by Michael Koh, Head of Procurement, Asia Pacific, Dimension Data
With profitability, compliance, globalisation and risk management high on executive agendas, demand for contract management is on the rise. Contract management includes negotiating the terms and conditions, as well as ensuring compliance with the terms and conditions, continual documentation and modification of the contract during its execution. Contract management is summarised as systematically managing contract creation, execution, and driving maximum financial and operational performance efficiency.
What do contracts mean?
According to Aberdeen Group study, 42 per cent of enterprises see that the top driver for improvements in managing contracts to better assess and mitigate risks. Sales contracts affect top line revenues. Supply contracts impact bottom-line results. Contracts are historically seen as legal documents that protect against the worst-case scenarios. In fact, the fundamental of contract management is to think from the customer’s well-being, not from the buyers or sellers. This reflects the ideal state where buyers and sellers work together to manage the lifecycle of the contract and minimise risks that result in project delays and unplanned cost.
It is reported that an overwhelming majority (95 per cent) of the Best in Class enterprises have standardised and formal contract lifecycle management processes are in place. They develop standardised automated contract creation methods to enable business users to create contracts based on pre-approved business rules. In short, a centralised organisation structure managing the contracts is a key characteristics of these Best in Class enterprises.
Looking to procurement
From procurement leaders, Local Government Association (LGA) noted that almost £30bn was being spent on third-party contracts. It identified that better management of contracts could save local authorities between three and 15 per cent of contract value. From the LGA report, it is clear that good contract management is more than ensuring suppliers meet their contractual obligations. It also helps to identify and manage buyers and their suppliers’ risks.
In the study, Mr Rob Woodstock, a managing director from Accenture, says the same lesson is true for all organisations. A holistic approach to contract management can improve collaboration among the procurement, finance, legal, and sales teams, which helps shorten time-to-value, accelerate contract cycles and identify new revenue opportunities. Many times, contracts are dispersed throughout the organisation and stored in various departmental databases, thereby creating unnecessary complexity. These contracts may have legal oversight, however there is no procurement involvement. The fragmented contract management means organisations miss many efficiency opportunities. It also leads to difficulties understanding the pricing schedules across multiple contracts. They may find a large number of contracts are outdated and there is no visibility for when contracts are up for renewal. Hence, executives are looking to procurement for commercial governance to set contract standardisation to deal with different types of suppliers and their different types of contracts. Hence, procurement needs to be fast and agile to manage the contract lifecycle as a centralised function.
Embracing continual improvement in contract life cycle management
Further insights from Gartner share that Contract Lifecycle Management is evolving from an operational record-keeping system, primarily used for legal audit purposes, to an enterprise-level core system addressing business risk, costs and the pursuit of revenue maximisation. Chief Information Officers (CIO) and line-of- business management need to identify the right solution for their needs.
Contact Lifecycle Management is not a practice for the legal department, nor is it just a big-organisation issue. It requires the focus of CIOs and IT leaders. Although it is not an IT issue, it is fast becoming a big data issue for IT to support. Chief procurement officers, sales and supply management must take responsibility for the organisation’s Contract Lifecycle Management process competency.
In an article, EMC consulting discovered more than US$35m in uncollected royalties, which represented 10 to 20 per cent of a large pharmaceutical company profit. In a telecommunications company, a maintenance contract can include payments for supplier materials and equipment when used on site. The supplier kept tools running continually on site and profited nearly US$50m. This highlights the importance of managing the contract from start to renewal or end.
Accordingly to Questys, there are nine stages in the Contract Lifecycle Management. The nine stages are contract request, authoring, negotiation, approval workflow, execution, obligations management, amendment, audit and reporting, and renewal. A holistic approach to contract management is to think from the customer’s perspective and continually improve the quality of each of the nine stages’ outcomes.
Learning from project delays
From the Civil Service College Singapore report, the Singapore Sports Hub’s financial close was initially planned for August 2007, with construction target completed in 2011. Many of Sports Hub’s delays were unavoidable in the context of the 2008 economic climate — first, unprecedented global construction inflation in early 2008, followed head-on by the global financial meltdown that September.
With banks reluctant to lend, the Sports Hub was in the same boat as many Public–Private Partnerships around the world, each facing immense difficulties in securing debt finance given the tight liquidity constraints. The hub was then expected to be ready by 2013 for the 27th Southeast Asian Games, to be hosted in Singapore. Due to the unexpected delays, it had to withdraw its hosting rights. The Singapore Sports Hub began operations from mid-June 2014 when it hosted a series of sporting events. However, it faced a number of teething issues, such as the poor state of the stadium’s pitch and a leaking roof. After resolving these problems, the Singapore Sports Hub was officially opened by Prime Minister Lee on 25 July 2015.
In the ICT outsource model, it doesn’t mean outsourcing the project governance to the suppliers and partners alone. Customer needs to keep strong and capable in-house competencies to manage the suppliers in the ecosystem. The success of project delivery should not be on penalties and liabilities clauses. Contractual incentives should be designed to motivate the suppliers to work together and complete work ahead of delivery schedule, instead of competing for bigger revenue when others fail. Therefore, the customer procurement and delivery teams play an important role to manage the supplier ecosystem to be healthy throughout the contract lifecycle.
In an article published in APAC CIO Outlook, the future procurement sits on a myriad of data connecting the organisation to external. We are data scientists that draw business intelligence out from the mass amount of data, including contracts. We architect the business processes for software defined solution to improve productivity. We train our internal stakeholders to be smarter buyers than we are. We become a professional problem solver and lead business improvement as a champion. No matter how we change, we have to quantify our efforts from productivity, financial, quality and timeliness perspective. Procurement will be a profit centre and drive innovative initiatives from a portion of our cost optimised for the organisation. Hence, it is imperative that all procurement leaders share their experiences with the industry, and collaborate with C-Suites to make procurement awesome in this era of technology transformation.
About the Author
Michael Koh is the Head of Procurement, Asia Pacific at Dimension Data. As a member of the NTT Group, we accelerate our clients’ ambitions through digital infrastructure, hybrid cloud, workspaces for tomorrow, and cyber-security. Prior to his role, Michael served as the Head of Procurement, Asia Pacific, at T-Systems and Schneider Electric ITB.