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Improving Contract Management. Kevin McGuinness October, 2013. Subjects Covered. Preliminary Questions Core Area Questions Creating a Contract Management Process Conclusion. Preliminary Questions. Preliminary, cont’d. What constitutes a contract? What types of contract are there?
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Improving Contract Management Kevin McGuinness October, 2013
Subjects Covered • Preliminary Questions • Core Area Questions • Creating a Contract Management Process • Conclusion
Preliminary, cont’d. • What constitutes a contract? • What types of contract are there? • Is a verbal contract binding? • When is a contract required?
Core Area Questions • What is Contract Management? • The discipline of managing the contracting process through the entire contract life cycle.
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
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.
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
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
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?
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.
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
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
Aspects, cont’d. • Planning • Know what procurements may be on the horizon to help identify time frame necessary to procure • Routine • Specialized Projects
Aspects, cont’d. • From Planning to Execution • Internal Contract Administration Team • Adequate Specifications (non-restrictive) • Contract Goals • Pre-Award Activities • Risk Identification/Potential Problems
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
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
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
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
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.
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
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
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?
What’s out there? • Developing a more active /aggressive approach to identifying available products and suppliers • Getting a better understanding of normal market pricing
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
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
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
Automation • Automation of the Process produces greatest results over time • Now numerous OTS solutions for implementing a contract management approach
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
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.
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
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
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
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
The Contract Lifecycle • Contract management concerns must be addressed at each of the stages shown.
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
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
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
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
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
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?
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
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
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
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
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
Dispute Resolution Process • Graduated • Commencing at lowest level • Advancing to higher levels in each organization
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?
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?