Contract Management

Procurement organizations are often responsible for contract management, but this seems to be one of the most inconsistently applied mandates in the realm of purchasing. Exactly what does contract management mean and what should procurement organizations be doing? 

Contract management can roughly be broken into four primary activities: 

  • Contract authoring and negotiation 
  • Administering individual contracts to incorporate changes and revisions as appropriate 
  • Tracking and managing compliance to contract terms 
  • Administering an overall database of contracts

Those procurement organizations that have responsibility for contract management tend to do a pretty good job with the first two items, but are significantly less effective in the last two. Ask any procurement leader if he or she has a contract database and the answer will be yes, but ask for a definitive confidence level in expiration dates, options, committed value, how many suppliers are complying with contract terms and at what level, and you may be met with furtive glances and broad, generalized statements. Furthermore, even for processes where procurement organizations are able to bring a high degree of value, such contract negotiation or administration of individual high-impact contracts, experience shows an extremely high degree of variability in cycle times, outcomes and end user satisfaction. 

The typical source of this problem is a lack of process control for contract management and administration. Therefore, contracting and individual contract administration results are largely determined by the talent and experience of the individual. In the cases of managing compliance and overall administration, input variation creates an inconsistent and ultimately corrupt database. The end result of these problems include lacks of credibility for procurement data, inconsistent service levels to internal clients, and all too frequently, justification to simply bypass procurement for contract management. 

Procurement leaders looking to get this right can leverage a number of best practices. Here a few to get started: 

Utilize a simple high-level process for each of the contract management processes. The high-level process will avoid over-engineering and accommodate a broad set of situations in a way that will minimize exceptions and not be over burdensome. Work towards a high level of process compliance to drive organizational discipline and control. Refine processes as necessary over time. This will become easier as the company gets used to the initial high-level processes. 

Implement a contract intake case tracker and workflow tool. Ideally this should be based on a Web form which can be completed directly by the requester or recorded by procurement based on a phone call or an in-person request. This will create a time-tagged record to which relevant documentation and notes can be attached. 

Integrate any dedicated legal resources into the workflow so that you can measure volumes, activities and cycle times. What gets measured gets fixed. 

Invest in a single dedicated resource or team to input all contracts into the contract database and manage the database. This is the only way to enforce and control consistent data standards. 

These practices will get you started on the path to solving the contract management problem. Of course, a good partner can bring these and other best practices to you out of the box. 

What are some other practices that work in your organization?

Comments

I recognize a lot of the issues mentioned in this article, during my work as procurement consultant it's very whise to advice companies to; 1. setup high level process (if you make it to complicated it will not fly!) 2. use a straight forward contractmanagement application (don't create a beast of a system as it's the basics you will need to be in control / add value to contract management.. I normally use 2Agree

When a company can get the contract management and the purchasing working together, it is a winning combination.

A million thanks for posting this information.

The point you make is interesting and soemtimes valid. However, as a negotiator from the other side of the fence (sales contracts), let me tell you why companies are soemtimes hesitant to boast about procurement success.If I highlight the quality of the procurement group's efforts at driving lower prices, or generating superior reliability, or cutting lead times then you are right that customers value this. So of course the immediate question (from one of those talented procurement professionals sitting opposite me) will be So where are those benefits reflected in your contract? They immediately turn my achievements around on me to look for superior' terms and conditions or lower prices. Now that is fine if I can indeed demonstrate that I do offer better terms shorter lead times, higher damages for failure, lower cost of ownership, superior guarantees or service levels. But few Sales organizations have this level of competitive intelligence we rarely know in detail what competition is offering or what they may be desperate enough to match.Second, in today's inter-connected world, many of my major customers are also my major suppliers. It is not always smart PR to suggest that I am somehow screwing my customers yet that is the way that Procurement success stories will often be read. So Marketing and Communications have a tricky balance to perform here, but in my experience trumpeting Procurement's achievements often results in unintended -andadverse consequences.

Now that is fine if I can indeed dntmesorate that I do offer better terms shorter lead times, higher damages for failure, lower cost of ownership, superior guarantees or service levels. But few Sales organizations have this level of competitive intelligence we rarely know in detail what competition is offering or what they may be desperate enough to match. That sounds like a problem with the Sales organization, not a problem with Procurement. Smart procurement should make an organization more competitive in ways that are easily measured and communicated. Your comment also implies that procurement professionals will not negotiate or challenge the supplier to put forth the most competitive proposal if they never heard of their counterpart's procurement success story.You also said: It is not always smart PR to suggest that I am somehow screwing my customers yet that is the way that Procurement success stories will often be read. This implies that smart procurement = screwing suppliers. There are several examples in the above-linked case study list where win-win relationships were the basis of success.That's not to say that an organization shouldn't be careful when deciding to share a procurement success story. But to write off the notion entirely because of perhaps a few poorly executed PR opportunities isn't necessarily a better strategy either.

Add new comment

Popular Posts