Friday, February 22, 2013

The Value of Contract Management

In these days of metrics and key performance indicators (KPI’s) people look to measure the value that contract management provides. In fact someone recently asked the question on LinkedIN. My initial response was the I had never seen one. I believed that there are always too many different variables. As I thought about it more I decided to write a blog post about the value of Contract Management.

To start, I don’t think there is a common definition of contract management. My definition of contract management is managing all contract aspects from initial definition of a need or potential sale through all the phases until the contract has ended or been closed and all obligations have been met.

In a blog post called Negotiation Stages, I describe what I view as the potential stages in negotiation.
For a Supplier those phases of negotiation include
1)Conceptual Planning
2)Product or Service Development
3)Marketing and prospecting
4)Pre-qualification by Buyer
5)Bid. Quote, Proposal Stage
6)Negotiation Planning / Preparation
8)Agreement is reached and signed
12)Close out
If you were a contract manager for a supplier you would normally not manage 1-3 but could be involved in 4-14

For a Buyer the phases of negotiation include:
1)Identification and quantification of a need
2)Identification and pre-qualification of potential supplier
3)Bid. Quote, Proposal Stage
4.Review of Suppliers bid or proposal
5.Planning / Preparation
7.Agreement is reached and signed
8.Management during mobilization
9.Management of performance
10. Management of changes
11.Management of close out
12.Management of warranty obligations
13.Management of claims.
In addition the contract manager needs to manage the administrative acts required by the contract such as submittals, notices, approvals, insurances, etc.

One of the problems with creating a metric for contract management value is few projects are exactly alike. Even if you had projects of the same design being used, you would always have the variables of local governmental requirements, local labor, different site conditions, different contractors, subcontractors, the prime contractor’s capability, their financial and performance risks plus availability of materials etc.

One way to look at value is not what you consider to be value such as cost savings or cost avoidance, it’s to consider what your internal the customer values. That will vary depending upon whether you are managing work for the supplier or buyer. It will also vary depending on the value they get from the completed contract. For example in the same company it’s easy to have customer’s that place different values on contract completion. For example a customer may be driven by time to market needs to time to revenue needs who are less concerned about cost than having performance on time or early so the can win in the marketplace or generate revenue. Other customers may value cost simply because they have limited budgets and the more you can save them, the more funds they have available for other needs.

The value that contract management can provide is having the knowledge and skills to work with the customer, understand their needs and what they value and why and the work with them to identify available contracting options, the cost, schedule and risks of each so the business can make the decision on how to best proceed. In negotiations the contract manager or negotiator needs to work with their internal customer to advise them of potential cost or risk impact of agreeing with certain terms. Once the contract has been agreed, the contract manager needs to manage all of the remaining phases according to what has been agreed.

The important thing to understand is that negotiation is not a single point in time activity. It occurs in one form or another throughout all phases of the contract relationship so the contract manager is a negotiator. As a negotiator there are three important things you need to remember:
1) How well you manage all the activities leading up to the formal negotiation will have a major impact on how successful you’ll be in the negotiation and whether your tactics will work.
2) How well you manage all the activities following the formal negotiation will determine how much of the value you negotiated you’ll actually keep.
3)Anything left un-managed will always cost more.

This means my view of the value of contract management is best measured by customer satisfaction measurements. Based upon what they agreed to as their value, their needs, and the risks they agreed, did you meet their needs> Further any measurement of a contract manager should be only based upon those phases that you actually control. Decisions made and actions taken in prior stages frequently impact what a contract manager has to manage. For example, if your company selected the wrong contractor or supplier for the work, there is a high probability that you will spend significantly more time having to manage that contract. To me the best way to lear contract management is to manage contract "cradle to grave" or from inception to close. That way you see first hand how what you do early in the process will impact success later on in the contract life and have to live with the problems you created.