Valuing the role of Contract Managers.
As a contract management professional, whenever I have started in a new organisation, whether that be blue chip companies, public sector or start-ups, I am always left with the same initial feeling. That is, that contract management continues to be an afterthought, and I can’t help but feel that by doing this, organisations are throwing value away.
Why do organisations not take contract management seriously?
Most of the time the answer that I have heard is that contracts are expected to be honoured. If a contract is agreed with another organisation, there should not need to be resource dedicated to making sure that it is delivered, that should be the expectation. While this might be a reasonable thought process, the evidence presents a different reality.
A comprehensive survey of more than 100 outsourcing arrangements at Global Fortune 2000 companies conducted by a leading research organization between 2007 and 2012 concluded that there is a median value erosion of up to 20% of the annual contract value.
Finding talent
With value leakage typically at this level, organisations should be fighting for contract management talent, however, herein lies the second problem. Contract management as a profession is yet to develop in a way that professions like Procurement or Supply Chain have. Take industry bodies as a prime example, CIPS was founded in the 1930’s, whereas IACCM was not in existence until 1999. Further, the challenge that most organisations have is finding contract management resources that are going to drive this value.
CIPS every year publishes the ‘Procurement Power List’. While slightly self-indulgent, it does celebrate procurement’s growing impact at the top table of big corporations and recognises that the function itself has become more influential in most organisations since the global financial crisis. The key thing this does though is for those who are just coming into the profession; it’s something to aspire to. And this line of sight to a successful career is not something that exists for contract managers, and even as a big proponent of contract management as a function, I would struggle to suggest it as a career for anyone seeking advice. There is no doubt that this needle is being moved in the right direction by organisations like IACCM, however the is still a long way to go.
So, if organisations recognise the circa 20% value erosion caused by poor (or no) contract management expertise and are willing to invest to reduce that value erosion number, what needs to change.
Firstly, and most importantly organisations need to move away from the underlying expectation that 100% of a contract value should be delivered without dedicating resource to achieving this. If that is the case, then contract management becomes a thankless task which limits the talent pool available. If the delivery expectation is 100%, it leaves room for nothing except adequate, or poor performance.
Contract management as a profession
Contract management as a profession should also be given the status that it deserves. More progressively than this it needs to make contract management appealing to talented individuals through both a clear career path and remuneration. Thinking progressively, should contract management not consider following the approach that sales organisations have used for so long? In its simplest form, sales targets are agreed, and commission is awarded for sales above a baselined figure. This is a basic form of incentivisation for professionals to have some ‘skin in the game’ and where applied effectively provides results for both organisations and individuals. Contract managers should be recognised and rewarded for closing that gap in contract value erosion, in the same way that other individuals are rewarded for their contributions to the bottom line.
Finally, technology also must play a key role here. For the last 20 years technology has transformed the contract drafting process to a point where agreements are growing, and the complexity of contracts is only moving in one direction. However, the delivery assurance of these contracts is still largely down to excel spreadsheets and the memory of the responsible individual. This has now reached a point where individuals, however capable, can’t possibly know the entirety of the content and obligations. Therefore, it is essential that technology is available to assist in making this complex task feasible. Technology in this area is still in its infancy, however solutions like SirionLabs are making huge advances in assisting contract management, and provides its users with the ability to systematically reduce value erosion, as well as mechanisms to measure the outcome to directly see the impact that a combination of good contract management and the right tools is making to the bottom line of a business.
As is often the way, there is somewhat of a ‘chicken and egg’ issue upon us. It is hard to convince business to invest in contract management capability and resources until you can show the reduction of value leakage, however you only get there by recognising the value that effective contract management can have, taking it seriously and making the investment. I absolutely feel that any organisation that makes this investment will see significant returns both in terms of cash, but also building capabilities that the market will be desperate for within the next 10 years.
Daniel Healy
Senior Consultant – Contract Management
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