1 Contract Management The Mavericks Won t Like This! Keith Wallis
2 How Much Did That Project Cost? Real Life Example Original contract amount $500K Variations scope changes not visible Total variations = $2m Contract delivery and performance monitoring negligible Only when project was completed was the disaster discovered Your contracts are your business
3 Agenda Take The Contracts Test What is Contract Management? The Golden Triangle Key Statistics Contract Management Business Processes The Solution Contract Management Some Key Rules Benefits Implementation
4 Take The Contracts Test 90% of enterprises view effective creation, monitoring and management of contracts as either very important or critical to their overall business success.
5 Take The Contracts Test Can you see all your contracts, consumption & spend against each contract? Can you find your contracts at any point in time? How much did you spend against any specific contract last year? Do you have full visibility of agreed service levels? Are your suppliers invoicing accurately based upon the contracted pricing? Are your purchase orders raised prior to the contract being approved? Can your organisation gain efficiencies through process standardisation? Do you want to reduce contract negotiation timelines? How easy is it for you to update all contracts with a single clause?
7 What is Contract Management? Studies have shown that more than half of all companies cannot even locate signed copies of 10% or more of their contracts!
8 The Contract A contract is a mutually binding agreement that obligates the seller to provide the specified products or services obligating the buyer to pay for them Contracts clarify responsibilities and define key deliverables Contracts are used because they are more legally binding, there is more accountability There is a current trend to outsource work subsequently requiring a contract
9 What is Contract Management? The process of managing the contract and the relationship between the buyer and the seller, managing contract related changes and when appropriate, managing the contractual relationship with the outside buyer of the project. PMBOK (3 rd Edition)
10 Project Contract Management Begins at project inception with the appointment of project manager and team with development of project s outputs, benchmarks and risk allocation with an understanding that things will change down the road Success depends on planning, good monitoring and flexibility from all parties involved
11 Collaboration OLD WAY minimal collaboration NEW WAY collaboration access to contracts portal
14 The Golden Triangle Key Statistics Most organisations have multiple contracts with the same vendor stored in filing cabinets at different locations. These contracts often expire at different times, have been negotiated for different prices, and apply to different territories.
15 The Golden Triangle Maverick Spending Fragments Supplier Leveraging Asset Accounting Plant Maintenance Strategic Planning Resource Portfolio Management Investment Management Business Planning & Consolidation Labour Services 20% 30% Materials 50% Best Practice - 70% of spend is on contract Module Project Systems cprojects
16 Contract Management Aberdeen report 2007 Your contracts are your business
17 Contract Management Aberdeen report 2007 Your contracts are your business
18 Contract Spend Analysis - Benefits Contract Analysis Best in Class Industry Average Laggards Annual spend 500m 500m 500m Non contract spend 161m 219m 308m On Contract Spend 339m 281m 192m Purchasing transactions compliant 300m 180m 93m Purchasing transactions not compliant 39m 101m 99m Move to contract 59m 147m 5% savings - based upon increased compliance and move to contract 6M 10M
19 Contract Management Business Processes Procurement organisations believe that 70% of negotiated savings are actually realised. Chief Financial Officers view savings with only 35% realised.
20 Contract Business Process Renewal or Termination System Alerts / Paramaters Contract Adjustment & Extensions Change Guidelines New Contract Creation Enterprise Contract Repository Templates / Libraries Contract Negotiation Negotiation Guidelines Contract Review / Approval Workflow User Groups Contract Storage & Access Notification & Contract Distribution Contract Execution Signatories Distribution Lists
21 Procurement Process Identification of need Specification Supplier qualification and appraisal Accounting: whole life costing Contract management and review Tendering and tender evaluation
22 The Solution Contract Management Consider a $200 million spend agreement which offers a 10% discount on contract spend. Reducing maverick spend in this case by just 10% yields $2 million in real savings.
23 Contract Management Components
24 Contract Management Key Features Generate, negotiate and manage contracts with a single searchable contract repository Create a library of standard clauses & contract templates enforces legal standards Workflow based approval Automate all contract activity Track rebates and thresholds Executive dashboards Multiple reporting options
25 Contract Management Key Features Packaged integration Requirements, awards and contracts to ensure employees maximise leverage negotiated contracts and purchase from preferred suppliers Supplier collaboration Discussions Respond to bid requests Auction functionality Scorecard performance Negotiate contract terms Supplier Performance Management Analysis by activity and defined metrics
26 Contract Management Integration of all Project contracts and documents (drawings, scope, plans, risk analysis) Reality Check Side Issues Contract Administration Notice Changes Performance Reporting/Monitoring
27 Reporting Regular/ad-hoc reporting on various aspects of contracts, including: Supplier information Contract value Usage Savings Performance Improvement opportunities Key performance indicators Exceptions
28 Simple Consultant Contract All Online, real time, full history recorded Information to relevant departments
29 RFP / Tender Based Process Online / Templates / Libraries Auto / manual assignment All records recorder Online / supplier portal Online scoring, weighting showstoppers Discussions, opinions recorded Reasons
30 Variations May be necessary due to contractual arrangements: Changes to specified personnel; Changes to contract milestone dates; Changes to supplies quantities; Change in scope of the requirement Changes to specifications; and Introduction of new technology. Stakeholder consultation required
31 Variations Example SAP PS Simulate variation Gain approval (CM) Update project Plan Budget Schedule Execute Monitor Contract Management Create variation to contract Workflow Approve Supplier Approval Execute Monitor
32 Some Key Rules An organisation s proactive management of the creation, execution and analysis of its contracts will increase its financial and operational performance while reducing risks. Today s highly competitive economy demands contract management become a core competency.
33 Contract Management Activities Activities include: Keep documentation up to date Establish administrative processes around documentation and processes Managing the relationship Identify and manage of risks Monitoring Key Performance Indicators (KPI s) Motivate suppliers Protect the interests of the organisation Document and report on contract performance
34 Monitor Performance Effective Performance Monitoring requires the Contract Manager to: Advise Contractor of performance issues Develop effective feedback mechanisms Keep written records of all dealings with Contractor and administration of the contract Maintain comprehensive documentation
35 Benefits Studies have shown that for each dollar earned by an organisation, as much as 80 cents can be lost to procurement costs. The strategic importance of contracts becomes immediately apparent.
36 Contract Management Optimisation Standardisation templates / terms Enterprise wide contract process Enterprise repository Collaboration between buyer and seller Improve ability to analyse contract performance, compliance and risk Automation of lifecycle F i n a n c e L o g i s t i c s L e g a l Enterprise Contract Repository O p s U n k n o w n
37 Benefits Improved compliance with procurement terms Reconciliation of procurement and sales orders to the contracts Reduced legal support through standardisation Reduced time to contract & contract research time More efficient audit processes internal / external Visibility and transparency of the process Reduction in quick renewals and maverick buying Platform for customer and vendor profitability performance
38 Implementation Discussion Surveys indicate approximately 67% of company revenues are based on contracts. Revenue leakage, estimated at 5% to 9% of revenues, was at the top of the list of concerns driving these organisations toward improved contract management.
39 Implementation Low Cost quick payback immediate benefits Short duration - e.g. 3-6 months Staggered rollout of functionality Unique implementation methodology Trained up front maximise knowledge transfer Preconfigured data load templates Value prototyping using your data reducing implementation costs (Go / No Go decision) Only experienced consultants SAP relationship / delivery partnership
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