Contract management – Ideal versus the Real
Posted by admin / August 14th, 2014 / No responsesWe’re going to start some regular blogs and what better place to start, than with the art of contract management.
Its an area of expertise which, in theory, should be so easy to get right.
Here’s how the world of ideal contract management should look:
1. Your Commercial Lead has been working alongside the Sales Director for 8 months to finalise the terms of a fantastic deal with Top Supplier UK. You now have a signed contract and are moving into implementation and delivery.
2. Your Commercial team has produced an Executive Summary and a Compliance Tracker to monitor and govern that contract effectively and efficiently week by week. There is a comprehensive Change Control Log in place to record any changes which take place in accordance with the agreed procedure. A Contract Manager is appointed who meets with Supplier UK weekly for review meets.
3. You receive regular management updates “On a Page” so that you can review supplier performance, risks and issues, current and upcoming delivery milestones, summary financial information illustrating value for money from the contract investment and opportunities for growth or improvement. This is done as part of an overall Supply Chain review process and dovetails into 3-year Business Plan.
4. You receive advance notice of issues arising, with clear plans of remedial actions and RAG status to show severity and potential impact. Where intervention is required from you, a clear brief is provided with desired outcomes and alternative options highlighted.
5. Well in advance of the contract end date, you are given recommendation whether the contract will be exited, extended, or transitioned to a new supplier. This decision is made based upon core performance information from the contract term alongside marketplace intelligence and alignment to overall commercial strategy.
6. You hold regular supplier relationship meetings to review the portfolio of contracts with that supplier, and attend armed with key information in order to discuss opportunities for cost savings, efficiencies, requests for change and relationship escalation issues.
7. You have a nice warm feeling around the level of risk, recognition of financial benefits and collaborative approach surrounding the delivery of the contract, which helps you to sleep at night.
Sounds simple huh?
OK, well now let’s look at the reality. In busy corporate environments contract management is often the poor relation compared to the sexy world of sales and procurement. A typical contract management problem arising looks more like this:
1. The Sales team have negotiated a fantastic deal with supplier Really-Good UK and are off to drink champagne. There is a signed contract (3am, lawyer’s offices) which has been thrown over the wall for the Commercial team to manage post-signature.
2. The Commercial team are already maxed out looking after other key contracts and are annoyed that no-one involved them in the negotiations. There are a number of areas within the contract which cut across the core commercial strategy within the business and the Commercial Lead calls a meeting with you to vent her frustration. You are told that the contract has a number of flaws, including financial profiles which don’t make sense, delivery milestones which don’t match with payments, and apparently there are no rights to exit the contract if things go wrong. You are flying out to Hong Kong for a conference the next day and suggest a meeting on your return.
3. Really-Good UK turns out to be a great supplier and actually you hear no more about the contract or the supplier for 12 months.
4. 12 months on, a problem has arisen and been escalated to you, it’s urgent and the supplier is threatening legal action.
You ask for a summary of the contract but there isn’t one readily available. You ask for a summary of contract performance and the commercial team say they need time to pull the information together. You ask for a summary of the issue and how it occurred and there are unclear versions of events. You ask how the relationship with Really-Good UK is being managed and there is a muddled history of events with no meeting minutes or actions formally agreed. You ring Really-Good UK MD to talk off the record, and are told that this issue has been bubbling away for 3 months and some end users of products have been seriously impacted.
5. Mediation is agreed and takes up an inordinate amount of management time to prepare and go through the process, but you are advised this is better than going through legal proceedings which could also damage reputation amongst your customers.
6. In the meantime, there are a number of other contracts within Sales division which are requiring your urgent approval and you haven’t got time to review properly.
7. Sleep is not coming easy at the moment, perhaps a holiday may be in order??
The above scenario is not uncommon. Exaggerated for effect yes, but if you recognise any elements of it then you are by no means alone. Many businesses fail to get the basics of contract management right.
Contract management requires planning and preparation, good strong processes, and the right people to diligently monitor and advise on the right things at the right time. This means it requires an investment of time and money upfront to get the processes in place before it can then reap rewards and benefits downstream. It doesn’t even need big investment to start off with. Massive benefits can be achieved from doing some simple contract health-checks, producing summary information and checking for bubbling issues, and implementing a regime of supplier management review meetings.
But…there is always something better to spend that money on, isn’t there? [Like the champagne celebrations from the recent Sales win…..]
Next week we’ll take a closer look at some of the simple tools and rules which can be the foundation of best practice contract management in your business. Let’s move your reality a bit closer to the ideal and get you sleeping better at night.