It’s a fact of life that contracts provide the foundation for the vast bulk of commercial and non-commercial activities transacted between organisations. It has been estimated that a typical organisation has between 20,000 and 40,000 contracts active at any time. Many organisations will have far fewer than this, some will have even more.
There is often a correlation between an organisation’s size and the number of contracts it has, but this is by no means universally the case.
An organisation’s size might be related to:
- The number of countries it operates in
- The number of product or service lines it offers
- The number of operational subsidiaries it has
- The number of people it employs
- All of the above
- Something completely different.
There’s no strict one-size-fits-all definition. It’s more a case of you know it when you see it.
Size is important though. Just ask any Contract Manager. If they are left to handle too many contracts, their performance could become hindered, especially as they are left to monitor and manage multiple risks.
It’s hard to find many useful stats about it, but it’s not unrealistic to expect your typical organisation to have one Contract Manager for every 5,000 to 10,000 active contracts. These seem like frightening numbers, and they are for Contract Managers.
It’s crazy, right? How can one person look after 10,000 contracts? Or even 1,000 contracts? The truth is, they can’t, and they don’t.
Even the best Contract Manager would be hard-pressed to just read 1,000 contracts in a year, let alone understand them all, figure out what’s needed to manage each one, prepare a management plan for each then implement that plan. Then add in the effects on that workload of the random arrival rate of new contracts and situations affecting active contracts, holidays, sickness, training and so on. It’s just not going to happen.
So, what’s the answer?
Contract Stratification
It’s abundantly clear that no individual Contract Manager could handle more than a tiny fraction of the average organisation’s contract inventory.
It’s also plain that no organisation could realistically ever have enough Contract Managers to deal with the entirety of its contract inventory. Fortunately, there’s no need.
Reducing the number of contracts that Contract Managers have to handle is the obvious solution to the problem of contract inventory size. Many organisations do this, but how?
They use stratification - the arrangement or classification of something into different groups.
Rearranging and re-prioritising contracts is the best way to increase a Contract Manager’s performance and longevity in the job.
Ideally, a contract stratification scheme should only contain two or three levels:
- Key or Critical: these contracts must work effectively for most of their lifetime to allow the organisation to operate properly. They need the most attention, most of the time, and they are often, or should be, formally managed in accordance with an individual Contract Management Plan. Key contracts usually make up only a tiny fraction of the total contract inventory
- Important: these contracts don’t need constant watching, but shouldn’t be ignored either. They may need some attention occasionally. This level could be dispensed with by also considering the relevant contracts as key contracts. The number of important contracts is probably around the same as key contracts
- Commodity or Not Important: these contracts can typically run unattended and unloved for their term. They would account for almost all of the contract inventory.
Bear in mind that the stratification grading doesn’t exclude a commodity contract from receiving attention if warranted. Its purpose is simply to limit the number of contracts receiving regular attention to those that really need it.
Organisations that have established a stratification scheme are likely to be using a Contract Management System to record details of all their contracts, including if a contract is key or important.
Setting up stratification
OK, the stratification scheme is super simple, but how do you allocate a contract to a particular level?
There can be two stages to answering this question.
1. The initial effort to stratify the existing inventory of contractsThis effort might not be as big as it could appear, because only the Key and Important contracts need to be identified. Assuming that some sort of register of all contracts is available, and some level of contract ownership has been specified, you can just ask the contract owners to scan a list of their contracts and identify those they consider to be Key or Important, as per the definition of these terms in the stratification scheme.
The contract owners must be clearly advised that their stratifications may be challenged at more senior levels if too low a bar has been set, leading to most contracts being considered as Key or Important. That’s an argument that Contract Managers shouldn’t get involved in. When the stratification settings are returned from the contract owners, the contracts register should be updated accordingly.
2. Stratification of each new contract when it is registered
Again, this is a job for the contract owner, and at this stage, it’s a best guess or expectation. Note that the stratification setting for any contract might need to change over its lifetime as circumstances change.
As Contract Managers become aware of a contract being marked as Key or Important, they should follow-up with the relevant contract owner to agree on a contract management plan that outlines the activities, the timing and the people to be involved with effective management of the contract.
Summary
The upfront effort to stratify each Key and Important contract is really worth it. The relative handful of contracts involved can be appropriately monitored and managed over their lifetimes, and the ease of finding them if needed when exceptional circumstances apply, like COVID-19, can remove at least one uncertainty when rapid responses are necessary.
If you’d like to understand how Gatekeeper can facilitate the contract stratification process, then contact us today or request a demo.
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