Contract Risk Management

Transcription

1 Cntract Risk Management A Practical Apprach frm The Caridn Academy telephne facsimile inf@caridn.net website 1

2 1 Over-expenditure, fr example thrugh nt expliting bulk supply agreements, rebates & discunts Cmpanies with gd Gvernance need t be sure f their cntract management and need t understand the risks inherent in their cntractual bligatins. Unless the rganisatin has a sphisticated and dedicated apprach t cntract management it can have n way f measuring this risk. Myths and Miscnceptins Cntract Risk Management Cntract Risk Management (CRM) is an enterprise-wide issue, which directly r indirectly affects everyne in the rganisatin. In the final analysis, all transactins in every rganisatin are based n cntracts f ne type r anther. Histrically, despite plicies and prcedures, cntracts are seen as the respnsibility f the legal department, and nrmal practice is t abdicate cntractual issue, prcesses and prcedures t the legal department. The cnsequences f this are all t evident: Unwritten cntracts ( handshakes and verbal cmmitments) Unsigned cntracts Missing and lst cntracts Operatinal activity in breach f cntractual bligatins Missed events and deadlines, such as renewals and terminatins Multiple, ften cntradictry, cntracts with third parties Inability f management t mnitr r respnd t cntractual expsures and liabilities In ur discussins with clients and cntacts in the market, it seems that managers have a wide spectrum f pinins as t what Cntract Management systems are. In their search fr slutins, rganisatins usually start with the idea that they need a system that captures images f the actual hardcpy f the dcument, and which then maintains a central repsitry frm where the images can be readily retrieved -in ther wrds, a dcument imaging system. A dilemma then arises because there is a need t identify hw the dcument flws thrugh the prcess frm creatin t terminatin, s (lgically) the dcument imaging system must have wrkflw n tp. At this pint, cnfusin reigns because these are tw separate applicatins f technlgy, and the search fr prducts that will integrate these tw ideas leads the custmer dwn many dead ends. The utcme is that the functinality f wrkflw is well presented by wrkflw vendrs, while the superirity f a specific dcument imaging slutin is sld in terms f efficient strage, retrieval, indexing and scanning. Nwhere des this line f thinking address the real functinal requirements f a system t facilitate the management f cntract lifecycles and risk. All this is seen as add-n develpment either by the user r by an external develpment team. S what must a Cntract Management slutin ffer? 2

3 The Practical Slutin Naturally, a widely accessible repsitry f cntract infrmatin in electrnic frmat is desired, but it ges far beynd that. Managing cntracts respnsibly means Knwing what cntracts are in place, and knwing where they are Knwing what cntracts yu have with all the business entities within yur business dmain Knwing in advance when the events n every single cntract will ccur (reviews, renewals, terminatins) Knwing cntinuusly the financial implicatins f all the cntracts, individually and verall Knwing the cnsequences and bligatins inherent in each and all the cntracts Knwing all the business cnstraints which the cntracts impse n yur business Knwing when cntracts becme unsustainable because f new sciecnmic and regulatry circumstances Ensuring that every individual within the cmpany is aware f and cmplies with all the terms and bligatins f the cntracts which affect them Knwing why the cntract exists and what risks are addressed by every cntract Knwing the risk prfile f every cntract and being accuntable fr the verall expsure f the cmpany t the risks in all the cntracts. Having a clear and accurate view f the significance f each cntract and being able t categrise them in terms f urgent and imprtant in the daily activities. The Challenges f Cntract Management It becmes evident that a dcument imaging system with wrkflw desn t begin t address these issues. Success still depends n the ability f the individual managers t read thrugh the cntracts every day t extract what has t be dne. This is clearly impractical, and therefre a gd deal mre autmatin must be intrduced s that cntracts can speak fr themselves. Cntract Knwledge Bases T achieve these bjectives, each cntract must be reviewed and the salient pints, events, dates, clauses and tasks must be recrded in an active data stre. This data stre must nt nly deliver meaningful infrmatin in respnse t enquiries, but shuld als push infrmatin t the relevant individuals whenever necessary. Scanning the cntract dcuments is easy interpreting them is nt. It is a manual exercise, and is very subjective. Fr example ur research has demnstrated that in the area f Risk, the extractin f the risk types depends n wh is reviewing the cntract. (-a key principle f Knwledge Management is in peratin here!) Legal will extract legal risk; Finance will see the risks in ROI, payment terms, cash flw and capex. The Business Cntinuity Manager will have anther view, as will Operatins. The challenge is t make the interpretatin and management f cntracts as cnsistent as pssible, s that risks can be cmpared and plicies and prcedures can be standardised. This desn t necessarily mean intrducing an autmated cntract authring system. That in itself is a separate subject fr heated debate, as it intrduces many dilemmas and cntrl requirements. 3

