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How to stem value leakage

August 31, 2017

How much value can be delivered through better contracts and contract management? It’s a question that many people ask and which directly impacts the ability to gain resources.

It is a frustrating question because, even though we have answers at a generic level (for example, the IACCM cross-industry research on value leakage), individual companies generally lack information specific to their business. Without the data, they cannot gain resources; without resources, they cannot establish the data.

So what can be done? A series of IACCM reports has been examining the likely cost and revenue impacts associated with each of the ‘ten pitfalls’ and identifying steps to achieve improvement. Some IACCM members are finding these sufficient to generate executive interest and gain support for further investigation. But others ask the question “If I want to do an audit, where should I start? What should I look for and what should I do about it?”

Conducting an audit

I thought it would be helpful to share the advice I recently provided to one IACCM member.

  • The key areas where I would initially focus are contract change management, amendments and performance issues / liquidated damages and credits. These are the easiest  indicators to track and of course represent various areas of leakage which should be analyzed:
    • if you are a buyer, are you suffering price increases or excess charges and if so, why? (e.g. poorly defined requirements, badly developed scope, inadequate contract provisions protecting against increases)
    • are you recovering compensation for performance shortfalls or are the business units simply waiving their rights to compensation?
    • if you are a seller, are you failing to formalise changes and providing ‘free’ services or performance, perhaps due to the issues above? And are your business units failing to challenge customer claims or complaints and perhaps granting additional discounts or providing free services without any formal monitoring or tracking? 
  • whether you are a buyer or a seller, what are the business costs associated with poor performance? – there is typically a measurable downstream cost and often the issues leading to performance shortfalls are endemic. Going forward, what steps should be taken to remediate poor performance and / or how to embed appropriate measures into future contracts or contract management procedures.

Other areas to explore: 1) are we failing to obtain ongoing price reductions (buyer) or increases (seller) versus market? If so, is that due to poor governance and monitoring; failure to have appropriate review meetings; failure to include reduction or increase requirements in contract or to monitor contract terms: 2) errors in invoicing. Especially in services contracts, many buyers are identifying typical overcharging of 5-7% due to invoice errors, charging at wrong rates, overbilling hours etc. However, sellers frequently undercharge, especially in environments where pricing is highly customized.

These ideas represent a starting point. Please add your experiences or suggestions on how better contract management generates measurable returns. Better still, join us at the next IACCM conference in Toronto and hear first-hand from some of the organizations achieving the best results and from the technology vendors who are equipping them.

 

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