Skip to content

Should contract management ever be part of Procurement?

April 30, 2015

In the past, companies often put contract management resources within the Sales organization. It was seen as an administrative support function.

When it came to Procurement contracts, they rarely had any dedicated resources. Responsibility for overseeing contract performance was often undefined.

Over time, many organizations started to realize that contracts were too important to be left in Sales. They grasped the point that there are too many conflicts of interest. A Sales function – or business unit – is typically driven by narrow financial measurements of revenue and profit, with perhaps elements of customer satisfaction. Contracts are certainly fundamental instruments in winning business and delivering revenue, but they are far more than that. They contain enforceable commitments that can jeopardize an organization’s future and on which its long-term health and reputation depend. Therefore contract negotiation and management cannot be left to the discretion of a function that is directly motivated to maximize short-term financial goals.

Today, except in some relatively small businesses, it is rare to find contract management groups reporting to the Sales organization.

So what about Procurement contracts? What is the problem there? It is actually that Procurement is in many ways the counter-side of Sales. In most cases, it is driven by narrow financial measurements that stand in the way of broader business judgment. Indeed, many Procurement groups see contracts as having limited relevance to business performance. They do not grasp – or are not motivated to grasp – the wider significance of terms and conditions on business risk, achieving value, driving innovation.

High-performing corporations create a close alignment between Sales and Contract Management, but ensure their separation. IACCM’s most recent benchmarking data appears to suggest that the best performers ensure similar separation between Procurement and Contract Management.

3 Comments
  1. I’m glad this topic is back again. This time it’s based a stereotype about purchasing. Sure there are purchasing departments who are too focused on cost. There are also legal departments who are too focused on transferring risk to suppliers. There’s always some truth behind stereotypes, but there are both purchasing departments and contract management departments who are perfectly capable of “grasping the wider significance of terms and conditions on business risk, achieving value, driving innovation.” In fact, assuming purchasing doesn’t have the skills to do that becomes a self-fulfilling prophecy that limits the effectiveness of the department and throws another player into the process. I think that creates needless complications.

    You call for a division between Purchasing and Contract Management. Could you elaborate on how the division should be? Who drafts contract clauses? Who negotiates them? Who signs them? Who is the main contact at the purchasing company if a supplier wants a change or an exception to a contract clause? The devil is in these details.

    I believe that if a purchasing company (or government entity) decides to expect more from their purchasing function, they should hire and/or train people within the purchasing department to take on the more broad based role.

    Regards

  2. Yana Chizhikova permalink

    Dear colleagues,

    Within the life cycle of any for-profit organization there are a lot of segments for the managing of contracts such as establishing the business entity, staffing and administration with outsoursing of some activities as bookkeepeng and consulting, sales, procurement, the outsorsing of some own services and production, assets management, intellectual property rights, corporate finance management, joint ventures, M&A with selling and purchasing of businesses, etc.

    So, I´d say the higher level of the contract management is not Sales. This is any way General manager or CEO and Executive Board of organization. The structure of the contract management in for-profit organization mostly depends on the size of organization and less on the fields of activities in business.

    Regards

  3. Well said Dick – I fully agree. Tim has raised a valid observation, that many current procurement teams have too narrow a focus.

    But I don’t agree that the solution is to make the difference between procurement and contract management bigger. No, get the procurement teams to change. Procurement should be about managing the supply chain to ensure it adds value now and in the future. And as such it needs to embrace documenting the “deal”, which is what a contact does, and then ensuring what was promised happens, both in the short- and longer-term.

    Good procurement teams will spend a significant amount of their time poat-contract.
    Separating responsibilities into silos can only be a retrograde step.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: