In high-value, high-risk, high-tech industries contract management is one of the most important business control processes to ensure profit maximization.
In this post, I will mainly focus on the processes after the signature of the contract and how contract management can support in preventing contract value leakage.
Why Contract Management Matters
Losing the track of key obligations and dates in contracts costs companies millions of euros every year. Although the focus is often very much on delays of goods and services related to liquidated damages, a lot of damage is done when you forget to renew or extend your contract, keep track of when the customer needs to exercise options, or forget to formally agree in a contract amendment on changes in the technical specification, price or delivery schedules.
A company manufacturing complex goods or delivering services losing track of key dates is like a bank losing track of money.
In addition, with the advent of IFRS 15 and similar accounting rules related to revenue recognition, managing contracts correctly has even become more important to comply with these new rules.
What is contract management?
Contract management is not the same as contract administration. The contract manager not only plans, develops, and executes the contract, he or she is also there when it needs to be amended, renewed, or audited.
Important contract management activities include:
- Proposal and contract creation
- Relationship management
- Contract amendments
- Managing disputes and claims
Medium to large companies in aerospace & defense, oil & gas, telecommunication, information technology, and other tech industries all around the world use contract management to manage contracts and their relationships with other businesses. Contract management as a business control tool is more and more becoming an item on the agenda of their boards and executives.
Effective contract management can ultimately strengthen the business relationship you have with your customer. When managed correctly, this can then lead to greater profitability over the long term. If they are not it will inevitably lead to financial loss, bad relationships and reputation damage.
They understand the importance of contract management and that it improves revenue and reduces risk, prevents unexpected losses, and even can give a company a strategic competitive advantage in the marketplace. In this post, I will highlight more benefits.
So what about your organization? Are you still undervaluing contract management and seeing it as only a tactical activity that can also be done by the project manager as a side job? If so, you most probably are losing money without knowing it. And your competitors already working with contract management may have a competitive advantage over you.
The Goal of Contract Management is Profit Maximization
Your contracts with your customers determine the deliverables, options, prices, pricing structures, discounts, payment schedules, delivery dates, service levels, and many other key aspects. All clauses in your contract control the three most important factors of any business: revenue, expenses, and risk.
Contract management then is the process of managing contract creation, execution, and analysis in order to maximize operational and financial performance at an organization. That’s the goal.
You can achieve the goal by ensuring that your commitments and obligations to customers and suppliers are clearly visible to the right people in the organization and that they are acted upon.
Unfortunately, as I found out working for many businesses, there are only a few companies in the world that see contract management as a broad and integrated discipline and process overseeing all obligations, commitments, regulations, sales opportunities, and behavior of their suppliers and customers.
The Impact and Costs Of Weak Contract Management
In many companies, contract management often is performed by different functions and departments that are disjointed and fragmented. Moreover, in most of the companies I worked, they were still using largely manual processes and tools (Excel, network folders) to manage the lifecycle of a contract. This can have an enormous impact on a company.
It has always amazed me that in a high-risk, high-value industry like aerospace or defense, although the manufacturers often produce state-of-the-art goods (aircraft, weapon systems), obsolete business processes and tools are used which were used 20 years ago.
Also, there are many famous cases in other industries where contract management could have prevented major damage to the company involved.
There are cases of pharmacy companies that promote drugs for non-approved use, and on top of that gave incentives to the medical community. some have been fined to amounts up to hundreds of millions of dollars (Novartis). By having contract management organizations that always review not only obligations but also business and market practices, such disasters can be prevented. Contract management can ensure that there is no misrepresentation related to products or services or that sales and marketing are in compliance with law and regulations.
Another case happening, again and again, is where customers are overpaying or wrongly being charged for products or services (like especially – as we all know – in the case of mobile data). Since contracts also govern pricing, charging, and payment mechanisms, an alert contract management function can prevent a lot of damage here as soon as the complaints started poring in.
