Contracts can pay you dividends

Gregg Barrett THE contracting policies and practices at most companies are resulting in lost revenue and profit. Few organisations have successfully established a link between their contracts and their financial performance. As a result, they have a limited insight of the opportunities being missed or the trading relationships being mismanaged. The reasons are there is typically no-one accountable for contract outcomes and the process is usually a series of disjointed activities with unclear or competing ownership. These conclusions were reached after extensive research and benchmarking by the International Association for Contract & Commercial Management (IACCM). They are supported by a wide range of case studies from the IACCM and academia and show that most contracting processes are driven by narrow perspectives of risk. These perspectives result in terms and conditions that protect against certain types of risk but take no account of the counter-risks they generate. The current collapse in financial services is the most recent example of this failure in contract governance. Why do we have contracts? The purpose of a contract is to establish and safeguard economic interests. While the ultimate protection of these interests may be a resort to law, the reasons for having a contract are not exclusively legal. Our networked world and the shift to a service-oriented economy have arguably reduced the importance of many traditional legal imperatives while increasing the significance of others. An effective contracting process from which the contract is an output ensures a mutual understanding between the parties involved. The contract is a formalised approach that provides a record of key expectations and obligations to guide performance and consequences if there is a failure by one or both parties. Contracting excellence expands on these basics by selectively creating a forum in which the parties can optimise the value of their relationship at inception and over time. This means that economic interests are protected and enhanced. To achieve this greater value, the parties must commit themselves to a wider and more open appraisal of their respective needs and capabilities. They must also embed ongoing review and change mechanisms to ensure a response to shifting needs or opportunities. Best practice in post-award contract management Throughout 2008, the IACCM conducted a research study to identify the top-performing organisations in contract management. The study identified 25 top-performing companies including Procter & Gamble, Hewlett Packard, Intel, Boeing and Capgemini. A full list is available at www.iaccm.com.

What makes these companies stand out from the rest? At a glance, all but one of the best in these top-class firms have a defined career path for contract management professionals. All those interviewed have defined processes for contract review, knowledge management and information exchange. Three of the top five use IACCM training and development programmes, 11 of the top 25 have adopted IACCM professional certification. Most have clearly defined team interfaces, regular reporting to executive management and visible executive commitment to contract management discipline. Transition is also viewed as a key period in the performance lifecycle. However, the handover/continuity of personnel is a target for improvement. The top-performing organisations in the study had these six traits: 1. Developing an effective working relationship The top-performing organisations view contract management as a process adopted consistently across regions. There is a strong focus on consistency and integration with execution taking place as a team effort with consistent roles and authorities in contract management and across other groups and functions. These organisations are also increasing investment in assisting knowledge transfer to partners. 2. Definition of requirements Top-performing organisations set up post-award teams to: - Review requirements during transition; and - Ensure responsive mechanisms for continuing review and update throughout the contract life-cycle. There is also the creation of checklists/guidebooks to help contract managers obtain a detailed and precise definition of requirements to ensure that everyone is on the same page. There is also regular reporting and review to ensure that needs and deliverables remain aligned. 3. Transition A standardised approach is followed when interpreting the signed agreement and communicating it to the group. Critically, there are also reviews to ensure clear integration between strategy, procurement, contracting and contract management before the final approval of the contract. The use of tools, like enterprise contract management systems, identify resource requirements to support perceived workload. 4. Measurements, service levels and performance agreements Importantly, there is a constant monitoring of contracts with high criticality and complexity, a broad scope and longer duration to ensure they are delivering value as intended.

There is the periodical review of the health of each account against objectives through a structured contract audit process. Executive reports are formulated with a regular review of performance and improvements ensuring the oversight of troubled contracts. 5. Change Management Lessons learnt or other repositories of past contracting experiences are established to promote best-practice sharing and transfer of knowledge across teams and relationships. This helps to foster better decision-making and reduce the chance of the same mistake being repeated. The use of embedded systems that support data access and transfer between customer and provider are also in place and help to foster collaboration. Contract categorisation is based on levels of future uncertainty and the likelihood of change and variability. 6. Career development There are clearly designated job roles in the contract management function. There are also specific career paths in this structured group. This provides staff with the confidence that they have a future and encourages higher levels of performance. Not surprisingly, top-performing organisations make substantial investments in skills development and training. More importantly, contract managers in these organisations also have a visibility and status in their organisation.