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Investing In Contract & Commercial Management

August 30, 2012

More and more academics and business leaders are starting to highlight the need for contract management to become a core competency of the organization. With growing complexity and increased interdependency between trading partners, contracting must move from an operational to a strategic capability. The journey is to transition from contract administration (industrial era), to contract management (electronic era) and to achieve ‘relational contracting’ (global era). We need a discipline that is capable of addressing the difficult balance between compliance and added- value – essentially, tools, systems, skills and relationship models that address risk in a more holistic fashion.

Top academics from the fields of law, supply management, economics and project management have realized that weaknesses in contract management result not only in value loss, but increasingly impact the fundamental competitiveness of today’s corporations. This understanding is reflected in the increasing presence of contract and commercial management as a Board level issue. Companies as varied as Ericsson, Shell, Verizon, CSC, Invensys and HSBC see this as a priority issue, driven by a combination of the need for improved compliance and the imperative of growth.

As the leading non-profit association for those with an interest in contract and commercial management, IACCM undertakes extensive research in its own right and works with member corporations to validate findings and identify areas for improvement. This work has led to a number of important insights, of which some examples are:

  • The underlying causes behind poorly performing contracts are due to weaknesses in contract and commercial management in more than 70% of cases.
  • Improved contract management (buy and sell) can yield up to 9.2% improvement on bottom-line performance (cross-industry average), with significant sector variations.
  • The highest performing sector (outsourcing and complex services) is also the sector to have made the most significant investments in contracting capability; this is based on their understanding that in a services business, contracts are the core asset.
  • High performers achieve substantially shorter lead-times in closing business; they are more effective in ‘partnering’ with their key customers and suppliers; they benefit from a large (30%+) reduction in the frequency of claims and disputes.

Achieving these benefits depends on executive support for a strategic shift in the role of contract management and investment in the tools and resources needed to develop corporate capability. In the short term, this is typically achieved through consolidation of resources; a program of up-skilling; earlier and more active involvement with the business units; lifecycle responsibility and measurement; and a more holistic focus on risk. Each day, organizations are awakening to the need for action and the opportunity that improved contract management offers.

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