Contract Management Part One Making the Business Case for Investment Executive Summary This paper is the first in a short series of three which will look at the business case for organisations to invest in Contract Management resource, tools and technology. We are defining Contract Management as activities post-contract award that are connected with the delivery of the goods, services or works defined in the contract. By Peter Smith Managing Editor Spend Matters
Executive Summary (Cont d) After some background to the long-running debate in the procurement profession around the topic, the overarching importance of Contract Management is discussed, with an emphasis on how vital it is within the end to end procurement process. Put simply, even excellent procurement work can be negated by inadequate Contract Management. management, and the tasks from that point onwards belong We then cover at a high level the two key purposes and justifications for Contract Management - risk and opportunity. Risks are inherent in all major contracts, whether that is commercial, operational, reputational or a range of other risk types. On the more positive side, opportunities to improve the outcomes from major contracts also exist in most cases. That may come from extracting greater commercial benefits, or gaining innovation and service improvements from the suppliers. These issues of both risk and opportunity will be covered in greater detail in the two subsequent papers in this series. The paper also explains why we need a business case at all to justify investment in Contract Management, and lays out a template for the potential business case, covering the key elements that should be included to make it compelling and complete. PART 1 - THE BACKGROUND Procurement and Contract Management Going back a few years, there were a number of debates around the various growth strategies that the Chartered Institute of Purchasing and Supply (CIPS) might adopt. One perennial topic was Contract Management. CIPS considered making stronger efforts to engage with the huge number of people who were engaged in Contract Management activities. But many of those people of course were not core procurement people in terms of their roles or training. There were three schools of thought within the CIPS leadership and the council members who discussed the issue. The first was the don t touch it with a bargepole group. Their argument was that procurement as a process and discipline has a logical cut-off point when the contract is awarded. Responsibility in most cases then hands over to line there. Many contract managers don t perceive themselves as connected to the procurement profession, and the skills they require are different to those needed by procurement people. Procurement might get involved in technical contract queries perhaps, but that would be the limit of their involvement. The second school recognised the linkage, and conceptually agreed that this meant there should be opportunities for CIPS, but felt it was just one of those too difficult areas. This group agreed that effective Contract Management is critical for effective procurement, and indeed vice versa, but thought the area was just too big and too difficult to address. The third group of us and yes, it included me - felt that procurement should stake a claim to Contract Management. We believed that, as the fundamental procurement task is to obtain value and competitive advantage from suppliers, then how contracts and suppliers are managed post contract award was simply too important a topic for us to ignore. This paper (the first in a series of three) develops the argument in support of that third viewpoint. It takes the view that procurement needs to be involved in the Contract Management process in all organisations, and lays out how procurement can make the business case for investment in Contract Management as a discipline. 2
The procurement function and leadership can t own that process end to end in terms of everyday delivery, of course. Many colleagues from different business areas will almost inevitably have a role to play. But procurement can take an overarching role that will add real value and improve performance. So, in this first paper in the series, we look at the logic for procurement taking on that leadership, explain why it is often necessary to make a strong business case for investment and involvement, and describe the overall structure and vital elements of the business case. In the second paper, to be published in early Summer 2013, we will look in more detail at the opportunities that effective Contract Management can deliver, and how they can be described in the business case. Then in the third and final paper, we will look at the risks that good Contract Management can mitigate, as that often forms the real burning platform for investment in this area, and we ll wrap up with final conclusions. Why do we need a Business case? We perceive that there are three main reasons why many procurement functions will need to make a formal business case in order to seek and gain approval for actions to drive better Contract Management performance. 1. It will need investment - probably covering resource, tools and technology. That investment (both one-off and ongoing costs) will need to be justified in most organisations. 2. Most executives don t understand what Contract Management is all about, and that will need explanation if investment is to be justified, including how it fits with procurement activity and structures. 