4 Risk and Cntracts A framewrk fr managing cntractual risk must be defined and implemented in plicies and prcedures. This must be applied t every cntract in place and new cntracts must be reviewed against this framewrk. A risk framewrk must at very least, categrise risk types, identify and classify pssible risk events, impact types, vulnerabilities and prbabilities. Frm this, a simple expsure can be deduced, which, even thugh it is unlikely t be accurate, des give management a vehicle fr measuring and cntrlling the cmpany s expsure. It must tuch and guide all rle players, cntract wners and administratrs in their daily activities. It is nt a direct part f the ERP system. Instead, the ERP system must be cnfigured t guide peratins in cnfrming t cntractual bligatins and prcesses. Interdependencies Cntracts are nt discrete, freestanding dcuments. There is always a structure within a cmpany s cntractual landscape wherein cntracts are interrelated r interdependent. A particularly visible instance f this is seen in the area f Prperty Leases. The lease must gvern the services cntracts fr the premises, because they shuld all have synchrnised terminatin clauses. Furthermre, cntracts that depend n ther cntracts inherit the risk prfiles f the assciated cntract, and this makes management even mre cmplex. Psitining Cntract Management slutins The true cntext f cntracts is based n the premise that a business interacts with thers t exchange gds 4

5 and cash. This exchange prcess creates a cntractual relatinship, regardless f the depth r clarity t which that relatinship is negtiated. The idea f never signing cntracts is a fallacy bligatins and liabilities arise anyway. The reality is that cntractual relatinships are ingrained in the very fabric f the enterprise. Therefre, Cntract Management must be deplyed frm the tp, dwn as an instrument t ensure gd Gvernance, Cmpliance and Risk Management thrughut the rganisatin. The framewrk in the figure abve illustrates the fur-layer mdel f an rganisatin and the interplay between infrmatin systems and management slutins. On the right side f the figure, it can be seen that Cntract management slutins belng in the EIS and Knwledge Management categries. These shuld access the Operatinal Data Stres and integrate with the Enterprise Resurce Planning systems t ensure alignment f activities at all levels. By their very nature, cntracts are anther surce f unstructured infrmatin, which shuld have very clse links t the data held in the ODS and ERP systems at an Operatins level. In cntrast, ERP systems maintain structured data in databases and warehuses. This structured nature f ERP systems des nt lend itself t true cntract management. Cntract Management mdules, which are develped as clsely cupled extensins f the ERP, fall shrt in delivering the functinality required t manage a cntract thrughut its lifecycle. This is in part because cntractual expectatins and bligatins becme active befre the cntract executin stage. ERP systems als d nt cncern themselves with crprate agreements, such as sharehlders agreements and jint ventures, which are areas where high impact risks can ften be identified. The Caridn Apprach Business fcused cnsultative apprach Ensures business issues addressed Decisins and chices are gverned by business issues Success measured by business benefits Stakehlders are included and actively invlved Objectivity is nn-negtiable fr Caridn. It ensures that n ne stakehlder agenda takes precedence ver thers and therefre reality, shared wnership and accuntability fr success r failure are ensured. Stakehlder Participatin Users and stakehlders engaged frm the start Ownership in the hands f the stakehlders frm the utset Expectatins and understanding set early in the prject Prject Phases & Rllut Initial wrkshps Mapping the envirnment and islands f activity Identifying the Prblems Issues & Expectatins Dcumenting cntract types and the cntractual relatinships Aligning the prcesses and defining the Cntract Lifecycles fr each cntract type Establishing the technical architecture requirements integratin, security, IT Gvernance, Enterprise Systems Management Implementing the slutin: Mdelling & custmisatin 5

6 Reprt set up Alerts tasks Rllut by business unit & train users Cntract Capture Data entry Dcument scanning Risk & impact assessments by cntract Cnclusin If there is still dubt abut the benefits frm effective cntract management, then fr thse nly mtivated by numbers, here are sme substantiated statistics frm Aberdeen Grup: Imprvement Area Impact A Cntract Management System is an executive tl, nt just an peratinal infrmatin system. It must be implemented t address executive level expsure, and supprt gd Gvernance, Cmpliance and Risk management... It must be present in the Bardrm. Cmpliance management Imprve cmpliance 55% Rebate / discunt Imprve 25% - 30% management Material / service csts Reduce 2% - 7% Cntract renewal rates Imprve 25% Revenues Imprve 1% - 2% Evergreen cntracts Eliminate Cntracting cycles Imprve 50% Administrative csts Reduce 25% - 30% 6