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Contract management: time for a re-think

November 25, 2014

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.

3 Comments
  1. Michael L Casey permalink

    I am a new member to your group. However, and whilst I agree with David’s summation, one issue that is often forgotten is the training of Contract and Commercial Management. Without such one must assume that Contract and Commercial Managers know it all, which is not the case. We continue to learn.

    After moving from my corporate role with BHP in the 1990’s I became a freelance Specialist Contract and Commercial Manager on many of ASIAs Major infrastructure Projects. The problems I faced was the level between self and my Client’s Contract and Commercial Management was so vast that it required strong leadership and training strategies to supplement the Client’s Goals to achieve the Projects Contract and Procurement objective. I now look back and smile at the successful skills of my Client’s Contract and Commercial Management teams.

    Has anyone of the members provided a paper of Contract and Commercial Management Training? I would like to read such if it is available.

    Michael L Casey,
    CDM Smith Inc.
    Vietnam

    • Michael
      I strongly agree with the point you make – and indeed the issue you highlight lies at the heart of IACCM’s reason for existence. Like you, I ‘stumbled’ into contract / commercial management and found a group of well-meaning, often talented, individual practitioners, but with no consistency of training and in many cases little consistency in their perception of the role to be performed. Within customer organizations, the contracts / commercial discipline was generally absent (outside their law department) and – as you say – in many geographies contracts were either seen as culturally alien or purely administrative.

      IACCM was formed to change that environment. It is 10 years since we developed the first unified ‘body of knowledge’ for the community and there have been some 12,000 practitioners enrolled into that program. That remains the tip of an iceberg, but it is an important start. Unfortunately, those who are most resistant to ‘professionalization’ and consistent standards are often the ‘leaders’ of the function. Either because they feel no personal need, or perhaps feel threatened by the idea of consistent training, there is often denial of benefit from consistent knowledge, practices and certified competence.

      It is this attitude which ultimately undermines the growth or status of the function. As an example just this week, I heard from the CEO of a large, international company who observed “I am told that the people in my commercial department work really hard, but I have no idea what they do’. In these challenging economic times, you can imagine that is not is not a good way to be viewed – but it is inevitable while we remain scattered individuals without a professional standing or ethos.

      • Michael L casey permalink

        Dear tcummins, I am not shocked at the CEO’s comment. Contract and Commercial Managers normally come under one of his/her General Managers Departments and the General Manager performance is measured. I remember reading almost thirty years ago a Handbook for Procurement Managers which provided a section on how to measure performance. In all my years, outside BHP Australia, I have never seen a six monthly or yearly evaluation of Contract and Commercial Departments management and personnel. I used the evaluation process in a way that personnel felt good about their achievements and projected goals and subsequent achievements. Unfortunately the book was removed from my belongings during a move from Australia to Thailand.

        Whilst we cannot change things over night perhaps IACCM could introduce a proposed training system that provides Contract and Commercial Managers/personnel with a number of accreditation training points per year to enhance the recognition of Contract and Commercial Managers achievements/learning; like lawyers and Doctors require a number of credits in their field of expertise. Moreover, over the next few years IACCM could seek the support from major international companies, not only recognising the importance of highly trained and skilled Contract and Commercial Managers, within an organisation, but acknowledging they are are a crucial part of their performance achievements, as Company’s Executives. This could be followed up by a system to measure the performance of Contract and Procurement Managers and their personnel.

        When moving from one project to the next I am only recognised by my LLB and then by the years spent in major projects as a Contract Specialist. Nonetheless, I am pleased to reflect on people, who have worked with and under me, as they take on their own career roles as Project management and Company executives.

        Michael

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