10 Things You Can Do to Squeeze More Value From Contracts.
Doris Ooley
Contract Management Administrator
Have you been to a grocery store lately? It kinda depends on where people live, but “things” are looking a bit different again. And not in a good way.
Empty shelves are starting to reappear. It’s not at pandemic levels, but the global supply chain is under duress...again. And if the signs at the grocery store aren’t hitting some of us, there are other indicators. Just ask anyone who needs a new appliance, or furniture. Then there’s the automobile industry. The chip shortage created a crippling chain reaction on new car production...as in there isn’t much of it happening.
And now everything costs more...everything. As a reminder, inflation is bad for nearly everyone. Think of the economy as a vehicle moving down the highway. The pandemic is the rain. The vehicle slips off the highway into the median, which thanks to the rain, is now muddy. Still moving fast, trying to get back on the road, the vehicle is now fighting the weight and damage of the mud. Inflation is the mud.
So what’s the point of this modern-day, developing, cautionary tale?
When things underneath break, even partially, the negative effects can reach all the way to our dinner tables.
This is true with Contract Management, a critical discipline within Sourcing and Vendor Management. For most people, this is not an alluring topic. Some people (not me of course) might even liken it to organizing a drawer full of socks.
But there’s a far better picture to draw here.
Contract Management (or CLM - Contract Lifecycle Management) is more akin to Financial Management. Think of all the investment we make in managing finances (which is about managing assets and maximizing value). Would any of us do that without any systemic connectivity, without rules and roles for how and who manages the money?
Contracts are assets.
They actually contain more risk and reward value than most anything else in the business. While not directly liquid, their value to the business is massive. That’s why the term “lifecycle” is relevant. Contracts are created, they are actively useful in numerous valuable business tasks, and they get renewed or cancelled when they no longer serve a purpose.
I mean, why do we spend all that time and energy negotiating contracts, only to send them into the inbox abyss? Or maybe we have a central “cold” storage location. But that is not management either. It’s just storage.
There’s an old parable that can shed some wisdom on the topic.
An owner of great wealth apportions a talent to a guy that works for him, for the worker to steward while he goes on a long journey. A talent is 20 years of labor wages. In today’s money that’s a little over a million dollars. The worker proceeds to bury the talent in the ground. When the owner comes back to see what profit the worker achieved with the talent, he pulls it from the ground and gives it back to the owner. He was fearful not to screw it up. The owner said it would have been better to at least put it in the bank to collect interest.
Here’s what that looks like practically. Without a best practice Contract Management discipline in place, the following things can and often do go wrong…
SLAs are ignored or changed, reducing performance and straining relationships.
Renewals are triggered without notification, eliminating valuable leverage, and often trapping companies in relationships that have implications that reach all the way to their customers.
Unforeseen financial burdens are created because key terms are literally forgotten. Productivity for multiple stakeholders is in a constant state of compromise as they work tasks that are inefficient, even unnecessary, because the work is not part of a best practice process.
In-house legal teams, hugely valuable assets for your organization, get caught in non-strategic administrative traps and hoops (like trying to track down missing or unsigned agreements).
Mechanisms are not in place to monitor and ensure contracts are fully executed leaving the business vulnerable to potential problems should a disagreement with the vendor materialize.
Contracts are not centrally located making it difficult to track down specific contracts when needed, resulting in wasted time and money.
When contracts are not digitized, paper is hard to share and is at risk of becoming lost or destroyed.
We see these challenges and more, almost weekly, as we work with Clients to make improvements in this area of their business.
Ok, so there was a lot of tough love up to this point! So let’s take a turn and look at the positive things you can do to make Contract Management the valuable disciple it needs to be to deliver value to your people and your customers!
Identify someone within your organization to take ownership of the process. In order for any contract management process to work, there should be someone who is responsible for asking the right questions, gathering the necessary information, organizing the effort, keeping interested parties informed, and ensuring the process is being followed.
Involve legal to standardize contract language. Invest in contract templates and use company paper in lieu of vendor paper, whenever possible. This should streamline the approval process and minimize undesirable contract terms in agreements.
Establish standard operating procedures pertaining to the contract approval process to ensure contracts are reviewed as necessary and everyone knows the process.
Track and manage the contract approval process to ensure necessary approvals are received and documented.
Assess and identify contract risk in a way that is not just based upon spend but upon the critical nature of the agreement.
Store contracts in a central repository for digital access and establish a consistent naming convention to easily identify the agreements.
Assign roles and limit access to the CMS. Balance visibility with security.
Choose a CMS that tracks the information in a searchable/reportable format and is capable of issuing notices around important dates, such as notice dates, to avoid inadvertent renewals or other important deadlines.
Set up periodic compliance review. Set up a system to review perpetual agreements on a periodic basis to ensure no changes are needed.
Engage the team, request feedback on ways to improve the process and the system.
Why do all this?
Because the organization will tangibly reduce risk and improve profitability. The investment in best practice Contract Management can deliver an ROI exceeding 10x in the first year.
If you want to get things right on your own, take the 10 items above and let us know how things turn out. Seriously, we love good stories and appreciate being even a small part of that.
If you think you might need help, feel free to reach out to your Chief Client Advocate, David Dvorak.