contracts are in place, termination dates, important conditions
•Managing payments – including incentives, penalties
•Defining suitable Key Performance Indicators and Service Level Agreements – and monitoring them, providing feedback
•Development and flexibility – can we improve the contract ?

Part 4 - Improvement opportunities; appropriate KPIs
• You can’t have 368 “key” performance indicators
• Performance measures should be developed early in the contracting process
• It is easy to end up with incentives that have perverse incentives e.g the AP centre paid on how many invoices it processes or IT help-desk paid on number of problems it handles
• Measures should be SMART (like personal appraisal goals) – specific, measurable, attainable, relevant and time-bound

Part 4 - Improvement opportunities; appropriate KPIs
What is wrong with this set of KPIs? “ The Customer Contact call centre will answer all calls;
• within 6 rings;
• politely and accurately; and will report on performance monthly.”

The Procurement Role
Procurement cannot own every contract in a detailed hands-on manner. But there are 5 key areas where procurement 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

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 issues that need immediate attention,
• Contract review – look at the top 10 or 20 contracts in detail
• Develop the business case (risk and opportunity) for further effort based on this review
• Implement management and governance processes and develop contract management capability

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”, but can play a lead role in key areas to improve performance

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

Contract Management - Generating Real Value from your Contracts

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