The challenge and value of better contract lifecycle management

State of Flux

 Modern businesses and other organisations are forced to create and manage a vast and complex array of written and unwritten buy-side or supplier contracts. This phenomenon presents an organisation with both a challenge and opportunity because the creation and management of “good contracts” will result in reduced contract risk and enhanced commercial value, while poor contract lifecycle management exposes the organisation to high costs, lost revenues and liability for contractual and regulatory non-compliance.

A study by the Institute for Supply Management uncovered that between 60-80% of all business-to-business transactions are governed by some form of written agreement, with a typical Fortune 1000 company maintaining 20,000 to 40,000 active contracts at any given time. Managing the creation, performance and termination of such a mass of documents is challenging to say the least, but organisations that shy away from this challenge do so to their significant risk.

And when we talk about risk in this context we mean it in a broad sense. It includes the risk of not being contractually covered when things go wrong and the risk that an organisation is not positioned to take advantage of the positive benefits that flow from well written contracts and good contract management. The latter includes missing:

• Opportunities to leverage existing on-contract spend to get a lower price;

• The ability to negotiate the value in contractual terms to get a better deal;

• Revenue by effective rebate management;

• Better service delivery by the creation and application of good SLAs and KPIs;

• Better and continuously improving sourcing based on good management information developed about the creation and performance of the contract.

Given the amount of contracts that large organisations are forced to create and manage (or not manage as the case may be) it is not overstating matters to say that the risks associated with poor contract lifecycle management (see figure 1) can be considerable. While it may be the case that managing one contract poorly is of marginal concern, magnify that practice across an organisation’s entire portfolio of contracts and the accumulated level of risk begins to look significant.

Why is the written contract not taken more seriously?

This notion that poor contracts lifecycle management is risky is not news to most, which poses the question why are many, if not most, large organisations not better at creating and managing their contracts than the evidence suggests (according to the Aberdeen Group, 65% of suppliers do not comply with their contractual obligations and from our experience at State of Flux, many organisations do not know where to locate a large number of their contracts)? The answer to this question is likely to be found in a number of factors, including the cost to an organisation of introducing effective contract lifecycle management, the limited legal and other resource available in most organisations, and the need to co-ordinate the effort of a variety of business functions, each of which has their own unique perceptions of what is and is not important when it comes to contracting.

The other important factor that is less frequently discussed in the material on contracts lifecycle management is individual and collective apathy or indifference to the significance of the written contract. This indifference is commonly manifested in a failure on the part of those responsible for purchasing goods and services, and for managing suppliers, to contract on the correct approved terms and conditions, to use the commercial levers in the contract to extract value, or to check and manage contract compliance during the life of the contract. In many cases the contract, if created, is “put in a drawer” never to be seen again.

This apathy or indifference towards the written contract can be attributed to factors including:

• a lack of education about the significance and value of the written contract and its terms,

• good contract lifecycle management is not adequately mandated across the organisation,

• the contracts executed do not fit the deal and are, therefore, perceived to be of minimal if any use,

• a lack of clear and well communicated policies related to contracting,

• a lack of accountability for the contract throughout its life,

• a lack of collaboration or a clear engagement model between the organisation’s contracting functions and the business,

• inflexible contracting processes, and

• a common misconception that long standing relationships replace the ‘need’ for attention to the written contract.

 What should organisations do to improve contract lifecycle management? 

1) Diagnose the problem

They should start by being very clear about what they are trying to achieve when embarking on an improvement exercise, and they should be realistic when setting that objective. We intimated earlier that most organisations are immature when it comes to contract lifecycle management, and any programme to improve their level of maturity must reflect each organisation’s starting point.

In truth, however, organisations tend to overreach when attempting to improve their approach to contract lifecycle management and in doing so their efforts often fail to achieve a meaningful and sustainable level of improvement. This overreaching reflects that organisations, while good intentioned, frequently overestimate their current level of contract lifecycle management maturity because their assessment, if any, is usually undertaken by a small number of people without reference to a meaningful set of metrics and without adequate penetration across the enterprise.

It is, therefore, essential that an organisation begins its quest for better contract lifecycle management by undertaking an assessment or diagnostic of its current position using a diagnostic tool like the tool developed here at State of Flux. The diagnostic will identify the organisation’s level of maturity which translates into clear and targeted recommendations for improvement that reflect the organisation’s existing level of maturity.

The diagnostic approach also works to get early buy-in from key stakeholders to the improvement plan. It does so by immediately engaging those stakeholders in designing the way forward and this buy-in is just as essential to the success of a contract lifecycle management change programme as it is to any enterprise wide change programme.

2) See technology for what it is – an enabler of people, policy and process

Any organisation which is determined to improve its approach to contract lifecycle management must also make effective use of technology.

