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Generating Real Value from Your Contracts
Contract Management – Generating Real Value from Your Contracts
Peter Smith, April 2013
©ALL RIGHTS RESERVED - Confidential
Spend Matters UK/Europe Real World Sourcing
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
Generating Real Value from Your Contracts
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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
Generating Real Value from Your Contracts
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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.
Generating Real Value from Your Contracts
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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?
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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
Generating Real Value from Your Contracts
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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
Generating Real Value from Your Contracts
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Spend Matters UK/Europe Real World Sourcing
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!
Generating Real Value from Your Contracts
Contract management can be an after-thought to the Category Management process
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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!
Generating Real Value from Your Contracts
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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?
Generating Real Value from Your Contracts
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The New CPO Who Asked To See The Contracts Database
Generating Real Value from Your Contracts
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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.
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Why is Contract Management Important?
PROCUREMENT PERFORMANCE
CONTRACT MANAGEMENT PERFORMANCE
good
bad
bad good
RESULTS?
Generating Real Value from Your Contracts
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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!)
Generating Real Value from Your Contracts
Why is Contract Management Important?
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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
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• 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
Generating Real Value from Your Contracts
Contract Management - why bother?
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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
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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
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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.
Generating Real Value from Your Contracts
RISK and OPPORTUNITY
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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
Generating Real Value from Your Contracts
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Planning &
ownership
Market
management
SRM
Supplier
development
Contract
development
Payment Risk
Delivery
Administration
Resources
GOOD
PRACTICE
Relationships
Not Contract
Management
Generating Real Value from Your Contracts
Putting Contract and Supplier Management (SRM) in Context
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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)?
Generating Real Value from Your Contracts
The Elements of Contract Management
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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
Generating Real Value from Your Contracts
The Elements of Contract Management
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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?
Generating Real Value from Your Contracts
The Elements of Contract Management
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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?
Generating Real Value from Your Contracts
The Elements of Contract Management
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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
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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
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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
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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
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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?
Generating Real Value from Your Contracts
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THANK YOU!
Please feel free to contact me on [email protected]
Generating Real Value from Your Contracts