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One company's paradigm shift turns potential loss into measurable gain

Published: 15 May 2013 Average Rating: 5 / 5 Print
 
This article appeared in Contracting Excellence magazine on 15 May 2013 view edition
 

In this article, author Anupam Sharan, the contract governance director of Sutherland Global Service in India, describes the derailment his company began experiencing because of poor contract management.  He recalls how his team sidesteped the pitfalls they saw coming. Their first step in keeping all contracting processes on track was to identify reasons why things began breaking down.

By Anupam Sharan, Director, Contract Governance, Sutherland Global Services, India

In this article, author Anupam Sharan, the contract governance director of Sutherland Global Service in India, describes the derailment his company began experiencing because of poor contract management.  He recalls how his team sidesteped the pitfalls they saw coming. Their first step in keeping all contracting processes on track was to identify reasons why things began breaking down.
 

Sound Contract Management: organisational requisite you cannot overlook

Even the best contract in the world needs to be managed through a sound contract management process. According to Faulker Information Services1, over ten percent of contracts executed by large organizations are not managed well and cost the company money and wasted time. Contracts end up archived on paper or in electronic systems without accountability.

If your organization tries to manage the contract in tads and pieces because it lacks a defined contract management setup, the contracting process could overburden the main processes such as procurement, business development, finance, and account management. The supply chain department may consume the contract management responsibilities.

Success story of Sutherland Global Services

Have you ever tried to build a seamless process only to find the flow down of responsibilities jamming with an engrained self-destructive process? Early in the contract process, you may assume your work will be hassle-free.  But a month later, problems start wafting  your way, because the system has been broken all along and no one has been accountable!

This happened with our organization.  The contract and process we were following looked good at first but later we realised that we actually lacked accountability and system process.

My main challenge as Director of Contracts was like people passing on the baton without knowing the hurdle. Stakeholders who produce the real fruits of agreed contracts were reluctant to make changes, and no one was accountable for contractual obligations assigned to them.

Even a simple proposal from the customer missed its deadline.  Efforts to fix these problems wasted time, risking company profits.   In the months that followed we reached out for assistance. 

A paradigm shift in thinking

We began a case study of a simple contract with one of our leading clients and the impact it had both contractually and operationally due to a derailed contract management set up.

Subsequently we discovered the industries best practices (Cisco Contract Management2 , SAP Contract Management3 etc.) and learned how to implement it to match our company's business need.

We held a series of meetings with higher management and stakeholders. The case study convinced management to launch a complete seamless contract function.

We set up the processes and ensured that right people were accountable for their performance.   We made sure the criticality of this was understood and implemented down the lowest level of organisation.

Let me stress that over a period of time the process has considerably improved, but we are still not at the matured stage.  Even so, benefits of this paradigm shift are already measurable, and as a result all stakeholders are following the short and long term targets.

Bridging Contract Management

Most of us know that one of the prerequisites for enforcing a contract is that the terms of the contract must be accepted by all parties to the contract.  We know that organisations globally are realising the benefits of implementing sound contract management throughout their businesses.

But a seamless process cannot happen unless we track the contract at each stage no matter how challenging and complex the project deliverable is at each stage. The entire setup should first address the organization's business need to implement the best process for the business.  It does not matter if it is a supply or service contract or a combination of both. The commercial and contractual aspect is essential for bridging the gap between what is negotiated and executed to correctly leverage compliance measurement and reporting activities.

Sound Contract Management Lifecycle   We devised a seamless process to include accountability and tracking at right intervals.  Figure 1 shows key aspects of seamless contract management arrayed in a lifecycle.  It begins with Authoring followed by Negotiation, Approval, Storing/Repository, Compliance Management, and Renewal. 

Key Aspects

  • Authoring: Use standard templates.  A clause library allows you to capture terms from sourcing or previous contracts
  • Negotiations: Submit negotiations to your counterpart for feedback, comments and correction to reach mutually acceptable T&Cs (helps develop relationship)
  • Approval: Base your Approval cycle on workflow like fiscal, legal, operational etc.
  • Storing / Repository: Make this enterprise-wide with searchable reports in contracts
  • Compliance Management: Your Contract information should flow into all processes i.e., sales, procurement, SD, BC etc., Track supplier or customer compliance with price discount
  • Renewal / Amendments: Base your Renewal or amendment on expiration date and internal & external factors; extend the contract 

Figure 1 Key Aspects of sound Contract Management

Lessons we learned: 

The case study and the contract process in figure 1 enabled us to improve the process and recognize the red flags of poor contract management.    Here are some examples:

Entrenchment, dogmatic attitudes and lack of vision

  • Traditional and conservative way of contracting lacks acceptance level.
  • Failure to allocate competent number of staff (headcount) and skills needed.
  • Placing too much attention on strategic sourcing and sales, because they are often used to estimate cost savings from the life of contract, but ironically, such estimates are rarely achieved.
  • As much as 40 to 65% of every savings dollar negotiated through strategic sourcing never materializes due to uneven involvement of the contract management process.
  • Contract governance is one of the key processes missing in too many organisations; this anomaly creates the gap between the signed contract and the contract delivery.