Effective use of contract management technology is born of a realisation that technology itself is no more than an enabler of a good approach to contracting which incorporates sound policies, simple, flexible and effective processes, and people who are required and adequately trained to realise the benefits of good contract lifecycle management.

Our experience at State of Flux is that many organisations focus their investment during a contract lifecycle management improvement programme on the acquisition of a contract management system.

The result is a highly functional system which is underused or misused for two notable reasons: 1) the organisation has not invested enough in the essential elements of people, policy and process which the system should be deployed to enable and 2) not enough consideration has been paid to how the system would communicate and integrate with the wider business (strategically and at a daily operational level).

From our experience most organisations would be better off spending their money on a simple system while channelling the balance of their budget to getting the people, policy and process elements of the approach working effectively. Provided the system selected offers certain essential functionality (e.g. online, search, reporting and alerting functionality), is secure and easy to use and perhaps functionally scalable, it can be adequate (although note what we say in the following two paragraphs).

It is, of course, easy to say that an organisation should deploy technology which “enables” its preferred approach to contract lifecycle management, but what if the technology does not exist. In that case it may be necessary to manipulate off-the-shelf systems to match the preferred approach in a way that is sub-optimal. Organisations should avoid this approach if possible, but our experience is that very few, if any, standard contract management systems deliver a solution that effectively supports management of the entire contract lifecycle and, therefore, organisations are led down the road of trying to make the standard system fit their specific needs, with varying degrees of success.

To avoid the need to shoehorn standard systems organisations may need to invest in developing bespoke technology. Building your own systems to support management of the entire contract lifecycle need not be prohibitively expensive. If we stick to the mantra of “keep it simple” our experience is that the development costs can be relatively low and, in the end, the organisation gets a system that looks, feels and delivers in a way that fit’s the organisation’s specific needs and ways of working.

3) Pay attention to the whole

In a subsequent article we intend to focus in more detail on the essential elements of people, policy and process, but for now we want to summarise several key points that organisations should be aware of if they want to improve their approach to contract lifecycle management.

We see from our diagnostic work that an important hurdle to good contract lifecycle management is the challenge of process. Many interviewees during the diagnostic assessments we have completed complain that the contract creation process is unknown to them or, when they are aware of it, they consider it to be complicated, inflexible, overly burdensome and of no apparent value. Coupled with the fact that contract lifecycle management rarely forms part of individual job roles and is not mandated and enforced within and across organisations, the burden of process typically results in high levels of enterprise wide non-compliance to contracting policies.

This challenge of inflexibility is a valid and important one. It goes without saying that organisations enter into a wide array of different contracts that vary in terms of risk and criticality to the organisation, expenditure, and complexity. To believe that one process will fit this variety of contracts is flawed thinking and to impose a lengthy and rigid process (including a lengthy and overly complex written contract document) on, for instance, a business area that wants to purchase a low cost and low risk commodity product, will inevitably lead that part of the business to find ways of avoiding the process. It is, therefore, essential that organisations build an appropriate level of flexibility into their contracting processes which allows for the different circumstances in which goods and services are purchased.

This is not a simple exercise and it requires a high level of cross functional input and planning. At State of Flux we have developed a flexible process tool which supports delivery of this necessary flexibility. Organisations should consider investing in a similar solution.

4) The people dimension

Arguable the most neglected yet most important element of good contract lifecycle management is people – the people who are involved at the different points in the contract lifecycle. Those people must be effectively informed and trained in the essential contracting related aspects of their role, and there must be in place, as part of a flexible and effective process, a clear engagement model which tells them where and when to go for support depending on the contract they are creating or managing.

Some of our recent work at State of Flux has involved creating and implementing competency matrixes against which the performance of personnel involved in the contracting process can be measured, and from which those individuals can begin to develop an understanding of contract creation and management as an essential aspect, albeit one aspect, of their day to day role.

More organisations are considering including contract lifecycle management competencies as an element of current role competencies, which is a positive step, but often the competencies are developed without the necessary cross functional and expert input. Consequently the competencies, once developed, are regularly set to one side and not implemented.

In a similar vein contract lifecycle management training is sometimes ad-hoc and inadequately structured; it does not form part of a programme which delivers training in the variety of competencies, technical and behavioural, that are necessary for good contract lifecycle management. Getting the right balance of content and targeting it at the appropriate individuals is not straightforward, and it is something that we at State of Flux have invested considerable time trying to get right.

With supply chain risk and regulartory requirements placing more burdon on organisations, the need to get contract lifecycle management right is increasing rapidly. In our experience 'getting it right' means a wholistic and dedicated focus. No longer does it work to ask the category managers to 'do a little more' when managing their contracts.