Where Manufacturing Matters

What is Poor Contract Management Costing Your Business?

Posted by María Arraiza-Monteux on Apr 5, 2017 12:51:33 PM

Why you should care

We have all dealt with contracts at some point in our lives.  If you are a company owner, a president, a sales or procurement director, an attorney or a contractor, your exposure to contracts may be in the thousands.  How do you know whether your contractual arrangements are an effective vehicle to manage trade relationships in your business?  Many are astonished to learn that, on average, poor contract management causes a loss equivalent to 9% of a company’s revenue. (1)

Participation in global markets come with increased levels of complexity, volatility, a variety of legal frameworks to master, and thus, greater risks.  To be effective, contracts must clearly address the desired outcomes, how performance will be assessed, how changes will be managed, the risks, and the reward criteria.    Furthermore, contracts should promote the behaviors necessary to ensure the success of the relationship, as defined by the parties that agreed to voluntarily enter a legally binding arrangement.

The contract lifecycle

Companies that recognize their opportunity to improve the bottom line through better contract management start out by educating themselves about the contract lifecycle.  The reality is that different people from different functions and geographies may play a role in each of the phases of a contract.  Excellent communication amongst all collaborators within a company, as well as with the external counterparts is therefore of paramount importance, as is integrated oversight of the contracting function. 

The contract lifecycle model utilized by the International Association for Contract and Commercial Management (IACCM) is presented in Figure 1.   Let’s see what each of the phases entail.

Contract Lifecycle.png

Initiate Scope

  • Understanding markets & industry
  • Understanding requirements
  • Financial considerations –cost & setting charges
  • Aligning risk through financial modeling
  • Identifying routes to market
  • Preparing Requests for Information
  • Undertaking a Terms Audit

Bid Scope

  • Request for Proposals preparation
  • Responding to a Request for Information or Request for Proposals
  • Understanding the influence of laws on the bid process
  • Cost identification
  • Opportunity evaluation
  • Proposal preparation
  • Evaluating the proposal

Develop Scope

  • Understanding contract & relationship types
  • Understanding contract terms & conditions
  • Understanding specialized deal specific contract terms & conditions
  • Understanding term linkages, managing cost and risk
  • Statement of Work and Service Level Agreement production
  • Following a structured approach for effective contract drafting

Negotiate Scope

  • Understanding the objectives of negotiation
  • Selecting appropriate approaches to negotiation (win-win, win-lose)
  • Applying appropriate negotiation styles (principled, positional)
  • Applying negotiation techniques
  • Closing the deal

Manage Scope

  • Transition
  • Managing risk & opportunity
  • Managing & monitoring performance
  • Program & project management
  • Change control & management
  • Dispute resolution
  • Contract close-out & lessons learned

The contract management needs of small companies

Small companies tend to have simpler organizational structures with individuals playing different functional roles.  This may enable integration across the contracting phases more naturally.  On the other hand, oversimplification of the contracting framework to keep workloads under balance may impair full attainment of the benefits from commercial relationships, both on the buying and the selling sides.

WIRE-Net member 3P Brava, Inc. is conducting research to better understand the relevance of contract and commercial management to manufacturing companies.  You are invited to participate by answering a confidential survey via this link:  https://goo.gl/forms/9crg2VKq1GSs50FX2The survey will remain open until May 15, 2017.  The results will be subsequently published in the WIRE-Net and 3pbrava.com blogs.

 (1) International Association for Contract and Commercial Management (IACCM)

 

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