OBLIGATION MANAGEMENT

OBLIGATION MANAGEMENT TRACK & TRACE: CONTRACTUAL OBLIGATIONS Better Visibility. Better Outcomes RAMESH SOMASUNDARAM DIRECTOR, IT VENDOR MANAGEMENT SERVICES MARCH 2012 E N E R G I C A

Governance Matter > Perfecting Partnership > Delivering Value OBLIGATION TRACKING & REPORTING BETTER VISIBILITY. BETTER OUTCOMES. Abstract In today s world of IT Outsourcing involves complex contract, managing multiple service providers for different type of IT services. Considering the current economic climatic conditions, contract performance, compliance and risk, client organizations are trying to monitor contract performance and improvise their extended enterprise by deploying any of the following governance process controls. Contract Compliance Management Program/Contract Compliance Roadmap Third Party Contract Compliance Assessment/Audits/Diagnostic Services Vendor Management Program (VMO) / VMO Governance Roadmap Obligation Tracking & Reporting This paper highlights the key issues and challenges around contract obligation management, the need for a comprehensive process mechanism to manage the obligations and move towards a maturity of building an obligation tracking and reporting tool for an effective relationship management and contact governance. Contractual Obligations A Contractual Obligation is a stated and formal commitment as agreed by both the client and the service provider organization in a binding agreement (Contract). Obligation Management is the ability of a client organization to manage its obligations throughout the contract lifecycle. This process ensures that milestones, deliverables are being met and the value realizations are achieved as expected. Obligation Traceability is the ability of client organization to trace and monitor the policies, processes, procedures, contractual clauses, and stakeholders who are involved and May/or/ may not be accountable for the delivery of obligations as a part of Sourcing Management & Governance. Obligation Traceability must be driven down from executive level policy decisions to the exact clause or clauses that are put in place (MSA, SOW s) to ensure obligations are met. Obligation Management plays a vital role in not only in the IT Sourcing Management but also an effective Governance tool to get aligned your service provider(s) on track. Obligation Tracking and Reporting is one of the key assessment factors to ensure that the vendors are adhering to contractual obligations and the objectives of outsourcing are achieved as planned and to have a solid handle on: Contractual obligations Compliance Performance measures Risk management and Governance Copyright 2012 Energica Advisory Services Private Limited (Energica ASPL). All Rights Reserved. Page 2

Obligation Management Challenges Contract management process ensures contractual obligations and milestones are met, services are delivered efficiently by the service providers, commercial risks are identified and managed effectively throughout the contract life cycle. The following are the most common obligation management challenges from both client and service provider organizations. The Sourcing Management & Governance (VMO) Process maturity varies from client to client and provides a greater amount of opportunity for improvisation in managing the contractual obligations and milestones from a governance standpoint.» Contract obligations can include anything from service level agreements and delivery times to customer service targets and can be directly linked to service credits, penalties for nonperformance; or even bonus payments for achieving targets. The Sourcing Management Leadership teams (CPO/SVM/CMO/PMO/VMO) from the client organizations are focused on the day today operational aspects missing out the ability to track the entire obligations of the contract.» A contract obligation may be identified by a legal specialist or a contract manager, but in most cases the responsibility for ensuring on-time delivery or vendor invoice accuracy is not that of the contract manager, but of other business colleagues/or/stakeholders who may/or/ may not involved in sourcing management. Tracking down the obligations is a key challenge. Complexity of the contracts and the details buried in various documents such as MSA, SOW etc., don t lend to an effective tracking.» Extraction and Interpretation of the obligations from contract language (Legal, Business Terms) into clearly defined commitments, deliverables and easily accessible reference material in the form of a Tracker is a major challenge. Copyright 2012 Energica Advisory Services Private Limited (Energica ASPL). All Rights Reserved. Page 3

