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Contracts, Commercial & Legal: Are they worth investment?

May 30, 2012

For those who wonder whether contract and commercial management really make a difference, current research by IACCM is revealing interesting trends in the outsourcing and IT / telecoms services sector. These developments will be of interest to the wider contracts and legal community.

Across the industry, there has been significant growth in the resources applied to contract and commercial management. In recent times, the relationship between Legal and Commercial resources has also clarified within the provider community, though remains less clear for many buyers. This reflects the growing appreciation by executive management in supply-side organisations that the contract and its effective management are critical to business performance. Similar understanding of the need for investment on the buy-side is often lacking, with a greater readiness to assume that the supplier is responsible for performance and that existing resources will somehow be adequate. This is reflected also in the buy-side reliance on external law and advisory firms.

However, the nature of the investments made – and the way resources are deployed – show significant variations. For example:

  • Industry leaders have been developing a more coordinated approach to shared services within both Legal and Commercial / Contract Management. These include growing use of offshore resources, with some outsourcing, but a general preference for captive centres.
  • Technology and systems tools are playing a much larger role in the management process. This has moved beyond the creation of contract repositories and obligation management tools and is increasingly reflected in investments in applications such as Sharepoint and others offering advanced risk management analysis. For some, there is growing integration with relationship management software to support improved proposals and better focused negotiation.
  • The role of Legal and Commercial Management pre-award has become far better defined; smoothing the transition to post-award delivery teams remains an area for focus. On average, pre-award Commercial resources outnumber those in Legal by approximately 2:1. The post-award organisational model varies, but across the industry it outnumbers pre-award resources by a substantial margin.
  • There is growing alignment between Commercial teams and the finance and risk organisations, with the focus of negotiations reflecting this improved balance of interests.
  • However, in several of the poorer performing providers, contract management remains fragmented or is seen as primarily an operational resource focused on compliance, administration or risk containment. This results in higher levels of inefficiency (e.g. up to 20% more time expended on contract / commercial issues by sales and delivery teams, more frequent disputes etc.) and increased ‘value leakage’ (up to 30% more claims, higher proportion of under-performing contracts).

In terms of funding, the high performers are typically spending approximately 1.5% of revenue on their contracts and related legal services. This represents a significant increase over the last 5 years and also a widening gap between the companies that have been growing and those which are generally struggling to maintain market share. This divide reflects in other data assembled by IACCM relating to the ROI (return on investment) from contract and commercial capability. Overall, the data provides a compelling business case for top management – and of course, it is data such as this that we will be sharing and discussing at the IACCM regional conferences this year, as well as at our many local memebr meetings around the world (see for those which are currently scheduled).

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