The Value of Contract Management: Evidence Mounts
I am excited about the break-throughs we are making in truly defining the value of contract management. Or to put it another way, the cost to organizations when they fail to develop strong capabilities in this area.
In previous blogs I highlighted IACCM’s early research into the return on investment from contract management. This was interesting and ground- breaking. But it was also generic and therefore begged the question “Is this really representative of my organization?”
The new news is that an increasing number of IACCM member companies are using those initial insights as a springboard to undertaking detailed internal analysis of their contract portfolio. This may be though a targeted effort, say focusing on a specific category of contracts, or it may be across the board. Some have examined just 20 or 30, while others have started to monitor and track thousands.
The important point is the results, which largely support the initial research findings. They confirm that there is tremendous value waiting to be mined through improved contracting practices and process. Buy side and sell side analysis both reveal large potential for bottom-line benefits. For example, one large corporation discovered that some 29% of its sales contracts underperform. They also identified six key areas that led to this – and that the average underperformance was 22% of planned revenue. Now a plan is in place to tackle this leakage, with the expectation that it can be halved this year. That will bring approximately 2.5% extra revenue to the bottom line – or around $500 million.
In order to gain these rewards, a business must shift its attitude to contracting and see it as a process. Improvement comes from analyzing the contracts portfolio to identify reasons for loss and then, of course, taking steps to fix them. This may require redefining roles within the organization. It certainly demands a shift in appreciation of the value of contracts and that the process can be used to test internal performance.
Here is a brief example. One area where there are frequent problems is contract scope. Weaknesses in definition cause disagreements between buyer and supplier, with many negative consequences. So this calls for further thought about the way requirements are identified, analyzed and discussed, as well as the process and people through which they get documented. But while this will yield improvements, it will also reveal the fact that today’s fast-moving business environment means that scope will often change. So the parties actually need to think about the post-award mechanisms through which change – and associated risks and costs – will be better managed.
Many of the sources of loss are actually much simpler than this one. They are due to terms that were omitted, or unauthorized discounts that are processed, or personnel who have not received training or have no access to commercial guidance.
As I mentioned at the beginning of this blog, I am excited by what we are discovering because at last there is a compelling executive message. Contract management is a critical source of value realization – and we can show you the money!