3. Executives often understand even less about the potential opportunities from effective Contract Management or the risks it can mitigate. And there is always another priority for investment (until you find the proverbial horsemeat in your raw materials...) Why procurement should own Contract Management If we re not prepared to take on the ownership of Contract Management across our organisations, who else do we think has the desire and the skills to do that? The heart of the business case will explain just why Contract Management is so important for organisations. But the business case may also need to include an explanation of the logic for procurement taking the lead. Here are three strong logical arguments that can be used. No-one else will do it! Whilst individual business areas, functions or even people may be very interested in managing their own contracts, it is hard to see that they would have the appetite to take on overall process ownership, in terms of driving good practice across the organisation. Common systems, training, governance, reporting need to be co-ordinated - procurement has a clear over-arching interest so offers some logical solution. Contract Management is logically part of the end to end procurement process. It flows naturally from the procurement and contracting process, and should build on the supplier selection, negotiation and contracting process steps that are central to procurement. Whilst contract users have an obvious incentive for Contract Management to be successful, procurement has a wider motivation. When a contract goes wrong, it is unusual to 3
hear people say that was a good contract but we managed it badly. It is more common to hear why did procurement choose that supplier or it s a really bad contract. So procurement people have a personal and vested interest in effective Contract Management! However, we would stress that users and budget holders also have key roles to play - procurement ownership is about oversight, strategy, tools and processes, governance, and skills, not executing every aspect of Contract Management. What about Supplier Relationship Management? There is often confusion between Contract Management and Supplier or Supplier Relationship Management (SRM). Our firm view is that they are both part of the continuum of activities that relate to post contract award management of the supplier and contracts (see Fig 1). So SRM is defined as actions that apply across a supplier s whole portfolio of contracts, and generally is accepted to be around the more strategic, longer term activities we undertake with them. SRM Supplier Development Contract Development Market Management Risk GOOD PRACTICE Planning & Ownership Payment Resources Administration Delivery Fig. 1. What is Contract Management? A Good Practice Model However, the fact that it is a continuum has one important consequence. It is very difficult to do effective SRM without having the basic Contract Management disciplines in place. How can you talk about strategic partnership, innovation or joint ventures if you don t have a grip on what contracts you actually have with this supplier, or how they re performing day to day? Effective Contract Management is therefore a necessary (but not sufficient) condition for successful SRM in our view. PART 2 - THE BUSINESS CASE The Structure of the Business Case Many organisations will have their own standard format for presenting a business case for investment. Clearly, if this is the case, you should work within that. But in most cases, the case will need the following elements. Overview / Executive summary Description of what you want to do Benefits Costs Programme / project plan Let s look at these key elements in more detail. What are you going to do? Obviously, you will need to describe what it is you actually want to do. That should include those activities that have an associated direct cost, but also others that don t, but for which some sort of senior level approval will be helpful or essential (e.g. significant governance changes). Within the direct cost area, this may include investment in people (additional or re-allocated staff, or consulting / contractor support), and / or in tools - for example, Contract Management software. Whilst this is not intended to be an exhaustive list, the activities to be undertaken may include; Governance - do you want to put in structures for reporting on Contract Management, or contract compliance reporting and monitoring? Are you going to gather information about existing contracts, or put in place approval mechanisms for new contracts? Do you want a Board level executive to take ownership of the subject? Structures and resource - do you want to recruit or appoint people to new Contract Management positions? Or use existing people in a different manner - for example, some organisations have kept contract managers in business areas, but with a functional / dotted reporting line to the CPO or similar. 4
Skills - do you want to invest in training or development activities to strengthen Contract Management? That is a very common and successful way of improving performance - but how will it be achieved? Tools and technology - how are you going to support the programme with the appropriate tools? Do you need technology to support progress, such as a Contract Management database, contract authoring software, a platform that will help with performance monitoring, notifications and general management of the contract portfolio? Laying out the benefits We will look in more detail at this vital element of the business case in our two subsequent papers. But we believe that Contract Management is fundamentally about managing value, and the two key elements of that are opportunity and risk. Opportunity relates to the additional benefits and value that good Contract Management can obtain from the supplier, over and above what is specified in the contract. Risk relates to those issues that can arise if you don t get what is specified in the contract - or indeed, you do get that but other circumstances mean that risk emerges, perhaps from external factors. Risk includes commercial risks, risk of supplier failure, of non-delivery, quality issues and so on, reputational risk caused by the supplier, or fundamental risk to the customer s business. We will explore these and more in a subsequent paper. Effective Contract