Does a Contract Management function deliver much value?
Even as senior executives are embracing the importance of contract management competence, they are at the same time questioning the value of their contract management resources.
These positions are not incompatible. They simply reflect a sense on the part of many executives that the function should be doing more, that it should be more visible, that it should be able to describe and illustrate its value to the business. So the agenda is not to eliminate contract management; quite the opposite, it is to demand evidence from incumbent groups that they understand their role and are delivering against it.
Unfortunately, many contracts and commercial groups struggle with such a demand. They are busy; they do a lot of things. But they rarely measure their effectiveness in a way that would be meaningful to the executive agenda.
I receive many request from IACCM members who face questions of this type. In one recent case, I replied as follows:
Your exercise should begin with an analysis of corporate goals. What is it that your executives value? Clearly revenue and margin will be high on their list, but there are probably other key factors which contribute to that financial success. They may include things like speed of execution; corporate reputation (honesty, integrity, reliability); innovation. If you want to demonstrate value, you must link functional contribution to some or all of those goals.
You might look at some of the recent benchmark data we have produced and start to evaluate whether this is true in your organization. For example:
– Organizations with a consolidated contracts function operate more efficiently than those with either fragmented or no dedicated CM resource. Obviously, contracts have to be managed by someone. The data shows that FTE heads are reduced by 35% when there is a consolidated function. VALUE: contribution to margin through reduced costs.
– A CM function reduces value erosion on contracts. It is typical for many agreements to either under-deliver on expected revenues or to overshoot on planned costs. Data suggests that an effective CM function reduces value erosion by 5 – 8%. This does not include its impact on contract or revenue growth – for example, through negotiated changes – but it does include disciplined change management and handling of claims and disputes. VALUE: contribution to revenue and margin through retained revenue and cost containment.
– The use of CM resources cuts cycle times and reduces the frequency of claims and disputes. Early engagement of CM in the bid phase of an opportunity typically reduces time to signature by 15% and reduces post-award claims and disputes by 24%, primarily through greater clarity of scope and goals, ensuring appropriate form of agreement and related terms and conditions. VALUE: increased speed to contract closure and revenue. Improved customer satisfaction and avoidance of reputation risk.
– In some organizations, CM is an active contributor to innovation. This depends on its leadership and objectives. The CM process generates extensive data, much of which indicates issues such as frequency of negotiated terms, frequency of claims, internal inefficiencies, accuracy of billing etc. Those insights can turn the CM function into a quality management function, generating ideas and initiatives for continuous improvement (e.g. revisions to standard terms, new commercial policy or practices, process simplification). VALUE: reduced costs, improved reputation, innovation in commercial terms or capabilities.
– Organizations with dedicated contract managers record higher levels of customer satisfaction and are more likely to earn repeat business. The data here is a little complicated and the results depend in part on the proficiency of CM and its measurements. It is, for example, important that CM is not a largely administrative activity and that its motivations are not to ‘nickel and dime’ the customer on every issue that arises. In those organizations where the function is measured on delivering successful contract outcomes, average NSI is some 6 points higher.
Moving forward, we see indications that an increasing number of customers will start to explore supplier competence and reliability as part of their sustainability evaluation. There is growing awareness that competence in contract management is a strong indicator of reliability and ethical standards. As a reference document, you might read (and reference) the National Audit Office report on contract management of September 4th 2014.
Unfortunately, I cannot fix the problem that most contract management groups collect little or no performance data. All I can do is give those who are IACCM members some insights to the sort of results that their work may be delivering – and hope that they can use this to buy time and to show top management that they are at least ready to start the journey to value delivery. If they are not ready, the job will increasingly be passed to others.