Lack of measurable contracting practices

  • Contracting practices are tied to the packages or tools used by organisations, rather than the way the organisations conduct the business.
  • Contracts or contract terms are negotiated without sufficiently leveraging the company's buying power.  Instead they are too often negotiated with the client or vendor by multiple vertical business models4 and individual business units, based on their needs.
  • Key stakeholders may not be collaboratively drafting and sufficiently reviewing contracts before signature.  This increases the risk.
  • Process enforcement is not adequate. The contracts policy fails to ensure the use of approval templates, documents and service assurance.  In addition, rewards and penalties for contractual compliance (such as milestone achievements) are unknown.

Ignorance of contracting tools and tracking systems

  • Inefficient document control centre and lack of an enterprise-based contract repository where all contracts (including amendments) are available and accessible, whether live or expired. 
  • Lack of information and proper communication results in the contract not being renewed in time or it leads to unfavorable terms of a last-minute renewal.
  • The system is not communicating with various internal departments such as service delivery, business controller, client services, customer team, procurement, or finance for various contractual terms and its compliance.
  • Alerts and notifications are not set up to monitor Key Performance Indicators (KPIs) and milestones of the contract and to ensure that stakeholders are aware of these events in advance.

Lack of contract enactment

  • Stakeholders cannot leverage new contracts because enterprise-based visibility is lacking.
  • Benefits and compensation of contracts are not clearly communicated.
  • Change management and claim management processes are lacking even though defined and agreed in the contract.

Ignorance of a proper governance mechanism

  • Contractual compliance is lacking among stakeholders. 
  • A process does not exist to define contractual metrics and measurements.
  • Key stakeholders who are delivering the compliance of the contract are not held liable for inaccuracy, missed timelines, etc.
  • Compliance of the contract is not traceable in a typical business model.
  • Consequences  for non-compliance are unclear or unknown

Sound Contract Management – deep dive

It is absolutely critical for the organisation to have a contract management which not only defines the business objective but also develops strategies, processes and tools to monitor, manage and improve contract life cycle; thus bring added revenues through compliance, change and claim management (figure 1).

Every organisation has a different policy for contract management performance. In some, the legal department performs presales and the contract execution department executes the contract. Whatever the situation, a process only works and is visible if the project lifecycle is managed through a sound contract management (figure 1).  Organisations identify the process using different verbiage, but in all industries and cultures, the application of these steps provides maturity and commitment in business with better partnerships.

Benefits:

One way to audit your own contracting management process is to ask questions like these:

  • Is contracting management a fair, transparent and efficient process that can track forecast to actuals and contractual outage?
  • Are stakeholders assessing contractual compliance by performing regular contract compliance checks?
  • Do stakeholders have better visibility of contractual terms and conditions and can they ensure that accountability exists within departments?
  • Is both contractual and legal protection enhanced for the organisation to minimise risk?
  • Is a clause library available and are standard templates used in collaborating with multiple stakeholders and multi-vendor agreements?
  • Do those involved in the seamless process realize the full value of the contract and do stakeholders have the opportunity to add value to the process?
  • Do you have seamless approval flows using up-to-date tools to make sure the system has better financial controls and reporting structure?
  • Does the customer supplier or service provider have deep visibility into contracts and better accountability of agreed KPIs and milestones?
  • Do you use an enterprise level repository and matured tools to keep management informed of contract expiration and other regulatory requirement?
  • Does the system curtail leakage of contractual savings and better visibility of SOX or SLA compliance, scope creep management and risk mitigation?
  • Are you experiencing faster accountability and control on payment deadlines, discounts and rewards programs?

Be consistent, connected and specific with every step

A consistent, connected sound contract management businesswide requires sharing the data, and sharing strategic goals, service policies, compliance procedures and metrics for delivering a low cost, high quality and response approach.  This approach grows the business into a robust, scalable and flexible platform that can adopt specific business policies and processes -- processes that embrace compliance measurement and management.

Your organisation should invest in best-of-breed contract management processes to manage contracts and oversee the initial implied investment to leverage the benefits of a sound contract management process.  Such diligence not only offers long term stability to the business, it also matures the organisation, giving it visibility within marketplace and among competitors.

End Notes

  1. Faulkner Information Services, a division of Information Today, Inc.
    http://www.faulkner.com/http://www.villanovau.com/contract-management-career-salary-guide/
  2. Cisco Contract Management  : http://www.cisco.com/E-Learning/gfo-cscc-training/public/cdc_single_files_entitled/Contract_End_User_Training/Contract_Management.pdf; http://forums.cisco.com/ecom/web/cscc
  3. SAP Contract Management: http://www54.sap.com/solution/lob/procurement/software/contract-lifecycle-management/index.html; http://www.rmms.ch/media//DIR_28601/7ce74d5485261ff1ffff95f5ffa86321.pdf
  4. Definition of vertical vs horizontal business model:  Horizontal Vs. Vertical Business Model | eHow.com http://www.ehow.com/facts_6823281_horizontal-vs_-vertical-business-model.html#ixzz2RIVKoCxn

Other references:

  • Infosys Contract Management – Procurement Department
  • Nokia Siemens Networks Contract Handbook  by NSN Global CM Team

About the Author

Anupam Sharan is Director and Head of Contract Governance for Sutherland Global Service Inc., with over 13 years of global experience in legal and contract management. His competencies include contract authoring, legal negotiations, contract management / administration, planning, contract compliance, governance, claim and change management and Risk management (including audits, litigation and arbitration). 

TO CONTACT THE AUTHOR, please mail your question to info@iaccm.com or connect using the IACCM Member Search (login required)

Copyright Sutherland Global Services Inc.

 
 
 

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