Leveraging effective contract management in procurement departments

The key processes and activities involved in contract management are fundamental to making sure you and your suppliers know your responsibilities under an agreement and that everyone meets those obligations.

Eman Abouzeid (CSCP, CIPS), a procurement and supply chain professional with global experience, explores the benefits of having effective contract management in your procurement department, in this month’s SmartProcurement.

Being legally required to ‘perform’ is only half of the equation…
The role of a contract is to set out the roles, rights and obligations of both parties in a transaction or relationship. A contract implies an intention to ‘enter into legal relations‘: that is, both parties agree to be legally bound by the specified roles and responsibilities.

It may take the form of a spoken agreement or understanding (e.g. based on a regular trading relationship that has developed over time), but more complex contracts are usually formalised in writing.

Once contracts are signed it is not as simple as saying: “the supplier will now do that”, as there will be obligations to be followed up on either side. If contingencies arise, the contract may or may not lay down what happens next.

If the supplier’s performance falls short in any way, there will be a variety of options for raising the dispute, enforcing the terms of the contract or pursuing any remedies under the contract (such as compensation). Circumstances and requirements may change, and contract terms may have to be adjusted accordingly. This is an ongoing process through the life of the contract – which is where contract management comes in.

…the other half is managing performance
Contract management is a process intended to ensure that both parties to a contract meet their obligations and that the intended outcomes of a contract are delivered.

It also involves building a good working relationship between the buyer and supplier, continuing through the life of the contract.

The key processes and activities involved in contract management are described as follows:

Developing the contract: includes formulating a legally binding agreement, as well as setting out detailed terms and conditions of business and the specifications or requirements.

Putting in place a contract manager or contract management team: for smaller contracts, a single individual may be able to carry out all contract management responsibilities. However, for larger contracts, a team may be required, especially in the early stages as this is the period that often demands more management time.

Administering the contract: this is concerned with implementing procedures, by the buyer and the supplier, to ensure that contract obligations are fulfilled.

Managing contract performance: service level agreements (SLAs) and performance measures may be developed to express the desired outputs from the contract. These documents will form an operational tool which the respective contract managers can use to monitor performance on a day-to-day basis.

Managing the relationship: this entails developing the working relationship between the purchaser and supplier, through regular contracts, communication and information-sharing; developing and applying supplier incentives; managing and resolving conflicts; as well as developing approaches to collaboration and mutual support.

Renewing or terminating the contract: towards the end of the contract period, the buyer’s contract manager should review the success of the contract, the relationship and the status of the supply need. If an ongoing need remains and the contract has been satisfactorily fulfilled, it may be renewed. If the need has not been met, or performance has been unsatisfactory, it may be terminated.

Working together
Many of the cost savings and improvements available from supplier management are achieved through how a buyer and supplier work together after the contract has been awarded.

If contracts are not well-managed by the buying organisation then the following adverse outcomes may occur:
– The supplier may be obliged to take control of contract performance and problem-solving, resulting in unbalanced decisions that definitely do not serve the purchaser’s interests.
– Decisions may not be taken at the right time (or at all).
– Buyers and suppliers may fail to understand – and fulfil – their obligations and responsibilities.
– There may be misunderstandings and disagreements, and too many issues may be escalated inappropriately, damaging the relationship.
– Progress may be slow, or there may be an inability to move forward.
– The intended benefits from the contract may not be realised.
– Opportunities to improve value for money and performance may be missed.

On the other hand, the benefits of positive contract management include:
– Improved risk management in developing and managing contracts.
– Improved compliance and commitment by the supplier.
– Incentives and momentum for ongoing relationship and performance improvement.
– Achieving better value for money, which arises from efficient contract administration and performance.

However, the role of Contract Manager on the buyer’s and supplier’s side is the topic for another day. In a follow-up article we will explore the main types of contractual agreements typically made between buyers and suppliers.

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