Management will address both opportunity and risk. It is often easier to find examples of risk to use in the business case, but in most major contracts, there will be elements of opportunity as well. However, it is often difficult to translate both risk and opportunity into hard business case numbers - that is one of the reasons why Contract Management often isn t given the priority it deserves. That means we do have to work hard in the business case to translate possibilities into quantified numbers, which requires some use of probability and risk assessments - more on that in future papers too. But stories have their place too. If you know you will need to write a business case anytime in the future, it is worth storing up the war stories of what poor Contract Management has cost the organisation ( that supplier going bust and failing to deliver meant we lost a major customer last year ) or indeed where benefits have arisen ( our supplier came up with the idea of new type of packing case that saved us 75K a year ). Costs Perhaps using the same headings we described in the what are you going to do section, this is where the costs need to be laid out. Whilst aiming for a good level of accuracy, at this stage there is likely to be some doubt about exact amounts - for instance, if the programme involves new tools or software, you may not have final costs at his stage. But you need to have enough certainty so that you are not later embarrassed - no-one wants to come back to the investment committee for more cash if the first estimate was too low! As well as potentially including costs for tools such as a Contract Management system or database, one-off costs may relate to people (contractor / consultant support), or training and development. Then there may be ongoing costs which need to be highlighted, including again human resources or technology. Programme plan Whilst the earlier section should have explained the proposed activities, a more detailed project / programme plan can be useful and adds to the credibility of the business case. That should include timings, dependencies, key deliverables and checkpoints. Governance of the programme may also be included; would it be useful to have a steering group, programme board or similar? That can be valuable, particularly as the implementation is likely to include stakeholders beyond the procurement function. Getting their buy-in is vital, so senior level involvement as you develop Contract Management capability and performance can be very helpful. Final thoughts Contract Management offers major opportunities for most organisations to improve value and performance. But if procurement leaders don t seize the opportunity, it is unlikely that anyone else will look for systemic improvement and high 5
performance across the organisation. Building a business case is not easy because many of the benefits are hard to quantify, but by focusing on risk and opportunity, and using both hard numbers (on a probabilistic / risk basis) and war stories, a convincing case can be made for investment in resource to address the need. That investment may be in people, training, tools and technology, so it is vital to lay out clearly in a business case what you are going to do, how you will do it, and what resources you need. About Peter Smith Peter Smith Managing Editor, Spend Matters UK / Europe Peter has 25 years experience in procurement and supply chain as a manager, procurement director, consultant, analyst and writer. He edits Spend Matters UK / Europe, and with Jason Busch, the founder of Spend Matters in the US, has developed it into a leading web-based resource for procurement and industry professionals. Peter is also Managing Director of Procurement Excellence Ltd, a leading specialist consulting firm, and is recognised as one of the UK s leading experts in public and private sector procurement performance improvement. Peter has an MA in Mathematics from Cambridge University, is a Fellow and was 2003 President of the Chartered Institute of Purchasing and Supply, and his first (co-authored) book, Buying Professional Services, was published by the Economist Books in June 2010. Before moving into consultancy, he was Procurement Director for the NatWest Group, the Department of Social Security (the DSS), and the Dun & Bradstreet Corporation, and held senior positions in the Mars Group. Spend Matters is thankful for the support of BravoSolution, our sponsor for this paper. Spend Matters sponsors have no additional opportunity to influence the content or research of Spend Matters material or products relative to other software or services providers. About BravoSolution Supply management executives are now, more than ever, under pressure to deliver more savings, develop and manage strategic supplier relationships, accelerate procurement cycles, and maintain process excellence. Confronted with these diverse yet consistent challenges, CPOs and sourcing professionals must seek tailored solutions that deliver rapid ROI to their business. BravoSolution offers leading software and services to fit the needs of today s sophisticated supply management organisations. Our services organisation, one of the world s largest teams of professionals dedicated exclusively to sourcing and procurement consulting, delivers lean, targeted services to support strategic sourcing and procurement initiatives. Our industry leading software toolkit supports the full supply management lifecycle across a myriad of industries, geographies and business models. As of today, over 50,000 procurement professionals in 60 different countries are benefiting from BravoSolution s technology and services, unlocking tangible benefits including increased process efficiency, decision support, cost reduction, improved process governance, greater quality relationships with vendors and the ability to share, understand and act upon the wealth of sourcing-related data held within their organisation. 6