Why Is Contract Management So Important?

The following post is based on the paper authored by Peter Smith, Managing Director, Spend Matters UK/Europe: Preparing for Procurement in 2020: Negotiation, Contract and Supplier Information Overload Getting to Grips with Contract Management? -- How the CPO Can Lead on Managing Contract Risk and Opportunity – Discovery, Focus and Capability (available for free in the Spend Matters Research library).

Going back to basics: why should organizations and procurement functions take contract management seriously?

Procurement functions often see their work as complete once a contract is awarded. Their activities around sourcing strategy, supplier selection, contract development and negotiation are central to their responsibility. But once the contract is signed, too often procurement washes their hands ?of it.

If we're lucky, it is handed over to someone in the budget-holding area; if we're unlucky, it is put away in a drawer or in an obscurely named file on a server and forgotten. Until something unfortunate happens. Yet there is a real paradox here because the contract management phase – everything that happens post-award – is arguably more important than what we might call the procurement phase of the overall process.

That's because of a simple fact: great procurement work can be undone by weak contract management. But even a less successful procurement or sourcing phase can be recovered through effective contract management. Contract management is therefore a necessary condition for successful end-to-end procurement and supplier performance – and arguably even more critical than the "sourcing" phase in the end-to-end supplier engagement process.

The ideal, however, is an effective sourcing process that also includes full consideration of how?the contract is to be managed. Determining and negotiating the key contract terms as early as possible (with focus on the critical KPIs and contractual aspects that will actually matter, rather than conformance to standard "boilerplate" Ts and Cs) and then making the terms visible to all stakeholders from the start will assist the supplier selection phase as well as promoting better end-user understanding, adoption and ongoing contract management post award.

Early discussion and negotiation can also help foster better supplier relationships, for example, enabling both parties to quantify the cost (and quantitative trade-offs) of more stringent indemnification clauses (vs. lesser) during the sourcing process itself.

We've found few CPOs who have really considered the aims of contract management. The obvious answer is about ensuring that suppliers meet commitments as defined in contracts. However, we?do not believe that covers all necessary activities that should fall under the contract management banner. Spend Matters defines the purpose of contract management as being fundamentally related to both risk and opportunity management.

We will expand on that later, but look at it this way – if there were no risks and no opportunities inherent in a contract, why would we spend any time or effort managing it?

Download our full analysis and opinions on the topic of why contract management matters for CPOs here: Preparing for Procurement in 2020: Negotiation, Contract and Supplier Information Overload Getting to Grips with Contract Management? -- How the CPO Can Lead on Managing Contract Risk and Opportunity – Discovery, Focus and Capability.

- Peter Smith

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