A recent post from a contract management professional brings up an interesting question: How come so many organizations (public or private) don’t make the connection between value and contract management?
In a post on the Spend Matters UK/Europe site, author Peter Smith recalled an incident illustrating the value of contract management. Smith recalled he was involved in working on a government project and wanted to get information about a £1 million-a-week supplier agreement. (Smith, btw, is a long-time consultant on government procurement practices and contract management).
To Smith’s surprise, there was no one in charge of contract management as no one involved (apparently) felt the cost could be justified. As Smith wrote in his post:
“That was a cost potential of perhaps £1,000 a week for a mid level person to manage a £1,000,000 a week. (Just a few regular checks on expenses and timesheets quite honestly saved many times the cost, once we did get someone in place).”
If you work in contract management, you may be familiar with the mindset that contract management shouldn’t “cost” anything – or that there’s limited value in contract management.
This is, of course, a major fallacy. Contract management (or the lack of it) can impact the bottom line significantly – just check out these examples from our own blog posts:
- — A $5 million cost-savings from contract management
- — Third-party vendors fined $530 million by Feds (so far)
- — An automotive company saved nearly half a million dollars because of misplaced decimal on invoices
- — A small municipality recovered $270,000 in payments made on expired contracts.
Even though the evidence is clear on the matter, maybe what can make contract management implementation an uphill fight is the absence of the word “value.” After all, a contract with a vendor or a sales contract is about much more than the actual terms in the contract.
In the end, the central question to both parties of a contract is: what’s the value of this? A contract management solution ensures that someone can record many aspects of a contract that are related to the question of value. Are the key terms being honored, are there changes to contract terms and are those being recorded? Are notes and related documents being stored (or associated) with contract records? Those notes and documents can provide an invaluable “bread crumb” trail when reviewers are examining a contract for deeper value (and, thus, value management).
When someone like Peter Smith looks at a huge contract and asks a question about it, not having a contract management record means finding value becomes more difficult. In the end, if you are a supplier or buyer, someone needs to show a contract has value.
In an ideal world, maybe there should be a “chief value officer” who is tasked with making these determinations. That may not happen anytime soon, however. For the present, organizations will have to determine value in easy-to-define ways, such a cost or profit.
No matter how your organization determines value of a contract, the starting place has to be by devoting enough commitment to contract management – either solutions, staff, or both.