generating real value from your contracts

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Spend Matters UK/Europe Real World Sourcing

Generating Real Value from Your Contracts

Contract Management – Generating Real Value from Your Contracts

Peter Smith, April 2013



Agenda

1. Introduction and the context for contract management

2. Why should procurement take an interest?

3. What is contract management – risks and opportunities

4. Key business case / improvement opportunities




Contract Management

• Far too big a topic to pretend we can cover everything!

• We’ll focus on positioning its importance and getting into the reasons why it is so vital; that helps define the business case for investment in contract management.

• Then we’ll give you some useful models to help implement and drive contract management improvement




Part 1 - Introduction The Real World Sourcing Series is a series of 6 sessions covering hot topics for procurement professionals. The Real World Sourcing Series is promoted and supported by BravoSolution, and developed by Peter Smith (Spend Matters) and Guy Allen (Real World Sourcing Ltd.) Peter Smith started his procurement career with Mars Confectionery, then was CPO for Dun & Bradstreet Europe, the Department of Social Security and the NatWest Group. He is now a consultant, author, non-executive director and editor of the Spend Matters website. He was President of CIPS in 2002/3.




Category / Sourcing Management

Transactional Management – P2P

Contract & Supplier Management

RESULTS / OUTCOMES

• Value / savings • Stakeholder satisfaction • Efficiency • Risk Management

TECHNOLOGY & TOOLS

PEOPLE

GOVERNANCE

STRATEGY & LEADERSHIP

Context - where does contract management fit?




Definition

All activities post-contract award carried out by the buying organisation, and associated with the execution of the contracted deliverables ( goods, services or works), through to the termination or conclusion of the contract




Understand internal

requirements &

stakeholders

Stage 1

Define scope and category

structure

Stage 2

Understand market and

suppliers

Stage 3

Develop category

strategy and plan

Stage 4

Select supplier(s)

Stage 5

Implement contracts

Stage 6

Contract and supplier

management

Stage 7

Develop, implement and embed category management

Iterative process

Contract management can be an after-thought to the Category Management process




Understand internal

requirements &

stakeholders

Stage 1

Define scope and category

structure

Stage 2

Understand market and

suppliers

Stage 3

Develop category

strategy and plan

Stage 4

Select supplier(s)

Stage 5

Implement contracts

Stage 6

Contract and supplier

management

Stage 7

Develop, implement and embed category management

Iterative process

BUT IT

SHOULDN’T BE!


Contract management can be an after-thought to the Category Management process



Part 2 – Why should procurement take an interest? There’s been an ongoing debate in the procurement profession for many years –

• Should we take the lead on contract management?

• Should we be involved but without trying to lead?

• Should we let others get on with it –contract management is just too big or ugly for us!




The Current State of Contract Management

Not very healthy in most organisations!

• Poor basic administration

• Limited visibility into key contracts, understanding of key

terms

• Contract management not considered during procurement

phase

• Data overload for managers

• Central / local conflicts and confusion; who is in charge?




The New CPO Who Asked To See The Contracts Database




Why should CPOs take an interest?

• Good contract management is essential for end to end successful procurement delivery and performance

• It’s hard to see how procurement can succeed if contracts are not managed well post award

• “Let and forget” is guaranteed to end up in at best adequate results and at worst, disaster

• CPOs and procurement executives cannot “own” contract management of every major contract in the organisation - but no-one else can either.

• Functional executives are only interested in their own contracts, Legal may be interested when things go wrong!

• So Procurement needs to take an overall leadership role here.




Why is Contract Management Important?

PROCUREMENT PERFORMANCE

CONTRACT MANAGEMENT PERFORMANCE

good

bad

bad good

RESULTS?



Spend Matters UK/Europe Real World Sourcing PROCUREMENT PERFORMANCE

CONTRACT MANAGEMENT PERFORMANCE

good

bad

bad good

ALWAYS SUCCESS

ALWAYS FAILURE

USUALLY FAILURE

? (CAN GO

EITHER WAY!)


Why is Contract Management Important?



Contract Management - why bother?

• So good contract management can actually recover a poor

initial contract, or a weak procurement process

• A contract can be re-negotiated, or weaknesses addressed by

a positive approach by both parties post contract award

• However, even if a strong supplier selection and negotiation

process has led to success at the point of contract award, poor

contract management can – and usually will – lead to poor

performance / results later




• That seems to be a strong enough reason in itself for

procurement to take an interest

•Allowing others to determine whether “our” contracts are

perceived as successful is a high risk strategy for procurement

people and functions!

•And users will base their view of that success on the contract

delivery


Contract Management - why bother?



Part 3 – What is Contract Management?

