What is Contract Management and why it’s a game changer for your Business
What is Contract Management?
Contract Management is the process of managing all of your contracts. For this article, we’re going to focus on Contract Management related to your Supply Chain Contracts, or Procurement Contracts.
This is the management of the entire contracting process though.
So many people out there in the World of Procurement do not realise that businesses that do contract management properly are the ones who do it for both the pre-signature and the post-signature contract activities.
This is the language used by the World Commerce and Contracting organisation and this is the way we see it. Some, such as CIPS may describe this as being downstream and upstream.
Managing all the activities both Pre-Signature and Post-Signature
If we get to the heart of what is Contract Management, what are we looking to achieve? At a basic level, Contract Management is the management of your contracts within your Organisation.
Sounds like a lot of work but why are we doing this?
The objective of Contract Management is to ensure that you get what you have contracted for. This is a macro top-level aim of Contract Management.
Let’s break it down into two macro sections.
The Contract Management Strategy: 2 Parts
Your Contract Management Strategy involves activity at the Pre-Signature and Post-Signature stages of Procurement. Without this Contract Management Strategy being in place you will be exposed to:
Unrealised savings
Diminished value creation for your business
Poor Risk Management
Poor Performance Management
Poor Supplier Management
Supplier Relationship Management loss of opportunity
Your Pre-Signature Contract Management strategy involves activities that need to be undertaken prior to the signing of a contract.
Your Post-Signature Contract Management Strategy involves activities that need to be undertaken after the contract has been signed.
Why do we need Contract Management?
Simply put contract management enables you to get more value from your contracts, to realise cost savings, to form stronger partnerships within the supply chain and to reduce risk.
You cannot be reading this right now and thinking any of this is a bad thing.
When you undertake contract management as a business objective, you've got options in this space to implement Contract Lifecycle Management (CLM) tools that make it far more efficient, effective, and let's be honest, easier to undertake contract management.
Contract Management is often considered to be mundane, dull and Businesses do not see the huge benefits it can provide. When you look at Contract Management it is a vital business process let alone a vital procurement process.
Contract Management reduces risks, increases profits, reduces burn rate of employees time, utilises identified best practices and provides strong governance to a Business.
Contracts govern Businesses and you probably have not considered this. If you look at a Business, Contracts are interwoven throughout across Supply Chains and with a variety of customers and suppliers. That is why Contract Management is important.
We're going to cover a lot here and you're going to come away feeling like a pro in the Contract Management space. We've also got a Contract Management Course called Contract Management for Beginners that will help tie this all together for you.
Here’s just some of the many benefits you’re going to get from a combination of good Contract Management and having a Contract Lifecycle Management Solution in place within your business:
Better Data which leads to better decisions
You will realise savings as opposed to simply documenting them at Contract award
Better Management of Renewals
Negotiations before Contract Notice expires
Better understand your position regarding Data Privacy
Better understand your position regarding Certifications
Improved Reporting at all levels across the Business
Improved visibility to the Business (say during investments, acquisition etc)
Efficient onboarding of suppliers and capture of key data
Identification of Supply Chain Risks
Accountability within your business with a defined Contract Manager who owns that supplier
What is the Contract Management Process?
The best processes around contract management focus on all activities that get you to a signature and activities that drive performance out of the contract.
For pre-signature think about contract reviews, risk reviews, compliance reviews, creation of contract documents, creation of contract management plans and summaries and loads more.
For Post-Signature, consider contract admin activities such as obligation management to track expiry dates, milestones, KPIs, SLAs and loads more. A good contract management process can be a game changer to your business.
We’re going to cover in far more detail below, the types of activities you need to undertake for Contract Management.
Contract Management isn't just about taking action after the Contract has been signed
This is where so many people get it twisted.
They hear Contract Management and they instantly think about all the activities that happen after the contract has been signed.
This is a bad way to think about it. There are many activities you need to undertake prior to contract signature, with all of your procurement and sourcing activities, that lay the foundation for successful post-signature contract management.
What are the Contract Management Activities?
Types of Pre-Signature Contract Management
Putting previous Learning From Experience in place
Drafting Contract Documents including Non-Disclosure Agreements for early conversations
Contract Strategy
Risk and Issue Management
Drafting of Business Requirements with sufficient boundaries
Reviewing Supplier/Customer responses to ensure it works within requirement boundaries
Contract Management Plans
Types of Post-Signature Contract Management
Contract Administration
Supplier Performance Management
Data/Analysis of Contract Metadata
Compliance with Legislation
Supplier Relationship Management
Pre-Signature Contract Management Activities
Learning From Experience
Learning From Experience guidance is the best place to start.
Learning From Experience is the learnings of previous contractual relationships that have been documented and it is the intention that this is then used in future contracts.
