It’s no stretch to say that an organisation’s contracts constitute some of its most critical assets. Anything of such importance warrants focussed attention to facilitate extraction of maximum value, in whatever form that value takes.
Contracts need to be regularly managed on a per-contract basis, from just a little to a whole lot, in accordance with their individual value-delivery expectation.
Beyond a fairly small number of contracts, the risks associated with their operation, their third-parties, and compliance with applicable regulations can quickly multiply.
This provides an organisation with ample justification for establishing a formalised, structured Contract Management (CM) function."
Like its sibling business functions, CM needs to demonstrably do its job well.
It needs to do so consistently, under sometimes very trying conditions with both internal and external origins.
This requires foresight and planning, flexibility and agility, solid research and thorough implementation. It won’t work without enough backing, expertise and technology in place.
This article discusses an approach for checking how well your Contract Management function is working and fine-tuning it, covering:
- Fundamental indicators of business function performance
- Typical contract management activities
- Issues limiting the effectiveness of the CM function
- Operational indicators of CM performance
- Optimising the CM function's performance
Fundamental indicators of business function performance
A business function is usually established to formalise the coherence and consistency of certain activities related to meeting a specific need. It provides more certainty and confidence in the likelihood of desirable outcomes.
Ad hoc can only go so far, which usually ends up being not far enough.
Near enough can quickly become not good enough.
Good enough is often acceptable but might sometimes just not be acceptable enough.
Going any further than good enough might always be desirable and even possible, but it can have implications for cost-effectiveness and ROI.
A business function should be set up to be at least good enough, and demonstrably be:
- Compliant: adhering to organisational policies, ethical standards and all applicable regulations
- Efficient: using the bare minimum of resources like time, money, people, technology
- Effective: requiring the fewest activities to produce only the desired outputs or outcomes
- Flexible: ready to accommodate or adapt to various likely and less likely situations
- Goal-driven: having a clear purpose and defined targets
- Obvious: operating via activities that are simple to understand and practical to perform with no wasted effort, whether performed manually or using automation
- Measurable: collecting operating statistics allowing evaluation of its performance and identification of improvement opportunities
- Relevant: remaining fit for purpose in a dynamic operating environment
- Risk-aware: cognisant of potential risks associated with the function’s role and the mitigation steps implemented
- Scalable: able to expand or contract according to demand.
Appropriate and timely measurement of these fundamental indicators provides the basis for determining if Contract Management, as an independent function, is set up to provide value.
Typical activities of a Contract Management Function
CM functions start small initially, but often grow in capability alongside an organisation’s hopefully increasing contract management maturity. The range of work needed to manage contracts typically involves key activities such as:
- Communicating and collaborating with contract owners and users, contracted third-parties, and stakeholders from other business functions who participate in contract management activities.
- Enforcing contract governance by defining CM roles and responsibilities, and establishing clear decision-making processes to ensure accountability and consistency throughout the contract management lifecycle.
- Establishing efficient, standardised and streamlined contract management processes, and using technologies to reduce administrative burdens, minimise errors, and enhance productivity.
- Facilitating compliance with all contractual, internal policy and regulatory obligations, and addressing any identified shortcomings.
- Maintaining accurate and up-to-date documentation relating to contracts and amendments, contract management plans, third-party performance reports and risk assessments. Anything and everything that needs to be known to help manage contracts must be readily accessible.
- Managing risk associated with contracts, third-parties and regulations, ensuring preparedness for its potential occurrence, minimising and mitigating the impact of any occurrence, and regularly testing risk readiness.
- Managing stakeholder engagement to ensure the satisfaction of contract owners and users with the performance of their contracts of interest, the CM function’s role in delivery of those outcomes, and their own part in these activities.
- Managing third-party relationships by setting clear objectives and expectations of the relationship, working to ensure mutual respect and acceptable behaviour, establishing workable escalation paths and triggers, and conducting regular audits of relationship quality to detect and mitigate friction points.
- Monitoring and tracking contract performance by establishing key performance indicators, conducting regular performance reviews, and measuring contract outcomes against predetermined goals and expectations.
- Providing knowledge and expertise about contracting principles, negotiation strategies, the practices of contract management, the nature of risk relating to contracts, and increasingly, applicable industry-specific and other more general regulations.
- Targeting continuous improvement in contract management practices through analysis of past performance and changes in business needs, implementing any process and technology enhancements where practical and possible, and regularly reviewing and updating current approaches to enable delivery of better outcomes.
Issues limiting the effectiveness of the CM function
There can be quite a learning curve involved with creating a Contract Management function from scratch or increasing the capabilities of an existing one.
Mistakes can be made due to inexperience, immaturity, underexposure or overconfidence. Help might be hard to get and slow coming.
