Improving Contract Management

1. Improving Contract Management Kevin McGuinness October, 2013

2. Subjects Covered • Preliminary Questions • Core Area Questions • Creating a Contract Management Process • Conclusion

3. Preliminary Questions

4. Preliminary, cont’d. • What constitutes a contract? • What types of contract are there? • Is a verbal contract binding? • When is a contract required?

5. Core Area Questions • What is Contract Management? • The discipline of managing the contracting process through the entire contract life cycle.

6. What is contract management? • Buy Side: managing contracts and relationships with suppliers and vendors • Sell Side: managing contracts and relationships with customers, partners and distributors • HR Management: managing HR related contracts and agreements • Project Based Contract Management: managing performance and obligations as part of project management

7. What is contract management? • Contract management activities may be classified in various ways • Usual to divide in relation to the chronological progression of the contract—from pre-contract to closeout.

8. Why is Contract Management Important? • One of the last key business process to be automated with the use of technology. • Contracts underpin 80% of business to business transactions • Contract management offers new tools to increase control over and efficiency of the procurement process

9. Important, cont’d. • Contract management is not intended to increase the extent of bureaucracy to which procurement is subject. • Goal is to improve the value for money derived from contracting. • Need to move from generalities to specific measures that can be taken to improve efficiency

10. Important, cont’d. • How many contracts does your college award each year? • What percentage of those contracts are completed, on time, within budget, and according to the original specifications? • How much of your day is dedicated to trying to resolve problems after a contract has been awarded, responding to protests, contract controversies, or unhappy customers?

11. Contract management vs. Contract Administration • Contract Management is comprised of the entire contracting process, from pre-solicitation activities through contract close-out. • Contract Administration is comprised of those activities after the award of a contract.

12. Aspects of contract management • Procurement Planning • Early involvement/partnering with our internal client departments. • Thoroughly understanding the needs of our client. • Creating a process that will address those needs • Consultation and engagement

13. Aspects, cont’d. • Planning • Know what questions to ask to ensure that all risks are identified during solicitation preparation • Know the market – or how to research market conditions • Know the supplier/contractor availability

14. Aspects, cont’d. • Planning • Know what procurements may be on the horizon to help identify time frame necessary to procure • Routine • Specialized Projects

15. Aspects, cont’d. • From Planning to Execution • Internal Contract Administration Team • Adequate Specifications (non-restrictive) • Contract Goals • Pre-Award Activities • Risk Identification/Potential Problems

16. Aspects, cont’d. • From Planning to Execution, cont’d. • Determine Required Documentation • Confirm Suitable Process for • Measuring Performance • Reporting • Documenting • Payment Processing • Approval of Change Orders – Contract Close-Out • Confirm who is directly responsible for each of these responsibilities

17. Areas of concern • Procurement options • Specifications • Identify Milestones for MeasurementDocument Payment TermsDevelop Contract Close-Out Check List = • Confirm that Approach to each is consistent with applicable policies/directives • Conduct in accordance with Contract Management Manual • Standardization of Approach

18. Evolving a Contract Management Approach • Evolution of a Process • Planned Procurement • Contract Management Manual • Standardized Approach to each Class of Procurement • Promotes consistency • Can be refined based on experience • Incremental improvement

19. Key challenges • Meeting milestones in terms of time, cost and quality • Proactively managing work so variances from the agreed schedules are identified early enough for remedial action to be taken. • Identifying, managing and solving the many issues that may need to be addressed • Communicating and demonstrating contract compliance without a lot of extra work. • Keeping everyone in the team informed in close to real-time, so everyone remains focused and no time or effort is wasted. • Documenting work in terms of effort and progress plus key issues solved. • Creating an credible audit trail

20. Key Challenges

21. Efficient Procurement • By consistently aligning your purchasing processes with your procurement strategies, while harmonizing your operational procurement activities, you will be able to make more efficient use of the available resources.

22. Efficiency, cont’d. • Value for money: amount spent to procure is justified by the quality of the products or services received, and the conditions (e.g. timeliness) under which they were delivered

23. Efficiency • Methods to enhance • Lowering transaction costs of procurement • Achieving best bulk pricing by pooling orders • Delivery timed to coincide with need (reduces cost of warehousing, shrinkage and re-shipment) • Contract terms which encourage competitive pricing • Bidding documents and rules which encourage prospective suppliers to bid

24. Efficiency, cont’d. • Public sector agencies are generally large scale customers, they always pay (eventually) for what they get, they rarely sue, and they try to be fair • Why are they not getting the best prices in the market? • Why do some of the best suppliers give them a pass?

