In this blog post, Anubhuti Gandhi, a student at Symbiosis Law School, Pune and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes how and why should organizations adopt contract management.
In any form or category of the business association today, the contract is the most important document that defines the relationship between the buyer and the seller covering various aspects such as legal, service delivery, commercial, information security, facility or asset management and governance aspects. The focus on the implementation of contracts is high in the IT/ITES industry in particular due to its global nature and complex business models. The contract is the sole go-to document for all the negotiations and conflicts in case of management.
Meaning of Contract Management
“Contract life cycle management is the process of systematically and efficiently managing contract creation, execution and analysis for maximising operational and financial performance and minimising risk”.
The activities of a buyer during the contract period to ensure that all parties to the contract must fulfill their contractual obligations. A contract management requires effective upstream and downstream management of the contract award.
- Downstream of the award of the contract includes – changes within the contract, service delivery management, relationship management, contract administration, assessment of risk, purchasing organization’s performance and effectiveness review and contract closure.
- The upward stream of award of contract includes preparing the business case and securing management approval, assembling the project team, developing the contract strategy, risk assessment, developing contract exit strategy, developing a contract management plan, drafting specifications and requirements, establishing the form of contract, establishing the pre-qualification, qualification and tendering procedures, appraising suppliers, drafting IT documents, evaluating tenders, negotiation and awarding the contract.
The Ingredients for Successful Contract Management are-
- Tools for differential contract management.
- Constructing the team and stakeholder management.
- Risk management.
- Relationship management.
- Service delivery and performance management.
- Change management.
- Exit management.
- Practical application of the lessons learned.
Managing risks and driving value from the contracts is an ongoing challenge for most of the organizations today due to fundamental gaps in the process followed today. It is difficult for contracting parties to monitor, control and manage the rights, obligations and term of the contracts. The key areas of concern for companies managing their contracts fall under the six broad areas:
- Deviation management – Organisation taking risks/agreeing to clauses like the liability. Indemnity etc beyond their risk appetite and without requisite approvals.
- Ineffective contractual risks and obligations management.
- Inefficient contract governance and reporting.
- Visibility – Weak and absent controls over the creation of contracts and no centralized repository of contract documents.
The Foundations for Successful Contract Management are
- Need for flexibility.
- Willingness to adapt terms and conditions to reflect the change.
- Clarity of contract contribution to strategic objectives.
- Understanding provider’s need to make a profit.
- The right team with the right skills.
- The ability of the buyer and provider managers to manage upwards in their own organization.
Importance of Contract Management
Organizations in both the public and private sectors are facing increasing pressure to reduce costs and improve financial and operational performance. New regulatory requirements, globalization, increases in contract volumes and complexity have resulted in an increasing recognition of the importance and benefits of effective contract management.
The growing recognition of the need to automate and improve contractual processes and satisfy increasing compliance and analytical needs has also led to an increase in the adoption of more formal and structured contract management procedures and an increase in the availability of software applications designed to address these needs.
It is worthwhile noting that Contract Management is Successful if –
- The arrangements for service delivery continue to be satisfactory to both parties and the expected business benefits and value for money are being realized.
- The expected business benefits and value for money are being achieved.
- The supplier is co-operative and responsive.
- The organization understands its obligations under the contract.
- There are no disputes.
- There are no surprises.
- A professional and objective debate over changes and issues arising can be had
- Efficiencies are being realized.
How Should Organisations Approach Contract Management?
- Assess Maturity of existing Contract Management Process
Organizations should develop a detailed understanding of the business drivers of contractual relationships to unlock the value of contract management. Organizations should assess the existing state of contract management (across process, people and technology) and envisage its future state. A detailed road map should then be developed for achieving such desired future state. Some of the key questions to be addressed for the maturity assessment are:
- Are there standard policies and procedures for both pre and post contracting activities?
- Are there standard contract clauses, fall back clauses and no-go clauses?
- Is there a defined workflow for exception approvals to contractual terms?
- Is there a searchable electronic repository of customer contracts?
- Are contracting roles/ responsibility clearly defined across the organization i.e. among legal, finance, service delivery etc.?
- Is there a defined mechanism for real-time monitoring of contractual obligations and taking remedial actions for any non-compliance?
- Critical success factors in Contract Management revamp
As leaders embark on restructuring the Contract management process and function, there are key factors to be incorporated in the strategy for holistic success. The critical factors to keep in mind are:
It isn’t only about Technology – Deploying a snazzy third party tool to streamline contract management is a very superficial answer to the issue. It not only involves significant investment but, also does not solve the underlying problem.
Technology should be seen as an enabler to be deployed after evaluating the scale and complexity of the situation. In many cases, creating a simple workflow in SharePoint/MS access for deal review is the best solution.
