Contract management: time for a re-think
At an IACCM member meeting in the UK, I presented on the topic of ‘Weaknesses in Contract Management’, focusing on the incremental value opportunities that are realized if we focus on driving bottom-line benefits.
Research consistently shows that a major contribution to financial results can be achieved by a more holistic, process-based view of contract management. To achieve this, organizations must shift from viewing contracts as individual events and explore their performance as portfolios – for example, looking at individual relationship or contract types.
The incentive for doing this is based on the relatively high rate of under-performing contracts. IACCM research has shown that on average 35% of an organization’s contracts fail to reach expected value by 10% or more and that a significant proportion of this value loss is avoidable.
David Hodges, Commercial Director at CGI, followed my presentation with a complementary session, “Do Projects Fail Because of Poor Contracting?” He started by defining the nature and potential degree of ‘failure’ as it relates to both customer and supplier. Following some web research – which focused largely on IT and technology services contracts – David came up with some even more dramatic numbers: CIO magazine, for example, estimates a failure rate of around 50% and other data revealed that “93% of contracts do not achieve what was envisaged”.
Based on his own investigations, David then explained what he had discovered as the primary causes of this value loss. His findings supported the IACCM research in pointing at issues of poor commercial discipline and judgment:
- Definition and management of requirements
- Availability or management of resources
- Unrealistic or over-optimistic schedules
- Weaknesses in planning
David made the point that while these are not traditionally seen as ‘contract management’ issues, investigation shows that in many ways they are. When it is recognized that they are repetitive problems, a high performing commercial team explores how they can be reduced or eliminated. He went on to explain his conclusions about the role of contract management (buy and sell) in driving improvements. These included greater engagement in requirement definition, ensuring the right contract model, improving governance and performance provisions and more active monitoring of change.
Both presentations are available in the library at www.iaccm.com.