Any number of constraints and issues can apply to the operations of your CM function, limiting its effectiveness.
They can be quiet and subtle, or in your face. The usual suspects include:
- Cognitive overload affecting the quality of management when different types of contracts are used for different purposes, associated with different types of risk situations, and require different types of compliance with different regulations.
- Error-prone, fragile, inefficient, manual, time-consuming or unnecessary processes, practices and workflows, resulting in user frustration and possible adoption of non-sanctioned alternatives.
- Excessive fire-fighting impacting the ability to undertake scheduled activities, leading to the urgent versus important dilemma where everything can suddenly be both.
- Inability to adapt in the face of constant change, quickly enough or at all, increasing relevance risk
- Inaccurate or meaningless measurements hiding the true picture of Contract Management and third-party performance, increasing operational risk
- Inadequate technologies not fit for purpose, with limited functionality, poor usability, zero flexibility, unacceptable support quality and infrequent upgrade cycles, leading to difficulties handling CM’s workload
- Ineffective contract monitoring and tracking, leading to missed critical contract milestones and renegotiation opportunities or unwanted contract renewals
- Insufficient or inadequate resourcing relating to budget, contract management expertise and experience, contract management technology and training, and staffing levels, leading to unacceptable quality or breadth of outcomes
- Lack of executive support, leadership or a contract management policy containing clear goals and objectives. This can make it hard to obtain the necessary resources, authority and strategic alignment the CM function requires, resulting in its low recognition or acceptance of its mandate
- Limited visibility into contract terms, milestones, obligations, and deadlines can lead to consequential non-compliance, or contractual disputes
- Poor communication and collaboration with third-parties and internal stakeholders can lead to delays, dissatisfaction, errors, misunderstandings and rework
- Poor risk management, through failure to anticipate, identify, assess, mitigate and respond to risks associated with contracts, third-parties, and the organisation itself. This can result in the CM function having low to no credibility
- Resistance to change, especially change that runs counter to ‘the way things are done around here’. This can derail efforts to do contract management better. It runs the risk of having little to no discernible improvement in contract outcomes across the organisation
- Unrealistic expectations, invalid assumptions and wishful thinking about the amount of contract management work to be done, the way it should be done, the people needed to do it, the time it should take, the supporting infrastructure that should be needed, and the outcomes and ROI that might be achieved, can cripple efforts to do contract management well
- Workload overload, where the volume of contracts to be managed depends on unrecognised or tacit dependence on personal heroics to get the job done. This risks the loss of any and all human capability and capacity for the organisation to manage its contracts, with unsurprising consequences.
Operational Indicators of CM Performance
There’s a broad range of measurements that can be applied to the CM function to gauge how well it’s doing with respect to achieving its specific purpose. Measurements on their own are not enough though. Performance is always indicated by the comparison of a measurement against a target.
The context of the target must be clearly understood because a measurement above or below target can be good news or bad."
The setting of the target might require a bit of trial and error before it lands in the Goldilocks zone. It might also have a relatively short half-life as internal and external influencing factors can quickly demand adjustment.
Here are a few ways to check how well a Contract Management function is doing:
Key Performance Indicators
KPIs measure quantities, durations, averages, ratios, trends, activity loads and so on related to the management of standard CM activities. These measurements are facts-based and objective, providing the unvarnished truth about the applicable aspects of contract management.
Guidance on useful measures can be obtained from Contract Management KPIs – Measuring What Matters but anything considered really useful that can be measured or assessed could be used.
CM Team Surveys
Strong performance of the activities that CM undertakes is generally conditional on having engaged and satisfied employees. That’s an outcome of having manageable and achievable workloads, usable and effective systems and processes, and enlightened and supportive management.
Regularly checking that these conditions apply, and addressing any concerns to the extent reasonably possible, will help to ensure that the CM team is willing and able to perform well in general, go the extra mile when really necessary, and contribute to the expected positive outcomes.
Minimisation and mitigation of contract-related risk is a key purpose of the contract management function. The use of dashboards to show condensed, rolled-up and trending views of risk over various dimensions, plus target settings for each that helps focus attention where it is needed most, might include:
- Level of benefits realised and value for money achieved
- Number and proportion of contracts actively managed
- Number and proportion of managed contracts that are rated as important
- Overall rate of organizational and third-party compliance with contractual and regulatory obligations
- Levels of contract visibility, market volatility and third-party threat potential
- Levels of risk occurrence and impact, by risk source.
Innovation and Adaptability Assessment
CM's interactions with different groups of internal and external stakeholders provide a more nuanced and subjective view of its performance than KPIs do.
Feedback obtained from these stakeholder groups generally reveals their independent levels of satisfaction with CM.