• Contract management is really part of the sourcing cycle

continuum, even if it does have a clear start and end point

•We can define it as separate to Supplier Management or SRM

although there are clear linkages

•And we would suggest that SRM is virtually impossible to do well

without good contract management as a basis and foundation




RISK and OPPORTUNITY

• Contract Management starts with ensuring suppliers

deliver against their commitments as defined in the contract.

• It also includes ensuring we play our defined role as per the

contract e.g. payment terms

• But that’s not enough to capture the full picture.

• We believe the basic and key principles of contract

management are RISK and OPPORTUNITY




Why do we bother with Contract Management?

•If there were no risk and no opportunity inherent in a contract,

we wouldn't put any resource into managing it (no matter how

big it was).

• So the Business Case for investment should be positioned

around these two factors.


RISK and OPPORTUNITY



Putting Contract and Supplier Management (SRM) in Context

Planning &

ownership

Market

management

SRM

Supplier

development

Contract

development

Payment Risk

Delivery

Administration

Resources

GOOD

PRACTICE

Relationships




Planning &

ownership

Market

management

SRM

Supplier

development

Contract

development

Payment Risk

Delivery

Administration

Resources

GOOD

PRACTICE

Relationships

Not Contract

Management


Putting Contract and Supplier Management (SRM) in Context



Planning and Ownership

• Is responsibility for contract management at a corporate level

clearly defined?

• Similarly, is it clear who owns individual contracts?

Resources

• Is contract management adequately resourced?

• Do contract managers have the right skills and experience?

• Are specialists available when required (legal, technical,

procurement etc)?


The Elements of Contract Management



Administration

• Are contracts organised and documented?

• Is the basic information captured and accessible, with use of

systems where appropriate?

• Are key contract trigger points identified and closure

mechanisms defined?

Relationships

• Staff on both sides understand their roles and responsibilities

• Communication routes – formal and informal – are clear

• Problem resolution is approached professionally





Delivery

• Are suppliers monitored and performance measured?

• Is reporting appropriate and proportionate?

• Are the right actions taken to address failures?

• Are incentives used to drive the right delivery performance?

Payment

• Are invoices and payments checked and verified?

• Are incentive or penalty payments made in line with the

contract?

• Are mechanisms for adjusting payment fair and effective?





Risk

• Are risks assessed and mitigated when the contract starts?

• Are risks updated with a two way dialogue between supplier

and contract manager?

Contract Development

• Are the inevitable changes managed in an effective, fair and

positive manner?

• Are changes recorded and documented properly?

• Are new supplier capabilities / products utilised where

appropriate?





Part 4 - Key business case / improvement

opportunities

Opportunity elements include:

• Financial and Pricing – driving savings and value improvements through

the contract term

• Full value extraction – ensuring that terms negotiated are actually

delivered e.g. discounts, rebates

• Development and flexibility – can we improve delivery and meet changing needs through the contract term?

• Mergers and Acquisitions – opportunities to harmonize and identify

best terms post M&A




The Procurement Role

Procurement cannot own every contract in a detailed hands-on manner.

But there are 5 key areas of overarching responsibility around contract management where a CPO can take ownership to drive better performance.

• Governance and programme management

• Defining best practices and processes

• Developing appropriate organizational skills and capabilities

• Driving initial and constant visibility

• Tools and technology




How do you get started? How should CPOs take initial steps to improve contract management performance?

• Get insight and visibility into your current contract population

• Consider tools to get the basic administration of contract management under

control

• Identify any contract-based red-flags that require immediate attention,

involvement, and remedy

• Contract review – look at the top 10 or 20 largest/most critical contracts in

detail

• Develop the business case (risk and opportunity) for further effort based on

this review

• Implement ongoing management and governance processes and develop

contract management capability




Conclusions and Key Messages

• Contract management is vital to the success of most of the key contracts procurement negotiates

•That makes it worth having on the procurement agenda

• Risk and opportunity are the drivers and justification for contract management investment and effort

• We can consider and define a range of activities that form the contract management space

• Procurement leaders can’t “do everything” in terms of contract management, but can play a lead role in key areas to improve performance




Discussion Consider a large IT contract with a “strategic partner” to your organisation. It includes some regular services – maintenance of current systems for instance – which are priced on a annual fee basis for an agreed schedule of services, plus a rate card for other ad hoc services. It is a five year contract, with an option to extend on an annual basis after that if appropriate notice is given. The supplier performs much of the routine work offshore, the development / ad hoc work is carried out usually in or close to your locations ( spread around Europe and USA mainly). What are the major risks and opportunities that might arise from this contract during the delivery phase ? How might effective contract management help?




THANK YOU!

Please feel free to contact me on [email protected]


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