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Who Owns Contract Management?

March 17, 2010

Over on the IACCM message board, a member has asked the question: “I am an attorney in the legal department who supports the Contracts Management Group who report to a business/procurement manager. I am trying to find out if most companies have the contracts group separate from the legal group, or if the contracts group is a part of the legal group. And, if the contracts group does not report up through the legal management chain, how do you handle contract negotiations, administration and management with the group?”

Of course, this is not a new question – but it does seem to be rearing its head with greater frequency right now. As I have observed in various articles recently, business conditions are placing real strains on the contracting process in most organizations. On the one hand, there is pressure for greater control and compliance; on the other, there is the need for increasing agility and the ability to remain flexible. And of course, there is the vivid memory of the recession and the scramble to renegotiate contracts, which bruised many and left others feeling exposed when they discovered the types of agreements they had in place (assuming, of course, that they could even find the relevant contracts!)

These factors have alerted executives to the weaknesses in their contracting process. It has caused internal frictions over control and ‘who is the blame?’ There is debate over the reasonableness of terms and conditions and about the time it takes to make decisions or reach agreement (internally and externally). None of these characteristics is acceptable in fast-moving market conditions.

But what change is wise? The problem is that contracts require balance. They must enable internal business goals and objectives while at the same time responding to the needs and expectations of customers and suppliers. They are instruments of governance that are designed to secure economic benefit. With so many stakeholders having a legitimate interest, they can rapidly become a battle-ground for control, with the most powerful function simply seeking to impose its will. On the other hand, few stakeholders are in fact equipped to represent the holistic needs of all affected parties – so often they turn to legal because no one else wants to carry the baby.

So how should an organization decide where contract management ought to belong? Here are a few ideas – and I will welcome additional comments:

  1. Give thought to the nature of your business and the scope of the contract management role. For example, contract management in a commodity business is very different from the role in a high value project business. Maybe your company has a mix of contract types – in which case it may bneed a mix of organizational answers.
  2. Who is willing to take accountability for the quality of the contracting process? Make sure that you have assembled the criteria that represent ‘success’ and then determine who is willing and able to commit to its delivery. For example, is the aim to be ‘easier to do business with’. Is it about increasing the quality and outcome from negotiation? Is it about shorter cycle times? I s it about greater business control? Is it about increased competitiveness? Without broad agreement about what you want to achieve, there will be continued arguments and failure.
  3. Who has the right skills today, or is prepared to invest in their development (and associated tools and systems)? Contracting is complex and in today’s markets it must remain a focus area. If the prospective owner wants to grab control because they think they will have a quieter life, or can suppress workload, they should think again. Contracting is set to remain a dynamic discipline, as more and more deals and relationships require active life-cycle management. 

In my experience, world-class contracting depends far more on the integrity and quality of the process than it does on who owns it. So my recommendation is to first focus on ensuring the process supports the goals and relationship needs of the business. Then from this process, the primary skill and knowledge requirements will become evident and potential organizational alignment more obvious. At the very least, whoever steps forward for ownership then has a clear understanding of what they are taking on.

Finally, just because someone owns the resources does not mean they should necessarily own the process. Today’s best performing contract processes operate with a degree of shared ownership where the ‘owner’ is really the first among equals and consults widely and regularly with other key business groups and functions to ensure that contract management continues to meet the needs of the business.

9 Comments
  1. Additionally, readers may find this article interesting: Who is responsible for Contract Management (http://wp.me/pqsHx-B)

  2. Christof Höfner permalink

    Tim,

    agree with you and would like to add some more considerations:

    having both Legal and Contract Management roles in the past I see some more aspects important for finding the best answer (there may be no right answer who owns CM) relating to industry, products, market, available budget and enterprise organisation.

    Let me add it is key to have one clear cut and well working relationship on global basis with other functions as well.

    Lokewise have one integrated, global contracting process (tools) covering all facets of the contracting life-cylce.

    In any case CM and Legal should be “Brothers in Arms” and not internal competitors.

    Best regards

    Christof

  3. Debra permalink

    My experience has predominantly been as a contracts professional for U.S. government contractors (manufacturing, A/E, services, logistics, IT), so the federal sector may operate a bit differently than the commercial sector. Most often I have seen a separate reporting chain up a VP of Contracts and with the growing emphasis in compliance issues, I’m now seeing Chief Contracting Officers. However, I have also seen Contracts as a subordinate group reporting to the General Counsel or the CFO.

    Federal contractors often have separate reporting paths for managing customer relationships & sales contracts vs. supplier relationships & purchase contracts. On the supplier side, there is often a VP of Procurement, but this position may also reside under Contracts, Logistics or Finance. However, recent trends seem to reflect a consolidation of both buy and sell contract management under the same executive.

    I agree that Contracts & Legal must be strong allies in managing risk for the company. However, I think it is more effective for the company when Contracts resides outside the Legal reporting chain.

    During the bid & proposal process, Contracts serves as the tension-balancing conduit between the typically risk adverse Legal team and the often no-holds-barred Sales Team. If all business decisions were left to Legal, companies would eventually have no business. Similarly, if Sales were permitted to make deals unchecked, the unmitigated risks and resulting liabilities may drive a company into bankruptcy. Contracts strives to make the deal happen, but protect the company’s financial and legal interests at the same time.

    During contract performance, Contracts performs a similar role in administering contracts as the conduit between Finance and Operations. The goal here being to facilitate performance of contractual obligations and make a profit. My experience has been that Legal often doesn’t understand the operational or financial aspects of contracting.

    For the above reasons and others, I am an advocate for the Legal staff being in an advisory role and not overseeing or supervising the Contracts function.

    • Thanks for this comment. Personally, I agree with your conclusions. However, I also recognize that there are times when lac k of leadership in the contracts organization, or company culture, may mean that Legal has to take control. And I can certainly point to a number of GCs that I have met over the years who have developed excellent contracts / commercial groups. However, I think the big problem that they typically face is the periodic conflict between their governance / policing role and the need for risk taking / enablement; and the endless pressure from their legally qualified staff to take precedence over the ‘less qualified’ contracts staff. I could write on these dynamics at great length – but in the end, contracts and legal need to work as partners – they bring distinctive capabilities and must work on managing overlaps.

  4. Great information on contract management. Thanks for sharing.

Trackbacks & Pingbacks

  1. Supply Excellence — Who Owns Contract Management?
  2. Aligning Legal with the business « Contract Lifecycle Management
  3. » Blog Archive » Aligning Legal with the business
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