The ROI of Contract Management – Part 2

Part 1 of this blog described current perceptions about the role of contract management and pointed to the difficulties these create when trying to demonstrate value. Part 2 will explain the benefits that can be achieved from an altered focus.

According to IACCM research, 98% of people agree that winning and awarding contracts is important to the health and performance of their business – so there can be little doubt that they see contracts as innately important. Where they struggle is in the form those contracts take (just 12% find them easy to understand) and the process through which they are formed and managed (just 17% are satisfied).

The problem, I believe, is due to a fundamental mismatch between business needs and contract management practice. Contracts are assets (hence the 98% who consider them valuable); but rather than supporting their creation and maximizing their value, the process has become dominated by issues of compliance and control. This is illustrated by complex and time-consuming review and approval procedures, undertaken for the purpose of risk avoidance or to allow the application of ‘expert judgment’, yet too often contributing little except delay and value erosion.

Contract management is not an extension of ERP (enterprise resource planning). Whereas ERP drives internal efficiencies, contract management is all about relationships that cross enterprise boundaries. As a discipline (and also as a software application), it must seek ways to simplify inter-enterprise activities and to maximize the benefits from a trading relationship. It is therefore first and foremost an enabling function, optimizing the value of contract assets and focused on supporting the quality and speed with which contracts can be closed. Measurements of success must therefore focus on the extent to which the form, structure and content of contracts is generating high-performing relationships – and avoiding terms, policies or procedures that generate unacceptable levels of risk or undermine value and success.

This approach shifts contract management from an internal to an external (market-based) focus. Its value comes from being able to illustrate steady advances in the efficiency and effectiveness of trading relationships through improved business interactions. For example, good contract management reduces the frequency of complaints or claims; it leads to accelerated decision-making, change management and issue resolution; it can demonstrate its contribution to on-time, within budget completion of contracts or projects. These improvements come from increased alignment with trading partners and an appreciation that the terms of contract that really matter are those associated with governance and performance management – the terms that increase the probability of collaborative relationships and success.

The true ROI of contract management does not lie in the risks it avoids; it comes from the value it can add through continuous update, adaptation and streamlining of the way that businesses interact. It is an instrument of creativity, based on consolidated and comparative performance data and supplemented by the ability to exercise judgment over individual (major) transactions or relationships. This is a big step away from administrative coordination, oversight of transactional obligations and monitoring of compliance – and it reflects the business intelligence needed to prosper in the digital age.