You can hopefully see that if you can ensure that you have included the good elements and excluded the bad elements of previous contracts in your early contract and procurement activities, that the final contract should be better than the previous contract.
That’s the first step you should take but the step than many Organisations fail to take into account. It can cause the same failures to be repeated and these failures inevitable lead to additional costs.
Your Organisation needs to have a Learning From Experience process in order to truly get the benefits from this.
Contract Strategy
You need to determine your Contract Strategy. It’s important that at the start of this process you determine how you want the contractual relationship to operate with any potential suppliers who are involved with the procurement.
Here are some considerations you should make:
How does the Organisation foresee paying the supplier? This could be regular payments on a monthly basis in the mode of a retainer. It might be based on performance metrics being met and if they are not then you will reduce payment.
How will goods/services be delivered?
What timescales are we working to and how can we incentivise these timescales being met?
You might be wondering why you need to think about this at such an early stage.
You might think that your Suppliers can input on this. The answer is they will and they should.
You need a guiding strategy that you can build into your requirement that will go out to the supply chain.
The reason this is important to contract management is that you are laying the foundations.
You are thinking about how this contract for goods or services could be delivered and how that works for you. That’s contract management and you are planning it at the start. This is how it should be.
The Requirement
It’s an important element to get right and it will have a big impact on your ability to undertake contract management if the requirement is not right.
The reason behind this statement is this.
If you ask for something and get it that sounds like a good result. That would be a good result but are you asking for the right thing?
Have you included everything you need at this stage?
If not, you may need to include those elements late on post-contract and if you’ve not made provisions for them, that could involve some post-signature negotiation. This is troublesome as you do not have leverage as you are tied into the contract.
Additionally, if you have included those elements that you may need but do not need at the outset of the contract, then you will need to contract manage the take-up of these elements, which are commonly known as contract options.
Risk Management
Risk Management is a step that needs to be considered by all that are involved.
Your risk strategy needs to involve the identification of risks, the mitigation of risk which means reducing the likelihood of them occurring and budgeting for risks. This is an active and on-going process.
Risk management is an important part of contract management as the team or individual that is responsible for contract management should be award of new risks as they emerge, risk events as they occur and new issues.
The Type of Contract
This is a step that should be considered when you are considering the contract terms. The type of contract you put in place can impact the performance of the contract.
You may just need a two-way contract that sets out the relationship between the parties.
You may need a framework agreement or a Master Services Agreement. These are contracts that set out the relationship without a commitment to spend any money with the supplier or suppliers.
There can be more than one supplier on a framework as this is typically used to cover off a multitude of requirements that a single supplier could not meet. You would then other tasks that are called-off against the framework and this becomes a call-off contract. You may have different call-off terms dependant on the requirement.
Developing your Contract Management Plan
The Contract Management Plan is going to be the north star that guides you through all of your contract management activities. It’s a document or a guide that should be used regularly. Even if you’ve got a contract management tool such as a SaaS solution that helps you undertake Contract Management you will still want to create a Contract Management Guide.
It details everything from who in your organisation will be responsible for Contract Management, their contact details, succession plans, how you will ensure delivery will be met and disputes governed.
All of the key contract details should be contained within this document.
The reason this document can be vital is that it tells the story of the contract and it allow you to visualise at the pre-signature stage how your own organisation will implement the contract. That’s powerful when you truly think about it and don’t just make it up as you go along.
It’s preparation and setting the foundation for successful Contract Management.
You will only want to do this on large, complex procurement programmes.
Post-Signature Contract Management
Contract Administration
Contract Administration is the effective management of the contract, the supplier relationship and ensuring that the outcomes of this relationship are delivered to your organization as expected.
What types of activities are undertaken in this contract management stage?
Contract Amendments - these are changes to the original contract document and accompanying documents such as the schedules of the contract, the annexes of the contract and any other changes.
Obligation Management - This requires the use of a Contract Lifecycle Management solution (CLM). You could do it on excel but don’t be cheap, understand there’s more to it that saving a few quid and invest in some decent tech for your Contract Managers.
Tracking decisions that affect the contract - this can be changes in business direction or new requirements within the organisation. You may need to get out of a contract or make your organisation aware of the contract you have in place that can be utilised. You bring value to your business by being pro-active here and not reactive.
Checking deliverables match requirements - ensuring that the end deliverable is in accordance with the contracted requirements or statement of works.
Spend Data - this is a key element of contract management especially in larger contracts where spend isn’t always clear. You need to know where the money is going in a specific contract, how much is being spent, to which companies etc. Open this organisation-wide to include all contracts and you build up the entire spend profile of your business. You now know how the entire organisation spends its money and you can make more strategic decisions around this when you know that level of information.
