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Do you really have a contract management process?

March 10, 2016

So who are we kidding when we say there is a process?

 A recent survey undertaken by Ray Carter of DPSS reinforces the findings of IACCM. In general, organizations do not have an integrated, comprehensive contract management process.

 While a majority in Ray’s survey (almost 60%) start out confidently proclaiming that a process exists, it is by the end evident that it does not, or that in key areas it is ineffective. For example, 90% admit to concerns about the quality of cost control and almost 80% acknowledge that there should be more visibility into the management of claims and disputes. Change controls represent an area of weakness for more than 70%.

When so much work goes into winning and awarding contracts and when it is clear they are such fundamental business assets, why is it that approaches to their management are so avant-garde? The major reason – as identified by legal academic Stewart Macaulay more than 40 years ago – is that executives have historically seen little value in contracts. Therefore no one was given ownership for the process by which they are created or managed. Responsibility is typically fragmented, with many stakeholders claiming ownership of elements, but none feeling accountable for quality or results.

This absence of ownership inevitably leads to an absence of data. Any measurements associated with contract management are typically meaningless. For example, the most common indicators are cycle time and (if there is a commercial or contracts function) a headcount to revenue ratio or number of contracts handled per head. None of these measures tells us anything about quality, suitability, or the financial results generated. In other words, organizations generally have no sense of whether their contracts are either efficient or effective. And that is precisely what the DPSS survey confirms.

One might argue that in the old world of product supply, when caveat emptor principles applied, the executive attitude to contract management was largely justified. Apart from major project industries, such as construction or aerospace, contracts served a limited and often short-term purpose. But that world is fast disappearing and contract management increasingly operates as the ‘organizational glue’ in aligning business operations across complex supply networks. In this world, the value erosion from weaknesses in the contracting process become substantial – but of course, the lack of such a process means that these losses remain invisible and ignored.

So why do survey respondents claim there is a process when in reality it doesn’t exist? I think it is a complicated answer, but ultimately there are many who do not want to acknowledge there is a problem because then they would feel obliged to fix it – and that seems too difficult. While we continue deluding ourselves, nothing will improve. And in the meantime, this remains a golden opportunity for someone to champion.

 

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