It’s not just a Legal Function Initiative – Contract management is often considered just a legal function’s imperative since the legal team is a physical custodian of contracts. However, a typical contract is owned by 6-7 separate functions across the organization -ranging from sales, legal, finance, HR, service delivery, audit, information security, admin /facility and thus, getting a consensus among all stakeholders is critical.
Any Contract management solution deployed shall ultimately require all stakeholders to modify their policies/processes and their prior buy-in is important. Thus, it is recommended to spend first 2-4 months in building consensus and agreeing on business requirements before getting into implementation and then getting caught in inter–departmental cross fire during deployment/ adoption.
It requires Investments in People and Processes – Contract management involves introducing a set of new processes to identify track and report activities cross the contract life cycle. Despite technology, it shall need investments in setting up a contract management function. In many cases, contract management resources spread across department’s needs to consolidate into a single function. Also, the role and reporting of this function need to be developed.
Given the organization-wide impact of the function, it is imperative to adopt a phased approach to deploy the entire solution and focus on the biggest challenges the business faces first such as – deviation management, risk appetite or obligation management. A phased approach for the deployment should then follow.
The foundations for effective and successful post-award contract management rely upon careful, comprehensive and thorough implementation of the upstream or pre-award activities.
During the pre-award stages, the emphasis should be focused on why the contract is being established and on whether the supplier will be able to deliver in service and technical terms. However, careful consideration must be given to how the contract will work once it has been awarded. The organization’s high-level requirements should be carefully researched so that there is clarity of purpose from the outset. This will help to ensure clarity in all aspects of the procurement process.
Management of contracts, particularly partnerships, require flexibility on both sides and a willingness to adapt the terms of the contract to reflect changing circumstances. It is important to recognize that problems are bound to arise, which could not be foreseen when the contract was awarded.
Finally, it may not be necessary to follow every activity for every contract, particularly in the case of small, simple orders, but, it is advisable to read the whole guide and to apply the advice provided under each stage as appropriate to the particular contractual circumstances.
- If the project is large, complex and in particular, innovative in nature, the market should be approached concurrently with the preparation of the business case firstly, to alert them to the potential need and secondly to take soundings on such issues as feasibility, capacity, capability, approach and level of interest.
All contracts are predicated on the need to obtain management commitment and approval at the appropriate level. This involves the formulation of a sound business case aligned to the organization’s corporate and functional strategies.
- The need to assemble a team to manage a contractual procurement programme will be determined not only by the scale, nature, complexity and significance of the procurement and the necessary skills and experience but, also by the extent to which it is considered appropriate, beneficial or a requirement to comply with organisational policy to involve stakeholders in the project.
- The strategy relating to a particular contract should accord with the organization’s overall procurement strategy.
A specification is a statement of needs and its purpose is to present to potential suppliers a clear, accurate and comprehensive statement of the organization’s needs in order that they can propose solutions to those needs. At the same time, the specification should enable the organization to readily evaluate offers, provide the basis for performance measurement and be a record of evidence in any dispute.
It is the aim of every purchasing professional to conclude the best deal for the organization he or she represents. This is often achieved by post-tender negotiation (PTN) and is an activity to be considered and planned for in the formulation of the contract strategy.
Changes are almost inevitable during the period of a contract, particularly in the case of large, complex construction and service contracts. They should not necessarily be seen as causes for concern but, effectively managed as opportunities to improve the contract outputs.
It is important to understand the implication of change for both parties. Changes of any significance will affect the scope and potentially the viability of the contract for either party.
If a change results in a reduction in the value or scope of the contract, the organization could be faced with claims for increases in charges and/or legal claims that there was, for example, misrepresentation in relation to the likely volumes required over the period of the contract. If the change results in a substantial increase in the value or scope, it is important that the organization continues to ensure that value for money is secured.
Suggestive Read: Contracts as a Connector
A company communicates through its contracts. The most important and reassuring experience for the various stakeholders of an organization is when they ink new contracts. Yet, a simple misplaced comma can alter the contractual meaning of a complex business arrangement. Then, there are the various procedural and cumbersome practical aspects of managing a contractual relationship, which more often than not, is regarded by parties with a jaundiced eye.
A robust contract management system which includes contract strategizing, vetting, versioning, storage and effective retrieval system, aided by prompting tools that highlight critical dates and events go a long way in managing a contractual relationship.
An important aspect of contract management is the categorisation of contracts for effective internal and centralized control and every robust contract management system should address the key elements for central and decentralized controls for contract execution.
That’s all about Contractual Management. If you want to share your views regarding the post, feel free to comment below. And Yes, Don’t forget to Share.
References – Contract Management Guide, CIPS (2007). (November 30th, 2016).