Download ContractExec’s Contract Value Leakage Infographic here:
So you should invest in setting up a contract lifecycle management process for your company and implementing related tools (CLM) to ensure you do not lose money during this important phase.
What is Needed for Contract Management?
1. Right people
First and foremost your organization needs to have professionals in place to handle contract management. You can have the best processes and the best tools in place, but thye are worthless if you don’t have the right people in place.
A fool with a tool is still a fool!Grady Booch – American software engineer
You’re not looking anymore for contract ‘administrators’ only dealing with monitoring delivery and key milestones and managing invoices. You need highly trained contract specialists with at least sales, negotiation, financial, legal, and project management skills who know how to focus on both bottom-line and top-line margin maximization and contract value growth.
2. Right processes
Then you need to have the right processes in place. All processes should start with the people actually thoroughly knowing and reading their contracts.
3. Right tools
Finally, it is essential to have the right automation tools (CLM or legal tech) to ensure correct contract performance, compliance, and business analysis output.
Key activities Leading to Successful Contract Management
With a successful contract management strategy and the implementation of successful post-award activities you should be able to see:
- the delivery of goods and services being performed to the satisfaction of both parties, and
- the expected business results and financial returns being realized, and
- the customer, satisfied with how its needs are being met, and
- no contract disputes or surprises.
Of course, this depends also very much on your customer and how they approach contracts. You need two to tango!
There are always going to be problems popping up, so both parties must have some flexibility and should be willing to adapt contract terms to reflect any changing circumstances.
Contract management actually starts before the signature of the contract: with proposal writing, contract drafting, and negotiation up to all the paperwork to make the agreement final and get it signed. Of course, you should have already thought about financial and contractual risks in the proposal and before negotiating the contract terms with your customer. See more about this in my post about the preparation and proposal phase and the article on contract drafting and negotiation.
I will further focus here on the post-signature stage since this is where successful contract management is needed to maintain your contract value and profit margins.
As different contract types go through the post-signature contract management phase, it’s important to follow contractual obligations while also making sure both sides of the contract are satisfied.
You need to monitor any potential changes or breaches of contract. If you or the other party is unhappy with their contract, or one of the parties fails to meet its contractual obligations, you may need to make changes to the contract. Or, when needed, apply penalties or send claims.
Successful contract transition to implementation
Common pitfalls in hand-overs to delivery teams are:
- Holding nobody accountable at the start of the contract roll-out
- Not seeing the impact of poor proposals or negotiation leading up to the contract
- Suffering the consequences of the downstream impact of others
- Not reading the contract and its annexes
- Underestimating the complexity and scope of the project
- Post-award negotiations not being finalized or concluding them slower than expected
- Slow to recruit and mobilize the implementation team
- No transfer of corporate experiences and best practices
- Failure to deploy effective obligations management on day 1
- Lack of focus on the near-term deliverables
- Skipping to understand and plan steps
- Not installing effective risk management
- Paying too little attention to cross-sell and up-sell opportunities
- Ineffective governance (internal and external controls) from the start
- Not keeping records of key decisions, key events (excusable delay!)
- Cost overruns from failing to manage requirements instability
- Inadequate business case and failure to identify realistic funding requirements
- Poor internal communications and coordination
…without a detailed and thorough hand-over to the contract implementation team, risks will increase exponentially!
The goals of a hand-over of the contract (and changes to the contract!) to the departments or managers that are going to be responsible for delivery are making sure that:
- all stakeholders know the terms of the contract
- everybody is aware of the contract
- everybody knows the goals of all stakeholders for this contract (business case)
- the contract manager is the point of contact for all changes, contract interpretation, and compliance issues and attends project and contract review meetings.
For this presentation meetings, workshops or training can be used by project team members and other stakeholders. By making summaries of the contract and distributing relevant parts to the relevant departments, the organization is made aware of the contracts and the tasks to be performed or monitored.
