Why contract management?
Historically, contract management is the poorer relative in the phases of the strategic sourcing cycle. It does not get much attention as it is time-consuming, labor intensive and it sits between various user departments and procurement with a supervisory role. Most the time, no clear demarcation of ownership and responsibility is the root cause of contract issues.
When contracts are not managed, you will see savings leakage of average 5%. Your risk of not getting the product quality or service level you are paying for will increase. The ineffectiveness of monitoring, measuring and managing the implementation of the contract will put a further strain on internal relationships due to delivery issues. You might never have bothered putting a contract in place if you are not going to own the outcome of it.
What is a contract?
A contract is a legally-binding agreement between two or more parties that outlines an agreed set of terms and conditions to be followed. It can be written or oral. Historically, agreement by each party was to physically sign a contract acknowledging their acceptance of the terms and conditions set therein.
With modern advancements and the ever-growing use of technology and the increased use of electronic or digital signatures, allows contracts to be signed from anywhere in the world. This allows for a much more diverse range of contractual agreements.
There are many types of contract used businesses and individuals for both commercial and domestic use. These include; sales contracts, lease or hire contracts, purchasing contracts, partnership agreements, trade agreements, and intellectual property agreements. These can range from a basic agreement to a defined set of goals to an in-depth description of financial and working terms between a vendor and seller.
How are contracts managed?
Contract management is the process of systematically and efficiently managing the creation, execution and analysis of a contract throughout its entire life cycle, usually between two or more businesses and most commonly between a seller and buyer.
Successful management begins at the pre-award stage where a contract’s terms and conditions will be drawn up along with any service level agreements (SLA’s), then negotiated between each party involved before being signed off. This is essential so that each party knows where they stand and minimises the risk of any problems falling back on the contract itself.
Once signed off, the management process will ensure compliance from each party throughout the life of the contract, making sure that all terms and conditions are met. The aim is to maximise operational and financial performance and minimise risk.
During the contract, changes may need to be made. This can be for a variety of reasons including the need to alter timeframes or conditions within the contract. Circumstances are not always fixed. Proper management is needed when outside factors determine a change in the contract. These changes need to be documented and a new set of terms agreed upon in order to keep a contract or agreement running smoothly.
Successful Contract Management ensures that all SLA’s and key outcomes of a contract can be both monitored and measured. Regular analysis and reporting on these levels will show any problems that may be developing or if any objectives are not being adhered to. This will help to reduce over/under payments, delays in service, problems with performance and other overlooked liabilities. This is key to reducing costs along with lost time, resulting in an improved bottom line to the business.
Success in Contract Management
There are many ways of measuring the success of Contract Management but generally, the arrangements for service delivery continue to be satisfactory to all parties when:
- Expected business benefits and value for money are being delivered and realised
- Any provider of goods or services are co-operative and responsive
- All parties know their obligations under the contract
- Disputes are rare, and
- The contract is fully compliant and satisfies both legislative and audit requirements.
Where contract management can become most effective is with larger companies or organisations who may have large volumes of contracts across multiple departments. A central repository can be created, usually using a cloud-based platform where details on all contracts are stored. This gives greater visibility and control over the management of these contracts:
- By merging multiple contracts with the same supplier, you can help to reduce costs
- Notification of contract renewal dates reduces the time spent outside of contract, and thus reduces the associated increased costs from suppliers
- With increased visibility, you will have greater oversight of your suppliers. Therefore you will be able to gauge when you need to review costs or find new suppliers
- Reduced time spent hunting for files to find information regarding a suppliers SLA’s or key terms of a contract
- Visibility of contracts across all departments gives the ability to drive better negotiations and deals with suppliers, improving contract terms and costs during renewals and renegotiations.
These benefits along with many others during a complete management of contracts enables a business to both maximize the effectiveness of spend and improve customer retention.