Getting to contract is good but managing for success is better!
It may have taken days, weeks or even months getting to this point, with a team of people from across the business, making sure the Ts & Cs are tight, the goods/services are well defined along with the performance metrics and the financials are clearly laid out but the contract is finally signed! You’ve shaken hands, backs have been patted, job done right? Wrong, and here’s why…
Why do contracts need to be managed?
World Commerce and Contracting (formerly IACCM) states that “9.2% of annual contract revenue is lost due to poor contract management.” This is real value being eroded from your contracts, that was so hard fought in those early negotiations.
What does that mean in reality? Value erosion occurs when key obligations, performance targets, deliverables, changes to the contract etc. are not adequately tracked, monitored or managed, resulting in poor delivery and errors. Here are some typical causes and examples of where real monetary value is eroded from contracts;
- Delivery Failures – e.g. omissions of credits for; failing to produce deliverables on time or to specification, service levels missed, or inappropriate/incorrect earn-back calculations.
- Consumption/Usage Errors – e.g. unapproved consumption, invalid inventory or incorrect timesheets.
- Contract Deviation Errors – e.g. incorrect rate cards applied, invoices not as per contract, change notes not reflected or are not done, and incorrect scope.
- Computational Errors - e.g. incorrect forecast led invoicing, minimum commitment ignored and ARC/RRC calculations or clerical errors.
All these clearly affect the bottom line but these failures and errors also have a real impact on the business, as you are not getting the intended benefits of the contract. There is also a significant risk element if certain legal and regulatory obligations are not adhered to, as well as reputation damage that can occur.
It’s unlikely that you’re ever going to remove all value erosion from your contracts, typically we see 1-2% of annual contract revenue erosion that can be avoided through improved contract management. When you put this in the context of the total value of your business’s contracts, this will really start to add up!
Example of contract value erosion from everyday life…
Imagine you’ve just bought a brand-new car on a 3-year a Personal Contract Purchase (PCP). As part of this contract you’ve agreed to several obligations, one of which is that you’ll only drive 10,000 miles per year, the consequence for exceeding this is 10p per mile.
After your 3-year term you’ve actually done 50,000 miles and you decide rather than to buy the car outright you want to hand it back. However, no one at the dealership has looked at your PCP agreement and so they aren’t aware you’ve exceeded your limit and should be paying an extra £2,000. Now, let’s look at this from the dealership perspective…
By not managing the obligations in this PCP agreement, the dealership has not collected £2,000 from you (real money out the door) and the car also has more wear and tear, which affects the future value and so they get less revenue from the re-sale. This is value erosion. Now if you factor this across the 100’s of PCP agreements they have in place with customers and they’re actually losing significant revenue, that will impact the bottom line.
What is contract management?
Contract management can mean different things to different groups but should encompass the complete lifecycle of a contract from initial creation through to closure. For the purposes of this article we are focussing on the activities that happen after the contract is signed.
CATS CM® defines post-signature contract management as “the realization of intended contract objectives by proactively monitoring the fulfilment of all contractually established responsibilities, obligations, procedures, agreements, conditions and rates, resolving all ambiguities, contradictions and white spaces, managing all contract-related risks and implementing all desired changes to the contract”.
How should contracts be managed?
The success of contract management is dependent on 5 factors;
People: Clearly defined roles and responsibilities with the appropriate people in post that have the requisite skills and experience to manage contracts. This may be a dedicated role for your most strategic contracts, or a shared responsibility in the area the contract is utilised for your more operational contracts.
Process: Standardised and repeatable processes that secure consistent outcomes when managing the contract. This should include processes for the following activities, which relate to managing:
- the completion of obligations and deliverables against the agreed timelines and criteria set, enforcing consequences for non-delivery or rewarding for over-delivery (if applicable);
- performance against service level agreements/key performance indicators, enforcing consequences for non-performance or rewarding for exceeding targets (if applicable) ;
- financials to make sure invoices match the services/goods delivered
- risk/issues and disputes to resolution;
- contract change to make sure they are appropriately raised, reviewed and approved and that the contract stays up-to-date; and
- contract governance to make sure key meetings are held and reports are delivered and actioned upon
Governance: Defined policies stating what contracts should be managed and the level of management required and who should manage them to underpin the process along with key performance indicators to make sure contract management is effective.
Content: Making sure the contract has all the appropriate elements to enable successful management (clearly defined governance structure, deliverables, performance mechanisms, obligations on both sides etc.)
Technology: Having the appropriate technology/tools in place to enable the contract management process to e.g. track key obligations and deliverables, monitor performance, record outputs of governance meetings etc. There are a number of contract lifecycle management (CLM) tools on the market but not all support this type of activity, so it’s important to be clear on your requirements before investing in one of these. In the short term more basic tools can be used to support with ongoing management e.g. Microsoft Excel, SharePoint and Teams
In conclusion, managing your contracts should not be an after-thought and should be front and centre within your business, making sure you are extracting the maximum value from your contracts and delivering the value you’ve promised.