25. What’s out there? • Developing a more active /aggressive approach to identifying available products and suppliers • Getting a better understanding of normal market pricing

26. Case Study • British Airways • £4 billion of purchasing annually (350,000 contracts) • Used sourcing technology to close the loop from sourcing to procurement • Used contract management technology to link negotiated agreements with purchases • Deployed technology to automate purchasing of £1 billion in indirect expenditure

27. Case Study, cont’d. • British Airways • Annual savings of ¢80 million • 4X increase in order capacity • Transaction costs reduced by 40% • Employee productivity increased 48% • Reduced suppliers from 14,000 to 2,000 • Reduced inventory by £200 million

28. Nextance Inc. Study, 2003 • Interviewed 100 customer • 54% said that simply finding contracts is a concern • 54% said finding key clauses in their contracts is difficult • 40% said they could achieve large savings by managing contracts better • 75% said contractual allocation of risk was a serious concern • 61% had no idea of the interdependencies of their contracts • 60% did not track contingent liabilities • 50% had no procedure in place to identify correct people of emerging risk • 26% were dissatisfied with process governing risk disclosure

29. Automation • Automation of the Process produces greatest results over time • Now numerous OTS solutions for implementing a contract management approach

30. Automation, cont’d. • Centralized record keeping • Original contract documents • Contract changes • Other important communications • Standard form contracts for each type of supply • Standard form terms for special types of contract (e.g. IT procurement) • Electronic document preparation (by entering key variable data) • Tickler system • Invoice and payment monitoring • Reconciliation of invoices with contract milestones

31. Contract Management Software • Novatus Contracts • Provides contract lifecycle management software • Contract management, paperless contracting and eSignature. Increase control, visibility and management across the enterprise. • Known for ease of use, fast deployment, attractive costs and support. • 13+yrs providing contract management solutions.

32. Software, cont’d. • The core features are generally similar from one program to another • Agiloft • provides the fastest time to value • Implements an initial a trial system that you can actually use to manage contracts

33. Software, cont’.d • Revitas Contract Manager • comprehensive contract management software solution for the authoring and administration of contracts, resulting in shorter sales cycles and reduced risk. • Single centralized contract repository • Automated rule-based workflows • Integration with Microsoft Word • Contract milestone management

34. Software, cont’d. • Open Source Contract Manager • Free trial. • Email alerts, full text search, customizable reports, easy import of any format, document compare (Word to PDF), authoring, approval workflow, configurable, on-demand, contract analysis-makes documents easier to navigate/restrict access rights, full audit, • Can go live in only 24 hours

35. Software, cont’d. • Over the course of an afternoon, I was able to locate 127 different software solutions for implementing contract management within any organization, from small to large. • Fairly competitive market

36. The Contract Lifecycle • Contract management concerns must be addressed at each of the stages shown.

37. Goals of contract management • Ensure both parties perform as specified • Right goods and services are delivered in a timely manner • Financial interests of the customer are protected

38. Goals, cont’d. • To carry out this mandate, you require • Clearly written, comprehensive and viable specifications • Clearly defined scope of work • Clearly identified deliverables • Testable method of assessing performance

39. Goals, cont’d. • Timelines and due dates (milestone dates) • Must be clear • Must be realistic • Should be stated in procurement document • Contract should be managed to confirm compliance to project work plan

40. Goals, cont’d. • Payment entitlement • Needs to be clearly stated • Proper balance of interests of supplier and customer • Payment trigger should be objectively verifiable • Avoid automatic payments (e.g. merely by passage of time) • Should be test to satisfy • Incentives and penalties

41. Good governance • Proper budgetary approval • Proper process of consultation with stakeholders • Ensuring all requisite approvals obtained • Ensuring proper signing authority • Licenses or other permissions to proceed • E.g. IT or Privacy sign off • Review of documents by legal

42. Preparing to Go to Market • Clear definition of what is to be provided and all requirements to be met • Means to measure performance: how can the supplier know whether or not it has performed properly? • Can amount payable be tied to performance? • Incentives and also penalties • Is allocation of price risk realistic?

43. Preparing, cont’d. • Does the project team cover all relevant areas • Affected users • People with required expertise • Are they committed to providing timely input • Do they have the requisite authority

44. Preparing, cont’d. • Provisions governing implementation and roll-out • Acceptance testing plan clearly defined, with comprehensible test standards • Clear methods and timelines for correcting perceived deficiencies in performance

45. Specifications • Clear and complete description of what is required • If an RFP, should clearly identify the need to be met • Performance constraints • Operating conditions • Usage requirements • Special needs to be addressed

46. Specifications, cont’d. • Specifications should communicate set expectations that must be satisfied • They provide the basis for oversight, management of performance and for application of sanctions • Vendor accountability during performance • Immediate notification where not met • Remedy immediately identified and implemented

47. Communications • A concern from commencement to close-out • Need to cover each of the following • Pre-bid • Post-bid pre-award • Operational • Close-out • Invoicing Arrangements • Processing of payment claims

48. Dispute Resolution Process • Graduated • Commencing at lowest level • Advancing to higher levels in each organization

49. Evaluation Process • Qualified evaluators • Consistent and rational approach • Evaluation tied to specifications and other requirements set out in RFP/Tender • Proper documentation • Conflict of interest: perceptions of unfairness • Proper understanding of role and responsibility • One level of evaluation or two?

50. Evaluation Process • Bid prices • Main consideration is usually whether they are within budget • An equally important concern is whether they are above market prices • In the private sector, it is usual for buyers to have an idea of the likely price • Why is this left to chance in the public sector? • If the best bid price is well above market, why award a contract?