Risk-drivers at hand-over over a contract to the implementation are many:
- Loss of knowledge
- Break-down of relationships built during requirements definition up to negotiation
- Loss of assumptions leading to underlying terms and conditions
- Loss of documentation
- No view of risks or inadequate risk register
- Onerous clauses not identified
- Unclear timetables & key milestones overviews
- Key customer issues/expectations
- Unclear obligations (legalese, bad English)
- Customer obligations not clear
- Poor understanding of contract
- Controls/governance not clear or not agreed
- Escalation procedures not communicated with the customer.
What to handover:
- Bid, proposal, and/or contract authorization documentation
- Contract master copy (like the final draft in Word before signing in)
- Contract summary
- Important mails and key responses
- Delivery design work package
- Financial statements
- Negotiating mandates
- Pricing, pricing structure, price revision formulas
- Account management planning strategy
- Risk identification & treatment
- Onerous clauses (liability, security, IP)
- Service design work packages (if any)
- Solution design work packages (if any).
Managing contract risks and opportunities after you sign
The engagement team should already at the hand-over have given you a risk register compiled up to the signature of the contract. If you have this and even have received a contract summary, all the members of your project team still need to read the entire contract and identify the risks related to payment, time schedules, and cost risks that could impact your margins. Or worse, put your contract (or company) at risk. You and your team need to understand the key rights and obligations in the contract.
You should prepare a contract administration roadmap for the delivery of the contract. This roadmap will be very important to prevent contract value leakage, minimize the risk of liability, and retain your margin.
I always look quickly at the following risks:
- Availability of resources and material: are we still able to deliver on-spec, on-time, and on-;
- Delivery schedules and grace periods;
- Liquidated damages and penalties;
- Security (especially in defense contracts)
- Flow-down obligations (to subcontractors).
But there are many others and it differs per contract and is often based on experience yu had with certain customers.
Keeping good records and good client relationships
In transactional contracts – which is still the standard- where the focus is very much on contract performance (like payment for on-time delivery) and in performance-based contracts – which look much more at customer’s performance (payment based on availability) it is important to keep a good paper trail.
Write minutes of meeting. Confirm key discussions in formal writing. Don’t depend on on verbal agreements. Save your emails. if your customer is claiming money for instance for a delay for which they are (partially or wholly) responsible, the documents will be your lifeline.
Maintaining good relationships with your customer also is important. Focus on interests, not positions (do read Getting to Yes! if you didn’t read it already). Follow the contract. Also if you claim for delayed payment interest, remain strong on the issue. You are just following the rules agreed with your customer.
But of course, try to keep your personal relationship with your customer, if you have one, intact by softening the impact of contractual notices by making phone calls to your customers to let them know beforehand that the delayed payment interest notices are on their way.
Do Our Contract Value Scan!
A 30-minute phone call to get a better impression of your contract management capabilities and tools and some first advise on how to reduce contract value leakage
You should see good contract management as a form of good communication between you and your customer.
You also need to agree on procedures on how and when to regularly do project and contract reviews.
Monitoring the contract with contract lifecycle management systems
Automation through contract lifecycle management (CLM) systems can help to streamline and improving contract management, reducing costs, and improve company performance.
Most companies I worked for still manage contracts manually through paperwork and network folder storage using Excel sheets, which is totally inefficient and often leads to huge errors based on which wrong business decisions are taken.
I implemented a contract lifecycle management system for a manufacturer of aircraft parts. For the first time in the existence of this company contracts were saved in on central repository.
The main reason to implement the CLM was that especially military programs in this environment were so complex due to massive numbers of regulations, restrictions, procedures, and processes that nobody had clear visibility on all obligations and risks involved, and managing contracts required huge numbers of people.
So CLMs allow you to improve your contract value and margin retention by automating your commercial and contract management processes in order to:
- reduce time
- limit errors
- lower labor costs (inefficiencies)
- decrease risks
- reduce value leakage
- enhance cross- and upsell opportunities.
