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The Role Of Contract Management

January 19, 2012

Many of the world’s most profitable companies invest very little in their contracting process, but that does not mean they lack a contracting strategy. Indeed, they have often chosen to operate with business systems and in markets where flexibility of commercial terms and offerings is not required, or can be managed by non-contractual means.

IBM in the 1980s, Microsoft in the 1990s, Apple today; each is an example of a company where market demand for world-beating products trumped the need for negotiation and commercial flexibility. Until recently, the pharmaceutical industry maintained high margins through product leadership and market controls that made rigor in contract negotiation appear of little importance. In all these cases, investments in contract management focused primarily on the administration of contracts and in the imposition of rules and procedures that prevented deviation from standard terms and conditions.

At the other end of the spectrum, consumer based industries such as retail may also view contracts as largely non-negotiable instruments. The inability of the consumer to dictate terms and conditions means that flexibility is needed only in the context of special promotions or deals; and in general, such industries are dealing with suppliers who also lack power to negotiate. Therefore contracts, to the extent they exist, are mostly standard forms and employees have little empowerment to agree variations to terms.

For these companies, ‘contracting strategy’ means having the ability to operate off standard terms of their choosing and avoiding the costs and risks inherent to negotiation and the management of non-standard agreements.

Between these two environments, the bulk of businesses need a more nuanced approach to the way they do business. However, the challenge for many is that they do not in fact have a contracting strategy, or the strategy they have is no longer aligned with business conditions and needs. This may be because they are still trying to impose standard terms in a market where competitive pressures demand a revised approach; or it may be that they are trying to operate with high levels of deal-based flexibility at a time when technology, regulation and cost pressures have combined to make such an approach unaffordable and vulnerable to unacceptable levels of performance risk. The financial services industry provides an extreme example of a business sector that failed to understand and manage its contracts. Others, in sectors as varied as outsourcing and engineering, are learning the hard way that commercial knowledge, supported by robust and consistent contract management discipline, is a necessity.

Misalignments of this sort result in ‘the contracting process’ being viewed by many as a source of complexity, frustration and delay. It becomes an inhibitor because, as business and market conditions change, contracts and the contracting process typically lag behind. And it is that lagging which results in a burden of excess costs and missed revenue, together with the potential for severe competitive exposure.  Recent IACCM research suggests that, on average, corporations are losing the equivalent of 9.2% of annual revenue through weaknesses in their contracting process, being a combination of missed savings and cost reduction on the one hand, and lost revenue opportunities on the other.

The role of contract management is clear. It is to secure economic value; to provide a framework for the allocation and management of risk; and to oversee the performance of commitments that reflect a positive brand image.

It is within this context that IACCM advocates the need for a fresh approach to contracting, including the need to reconsider the purpose of the contract itself, and to develop a clear strategy that is capable of rapid adjustment to shifts in business and market conditions. In a new paper, ‘The Future of Contracting’, it will lay out the rationale for change and the steps that are required to turn the contracting process into a source of competitive advantage and economic value. Currently in the final stages of production, the paper will be issued in several weeks and discussed at a  variety of forums, including the Ariba LIVE event in Las Vegas and the IACCM EMEA conference in London.

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