a brief introduction
We’ll consider size (always important!) and complexity.
We’ll suggest how you can spot a poorly managed contract.
We’ll also suggest a route to improvement.
What is the Contract for?
A contract should be an active presence that guides parties through ad-hoc issues. It captures the guiding principles of the deal and enables the parties to treat each other well. It enables both parties to track the achievement of their original objectives. Managing contracts well will help protect contract value.
What type of contract do you need?
Short and sweet?
If you are buying baked beans then you have a low-risk, low-value transaction. You only care that the beans meet your specification and that they arrive on time at the right price. So there is no need for complex terms about intellectual property, export conditions, etc. You can leave contract management for the bigger beasts.
Similarly, transactional contracts will operate with a set of key performance indicators (KPIs). Display these KPIs on a dashboard and it will be easy to spot problems. In this type of contract, it is easy to replace a supplier. You should expect to see very good results (90% or above) in the KPIs or go elsewhere.
In contrast, outsourcing the whole of IT or a business process will need a much more complex contract. Contracts for a third party to run parking services over many years can run to hundreds of pages. It is difficult and time-consuming to describe the work of a whole department. You must include all the goals, the tasks, relevant regulation etc in the definition. The more detail you describe, the clearer the understanding will be. This will make it possible to define the service and estimate the costs to deliver it.
Another example of a complex operation is the transfer of staff to a new employer (TUPE). This is an emotive issue as well as a detailed one. It is crucial to plan the induction of employees into the new organisation. Not to do so risks major disruption to morale and operations. And because they are long, they can take months to negotiate and execute. Complexity carries risk, lots of complexity carries lots of risk. Organisations risk large losses when they enter into complex contracts.
Recent research* says
Recent research* says an “averagely performing organisation” will lose about 9.2% of contract value. This is down to poor contract process management.
(*World Commercial and Contracting Association, formerly the IACCM.) If your organisation is doing better than average, congratulations! If not, then you may want to consider how to identify how much you are losing. And then figure out how to prevent or reduce that loss.
How do you save that 9.2%?
The problems start with the actual length of contracts: some are 300 to 500 pages long. Once printed, they live in inaccessible filing cabinets. (Were you able to access your contracts when lockdown began?) In consequence, we forget all about them until trouble arrives. This makes them almost impossible for one individual to manage.
How can we start to do good contract management?
Like eating an elephant, it’s best to take them one bite at a time (sorry Nellie!).
- Capture the objectives of the contract and create a dashboard to track progress. These can be quantitative or qualitative.
- Identify all the obligations that need active management. Not all do: the clause that dictates legal jurisdiction won’t need further review.
- Assign responsibility for each obligation to a person. That person could be one of the Commercial team or come from another department e.g. Finance or Estates. They could even come from the other contracting party. Crowd-sourcing at its best asks for a little effort from a lot of people so is well-suited for this work.
- Set up a review frequency for each obligation. Ask the crowd to review their obligations in compliance with the timetable.
- Consult your dashboard which should be a sea of green. (Eveything is green, right?)
- Investigate anything that’s not green, fix and repeat.
Crowd-sourcing will free up time for Contracts Managers to concentrate on adding value. This can be through process improvement, better quality negotiation etc.
Something changed, what do I do?
Ideally, record change controls in the contract record, noting all affected obligations. The same is true for any claims and disputes that arise. Alert Finance and others to the impact on budgets and revenue. Let them know if you think they need to provide for settlement of a claim. Keep the dashboard up to date with details of changes so that Senior Managers are aware. Allow the other contract party access to all pertinent contract information. Ask questions! The more questions you ask, the more you will understand. And record the answers in the contract record so that your replacement (when you get promoted!) will understand your thinking.
You are starting to get control
In conclusion, good processes enable the parties to talk and make joint decisions. This means they will enjoy a more relational form of contracting. Similarly, good systems will flag issues as they arise, allowing early resolution. Senior managers will enjoy the ‘no-surprises’ approach to managing contracts. Contractual relationships flourish in shared work spaces where responsibility is clear. And good contract management will enable you to go after that 9.2%.
Who Is Contract Toolkit For?
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MEET THE CONTRACT TOOLKIT TEAM
Graeme is an experienced and highly successful Contracts/Commercial Director. He is fascinated by the new areas of Relational Contracting and Contract Automation and is working to enable those concepts in Contract Toolkit products.
He is used to leading large-scale Business Process Outsourcing, IT Outsourcing and Business Transformation / Separation opportunities, together with large capital installation projects in both private and public sectors.
He has a creative and entrepreneurial spirit and can always find the ‘win’ for all, being entrusted with and delivering commercial strategy along with the practical negotiation and procurement decisions.
Specialties: Relational Contracting; Contract Automation; Commercial Leadership; Contract Negotiation; Information Technology Outsourcing (ITO); Business Process Outsourcing (BPO); Business Transformation and Separation; P&L Management.
Paul qualified as a solicitor in 1993 and offers a wealth of commercial legal counsel experience and insights. He has worked across a range of industry sectors, from telecoms, IT, technology, manufacturing, transportation, to financial services and fintech.
He delivers timely and accessible legal solutions by zooming in and out between the technical detail and the wider direction of travel. He maintains safe, playbook-compliant closure and long-term, win-win business relationships.
Self-motivated and precise, his strong inter-personal skills and commercial awareness enable highly effective collaborative working and project delivery. He inspires confidence at all organisational levels and with all relevant stakeholders.
Specialties: Contract negotiations and strategy, project risk review and pre-contract automation and contract lifecycle processes, procurement law and process, public and private sector projects, trade regulatory advice
Alison specialises in requirements analysis and solution design for financial and commercial operations. She has used the perspective of an end-user to guide the development of all Contract Toolkit apps, making sure they are easy to understand and use.
An accountant and auditor by training, she has spent twenty years selling and implementing enterprise software to large multi-national companies such as Siemens Michelin, Kerry and DuPont.
She will get to the heart of your requirements and enable you to transform them into value-driven solutions.
Specialities: customer service; relationship management; user group management; requirements analysis; solution design;
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