“The overall purpose of contract management software is to streamline administrative tasks by creating a centralized and uniform record for each contract’s processes.”Robert Powell, CEO and founder of Rob Powell Biz Blog.
Obligation management: monitoring your performance
Each contract specifies obligations: activities that each party or both parties are obliged to do or not do.
When you sign a contract you and the other party now have legally enforceable commitments to comply with the obligations in the contract.
Complying with contract obligations is a challenge for any business to maintain contract value. Failure to comply with contractual obligations can lead to a breach of contract. Therefore obligations need to be closely managed.
For the supplier the main obligations are:
- On-time, on-spec, on-budget delivery of the agreed product or service
- Issuing invoices within 30 days of the end of the month
For the customer the main obligations would be:
- Taking delivery of the agreed product or service after acceptance
- Paying invoices by the due date
Other obligations that apply to both parties are compliance with:
- Laws and regulations imposed at any level of government, such as data protection principles and export regulations. Sometimes the applicable laws and regulations will be stated in the contract by reference without any details. At other times, those laws and regulations will apply even if not explicitly stated in the contract
- The parties’ internal directives, policies, and operating practices, such as a code of conduct governing behavior on the organization’s premises, security, confidentiality protocols. Compliance cannot be expected unless details are provided before contract execution
- Generally accepted international standards, such as ISO quality standards.
The ROI of Contract Management
How can contract management in your company support the value of their business contribution to your top an bottom line?
Or what is the value of contract management or the return that might be achieved from investment (for example in contract lifecycle management software)?
The problem is also that many companies still see contract management as essentially an administrative function, primarily focused on sales or procurement of goods.
Automation is then (only) focused on internal efficiency, supplemented by the possibility of savings from reduced errors (e.g. not overseeing a renewal or expiry date) or compliance (applying standard terms).
The contract management activities consist mainly of coordination, support, oversight, reporting.
Traditional arguments most often heard are:
- risks avoided (“terrible things would happen if we weren’t here”),
- the volume of contracts handled,
- compliance rates achieved (neither of which necessarily represents a benefit).
- incremental revenues, margin, or savings achieved in post-award management.
The true source of contract management value lies in:
- reducing contract value erosion
- supporting contract growth
- contributing to reputation, and
- ensuring ethical practices.
Everybody agrees that contracts are assets and therefor important. But they also have issues with:
- the form those contracts take (difficult to understand) and
- the process through which they are formed and managed.
- mismatch between business needs and contract management practice.
- rather than supporting their creation and maximizing their value, the process has become dominated by issues of compliance and control.
- complex and time-consuming review and approval procedures, for the purpose of risk avoidance or to allow the application of ‘expert judgment’, yet too often contributing little except delay and value erosion.
Contract management is not an extension of program management nor of ERP (enterprise resource planning). Program management is focused on improving an organization’s performance. ERP drives may drive internal efficiencies – contract management is all about relationships that cross department and enterprise boundaries.
Contract management looks for ways to:
- simplify inter-company activities
- maximize the benefits from commercial relationships
- enables business,
- optimize contract asset values
- focus on the quality of contracts and supporting the speed and quality of closing contracts.
Measurements of success must therefore focus on the extent to which the form, structure and content of contracts is avoiding terms, policies or procedures that generate unacceptable levels of risk or undermine value and success.
Contract management should not only have an internal but also an external (customer-centric) focus.
The focus should be on:
- improving efficiency and effectiveness of trading relationships through improved business interactions
- reducing the frequency of complaints or claims
- accelerating decision-making, change management and issue resolution;
- contributing to on-time, within budget completion of contracts or projects
- increasing alignment with trading partners and an
- understanding that the terms of contract that really matter are those associated with governance and performance management – the terms that increase the probability of collaborative relationships and success.
The true ROI of contract management does not lie only in the risks it avoids.
It comes from the value it can add through continuous updates, adaptation and streamlining of the way that businesses interact.