Payment and Invoice Management - you need to ensure that you are aware of all the invoices that come in, whether they can be accepted and what payments can be made. It is likely that your finance team will issue the payments to the supplier or receipt of a valid invoice from the supplier. The word valid is the key element here and you need to ensure that you are letting your organisation know if the invoice is valid. This can be completed by knowing if the goods have been delivered or the services have been completed.
Performance
Managing the supplier’s performance is essential in preventing poor contract delivery and getting what you’ve paid for.
A common way of managing performance is through Service Level Agreements/Key Performance Indicators. These are usually specific criteria that the need to be met and are incentivised (additional payment) or persuaded to complete (penalties).
They are incentivised using a couple of methods by deducting/reducing the contract value should the KPIs as they are known in the industry not being met or if they are met or exceeded, the supplier is paid above the contract value.
It is essential that you maintain the governance of this to ensure your Supplier is delivering to the criteria that you’ve agreed in the contract.
Contract Exit
It’s inevitable that you will reach the end of your contract relationship at this stage. You should have prepared for this at the pre-signature stage and now it’s time to put it all into action.
You need to consider how you will:
Hand back all material/property to the other party.
It is fairly common for contracting parties to exchange information such as intellectual property, hardware and even resources in order to deliver the requirement.
You need to ensure both parties give back all the information, that the hardware is returned in the state expected and that people go back to their organisation. This needs to be tracked throughout the life of the contract.
For example, if you need to provide secure laptops with a specific processor for some work, then you need to know the how many you’ve given to the supplier, the serial numbers of the laptops and where they have gone. This makes it easier to get them back at the end of the contract.
Depending on the intellectual property and ownership contract terms, it’s likely that any work, documents and prototypes belong to the buyer. So you need to ensure that all of that information and hardware is delivered as part of the contract. This should be a deliverable that is clearly articulated and will likely be the last deliverable you will be provided with.
If you’ve a contract option to extend the life of the contract then you may wish to put this into effect. You need to follow the process as stated in the contract terms. This is simple to do but a lot of option clauses have a specific date as to when this option must be taken up. If you are football fans, you may hear of clubs taking up a contract option on a plater and that keeps them at the club for two more years. A contract option is pre-defined pre-signature and details the amount of money and timeframe.
Hand over to new supplier - you may have included the need for the supplier to assist you in transferring services to a new supplier should that be applicable. You need to begin this process at the earliest opportunity and manage this complex relationship.
Learning From Experience
This is my favourite out of all the contract management activities and it’s my favourite as it is often neglected. There is so much good learning to have by implementing this in your business.
Learning from experience is the process of documenting all that didn’t work well and how it could be improved. It does not stop there though. It also includes everything that worked well so you can ensure that it is included in future procurement and contract management activities.
It’s there to ensure previous mistakes are not made again and that good practice is always used moving forwards. It’s very powerful.
You need a Contract Lifecycle Management Solution in place within your business.
I know some of you might be thinking it's all about getting the process right before jumping to a CLM.
I think this is nonsense and I'll tell you why.
You cannot possibly begin to understand the incredible efficiencies that a CLM solution can afford you beyond manual processes.
You cannot begin to understand how managing all communications, all drafting, all of the redlines, all of the negotiations in one single place can make to your strategy and approach to contract management.
You simply should not, and I was going to say cannot but that wouldn't be quite accurate, lift a manual contract management process, and I'm talking about both the pre-signature and post-signature contract management process and stick it into a CLM and expect the CLM to make a difference.
You need to understand that the CLM is likely going to have some Robotic Process Automation (RPA) built in which will replace the need for a Contract Manager to send an email, to extract information, file types and that it probably uses some form of Artificial Intelligence (A.I) to do some of the review work for you.
You cannot build this into a manual process.
You need to shift your thinking to a digital first approach. We shouldn't still be emphasising this position in 2022.
As a millennial in Procurement and Contract Management, this is the expectation yet it feels like a constant battle within teams to illustrate the value. It's an easy sell. We all use phones that automate huge swathes of our life and work should be no different.
What are the benefits of using a Contract Lifecycle Management solution?
Time saved automating once manual tasks
Visibility of the entire Business contract eco-system
Audit trail of all decisions, negotiations and communications for each contract and each supplier
Self serve of contracts, documents and information within the business and within your supply chain
Storage of documents and the ability to pull data from them to use it for decision making, improvements, risk positions and performance management
Compliance with legal and regulatory requirements across different sectors/industries
Sounds good, right?
Contract Management is a Game Changer
I’ve worked with a lot of different clients over the years. Every single one of my clients struggled with Contract Management. Most didn’t realise it’s importance. Once we got it in place they realised it was a game changer.
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I hope you’ve got just a bit more information on how to carry out effective contract management within your business now.
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