Successful contract management requires careful preparation before a contract can be implemented. A solid preparation lays the foundation for successful contract execution. In this contribution, I will discuss the role of contract managers in the preparation phase,mainly in two areas:
- Contracting
- Contract Governance
Contracting
Before a contract is signed and implemented during the contracting phase, the parties navigate a pre-award Contract Management phase. In many organizations, this phase is led by procurement professionals. However, we often observe that contract management is not involved in the contracting phase, even though this phase establishes the very basis for the contract management process.
Among the contract management professionals we speak to, it is widely recognized that contract management should contribute to this phase to clarify how much a contract should contribute to organizational objectives and how this will be achieved. Understanding ambitions, requirements, and, perhaps more importantly, the feasibility of a contract is crucial for achieving overall organizational goals. During contract execution, value creation is the ultimate goal, and this value creation is compromised if good governance is not secured.
Outsourcing has become more complex due to extensive specialization, substantial growth in data, increased regulations, and requirements for accountability and compliance. This makes the role of the contract manager during the contracting phase even more crucial.
Contract Governance
After the contract has been signed, the post-award Contract Management phase begins. Before this phase starts, it is essential to establish good contract governance, outlining how organizations manage their contractual relationships with the help of policies, procedures, and technology (including tools).
Effective contract governance ensures that all stakeholders understand their respective responsibilities, significantly contributing to dispute prevention, risk minimization, and maximizing contract value.
The setup of contract governance depends on the potential impact of a contract on the organization. Contracts with minimal impact, such as those for pens and pencils or floral arrangements, may require only limited oversight, mostly confined to administrative tasks.
On the other hand, more complex or risky contracts necessitate intensive collaboration with stakeholders. Below are aspects crucial to the setup of contract governance:
Stakeholders: Identify relevant stakeholders in contract execution and their roles. Key stakeholders typically include the contract owner (usually the budget holder), the operational manager, the buyer (for contractual adjustments), relevant support functions (e.g. legal and finance), and, of course, the contract manager. Clarity in everyone’s role contributes to the predictability of the contract management process and increases the chances of success.
Communication and Meeting Structure: Effective contract governance requires open communication between internal and external stakeholders. Layered operational, tactical, and strategic discussions, both internally and externally, promote effectiveness and provide room for potential escalations. Open communication is crucial for maintaining good relationships between all stakeholders and preventing conflicts.
Agenda formation: A clear agenda is indispensable for effective meetings. Both hard and soft key performance indicators (KPIs) contribute to this. Monitoring KPIs allows contract managers to measure and evaluate contract performance, enabling them to react instantly to any deficiencies and take corrective measures to improve performance.
Risk Management: Risks are often insufficiently considered during the contract management process. Well-established contract governance should focus on managing risks that may arise during contract execution. Contract managers should ensure that these risks are identified, evaluated collaboratively, and appropriate measures are taken to avoid or mitigate them.
Change Management: A contract is a static document, but contractual agreements may need adjustments due to evolving insights, changes in laws and regulations, or technological developments. Good contract governance formalizes and implements contractual changes.
Summary
The preparation phase preceding the implementation of a contract is crucial for an effective contract management process. Contract managers play a significant role in this phase. By contributing their expertise to the formulation of contract conditions and the establishment of contract governance, they contribute to maximizing value and promoting successful contracts.
This is part 3 in my series on contract management. In my next contribution, I will delve into how contract implementations can be effectively executed.
Vincent Brouwer
Managing Partner AddVue