This should cover their experiences as users of CM's systems and processes, their invited participation in certain contract management activities, and the outcomes of CM's management of their contracts of interest.
Gathering regular feedback through surveys and meetings provides the CM function with valuable insights into its direct and indirect interactions with stakeholders, any friction points they may have encountered, and suggestions for improvement of its systems and services."
Prompt and reasonable responses to feedback will often improve the depth and quality of subsequent feedback.
Compliance and Risk Management
Evaluating CM's adherence to legal and regulatory requirements, as well as its ability to identify and mitigate risks, is important for assessing its performance and ensuring long-term sustainability.
Optimising the CM function's performance
For a business function like CM, doing well often requires dealing with the tension between excess and insufficiency.
This commonly manifests in the form of workload volume on the one hand, and resource availability on the other.
Under pressure on all resource fronts, it can be challenging to find ways around or through the attendant issues. Here are some approaches that can help:
- Assess relevant technologies. Regularly review the capabilities of available technologies that can improve CM's performance. This can reduce the acquisition timeframe if and when budget is allocated.
- Balance workloads. Analyse available resources and potential workloads to identify areas where tasks can be allocated more equitably. This can reduce burden and burnout for the most experienced people and provide learning opportunities to increase the capabilities of those with less experience.
- Categorise and prioritise work. Evaluate the workload volume and categorise the tasks or items based on urgency or importance. Prioritise tasks that require immediate attention to minimise negative impacts.
- Communicate and manage expectations. Keep relevant internal management, stakeholders, and third parties advised about any unusual situations CM is dealing with. Manage expectations to help avoid unrealistic demands being made with respect to such situations.
- Cross-train employees. If possible, provide employees with mentoring and training in multiple contract management areas to broaden the span of activities they can participate in. This flexibility allows for better resource utilisation during periods of high volume and backup during employee absences.
- Delegate responsibilities. Distribute tasks among employees or seek assistance from contract stakeholders with appropriate knowledge. Delegation can help distribute the workload and ensure tasks are completed in a timely manner.
- Implement appropriate tools and technologies. Adopt proven technology or software solutions that can automate repetitive tasks, streamline processes, and record the myriad details that need to be known about contracts. This can help handle volume with limited resources.
- Know the important contracts inside out. Important contracts are the ones that really matter to the organisation, for any number of reasons. They warrant enhanced, focused, and rapid attention when it is needed. Delays and uncertainties arising from on-the-fly reviews of such contracts may not be appreciated either internally or externally, colouring views of CM's performance.
- Manage issues to prevent disputes. Establish a triage system to prioritise issues based on urgency, importance, or impact. This ensures that critical issues are addressed promptly while others can be addressed later. Whenever possible, provide prompt, considered, and viable responses to issues that arise. Escalate as necessary for early resolution but always with the intent to prevent redirection of limited attention to deal more formally with disputes.
- Monitor and adjust. Continuously monitor the workload arrival rate and in-progress volume, and current resource utilisation. Adjust work allocation strategies accordingly. Focus on the core activities or tasks that are essential for business operations. Regularly review and refine processes to optimise resource allocation and mitigate the impact of excess volume.
- Outsource or collaborate. Consider outsourcing specific tasks to, or collaborating with, third parties who can provide temporary assistance during high-volume periods or employee absences.
- Streamline processes. Continuously analyse existing processes and practices to identify areas where manual or automated inefficiencies occur. Look for ways to simplify or automate activities to reduce effort.
- Track and report. Document the workload and key dates. Track activity completion, effort and timeliness. Record all firefighting activities which interrupt planned work. Report regularly to management about causes and effects of capacity management issues, the efforts made to resolve those issues, and the results of those efforts. Propose the next steps towards a solution, possibly backed by a business case, that can help deal with workload.
Remember that these approaches may not be universally applicable. It's important to assess specific circumstances and tailor these approaches to the organisation's needs.
In an ideal world, to perform well, an organisation’s Contract Management function will have, at a minimum:
- The backing of senior management
- Mature contract management practices
- Appropriate staffing levels
- Sufficient contract management and risk management expertise
- Useful, usable and effective technologies
- Engaged and satisfied stakeholders and third-parties
- Manageable(ish) workloads
- Agility, adaptability and resilience in the face of rampant change
- A trusted performance measurement regime
Roy Orbison once sang “It’s too bad that all these things can only happen in my dreams”. This could almost be considered the Contract Manager’s lament."
Having a demonstrably well-performing, highly effective Contract Management function in place can be more pipedream than a possibility for some organisations, maybe many of them. Living the dream has to be the ambition though, preferably much sooner than later.
If you would like more information about checking how well your Contract Management function is working, or how Gatekeeper can assist with those activities, then contact us today.