Establishing Obligation Traceability Matrix to your Contract(s) is very important.» Analogous to Software System, where Requirements Management and Traceability are necessary to connect a system requirement to a software module, Obligation Management and Traceability are necessary for commercial businesses to track obligation fulfillment throughout contract life cycle to the specific costs. The stakeholders from both client and Service Provider organizations are responsible for meeting the obligations. Obligation Traceability Matrix minimizes the value leakages from the Contract.» Obligation Traceability reveals about the value leakage in-terms of risk, cost control, revenue maximization and contract performance. Need for Contract Governance The absence /or/ lack of implementing a control measure to manage the contract obligations will lead to: Poor Understanding of the contract by the implementation team (both client and SP team). Client and Service provider will have their own perspective and interpretations of the contract (lack of unified View of the contract), contractual obligations, commitments and deliverables. Broken commitments, vendor non-performance issues, terminations, disputes, compliance issues, risks, unnecessary cost implications (overspending, penalties, cost avoidance etc) and failure to meet the outsourcing business case objectives. Ineffective change management practices lead to poor contract governance, performance and alignment expectations. Failure to implement such a governance tool will lead to frequent contract changes, force the client to renegotiations within a short span of 2-3 years or within the first contract term expiration. (e.g. unrealistic client expectations, pricing etc.). Hence it is very vital for the client organization to manage contract governance, service delivery management and vendor relationships during the contract life cycle. It would be more appropriate to build a contract governance tool for Obligation Tracking and Reporting for effective management of their outsourcing contracts, vendor relationships and value realization. Obligation Tracking and Reporting: Energica has exclusively designed a comprehensive framework (Track &Trace framework) for obligation management. Leveraging this framework and building an appropriate tool for Obligation Tracking and Reporting will ensure the client organizations a better visibility and yield better outcomes throughout the contract lifecycle. An effective Obligation Management program built using Energica Track &Trace framework will provide a leading edge from the governance standpoint to both client and service provider organizations. Building an Obligation Tracker will provide you deep insights about the obligations (both financial and non-financial), service levels, critical milestones and commitments that need to be met by both the Client and Service Provider(s). Energica Track & Trace framework will facilitate the client organization in building en effective obligation management tracking tool. Define/Develop/Standardize the process for Obligation Management covering all domains (i.e. F&A, Regulatory, BCP/DR, Governance, Reporting etc...) Copyright 2012 Energica Advisory Services Private Limited (Energica ASPL). All Rights Reserved. Page 4

» Client organization have to establish a comprehensive obligation management process in line with the current policies, processes and procedures by appropriately integrating the key stakeholders from CPO/CMO/SVM/VMO/PMO. Obligation Management (Extracting/Tracking/Reporting) processes and business rules should be compiled as per the agreement/or/ contract in line with your Organization policies covering HR, CPO, SVM, IT Security etc» Leverage your existing contract management System/tools/repository to Extract contract terms/clauses. Obligations to be extracted from MSA, SOW, Appendix, Schedules with appropriate clauses.» Interpretation of the obligations from contract language (Legal, Business Terms) as expected by the client into clearly defined commitments, service levels, milestones and deliverables.» A Summary Snapshot of Extracted and Interpreted Obligations marked with Obligation details like ID, Obligation type, severity, remarks with status and other tracking parameters. Devise Performance metrics for Obligations Management Generate Obligation Management Report. This Report should list out all the obligations details with appropriate status, risk and mitigation plan for any obligations which are marked with RISK category. Energica Track & Trace Framework for Contract Governance Copyright 2012 Energica Advisory Services Private Limited (Energica ASPL). All Rights Reserved. Page 5

Ensure that Obligation Management Compliance Reporting as a part of your Monthly Governance Review with your service provider(s). Benefits of Obligation Tracking and Reporting Effective contract management process and appropriate governance tools will provide greater visibility and control over the contract process by not only providing a more logical environment to manage contract documents, performance and milestone data, but also an environment where contract obligations can be easily tracked and adhered to. Building Tools for Obligations Management will help Sourcing Management Governance stakeholders (SVM/VMO/CMO/CPO/PMO), who are then automatically alerted when a relevant obligation is due. Obligations tracking and reporting tool can be very much process-driven once the Obligation Management processes have been established with the client organizations using Track and Trace framework. Areas of Impact End-to-End Visibility Compliance with policies and regulatory guidelines Risk Mitigation Maximize Contract Value: Cost optimization & Revenue Recovery Enduring Relationship Effective Governance & Contract Performance Management Best practice procedures Benefits» Automating the Obligation Tracking Process improves end-to-end visibility, while enabling businesses to speed approval cycles and reduce vendor performance risks.» Greater visibility into contract processes significantly reduces the risk and exposure that complex agreements typically introduce.» Contracts milestones and obligations managed more effectively» Mitigate sourcing management, governance and contract risks» Address the risk beyond contractual obligations (To avoid financial, legal or reputation risks)» Automated alerts linked to expirations, renewals, and key events.» Improved Profits by eliminating waste or excess spending.» To identify potential cost recoveries» Improves contract structuring for sustained cost reduction.» Improves procurement and payment processes.» Elimination of auto renewing contracts» Avoidance of Penalties, litigation, disputes.» Improve relationships with service providers» Accommodating and monitoring the changes in a transparent and collaborative manner.» Minimizing the unexpected surprises from both sides.» Faster Negotiation Cycles» Drives additional value & benefits from the vendor relationship.» Ensures that the vendors comply with contract terms & conditions» Ensures that performance expectations are achieved» Fulfillment of Outsourcing objectives» KPIs can be linked to contract obligations and these should form part of a comprehensive programme of Contract Obligation management.» Identify opportunities for improvement on Contractual Obligations, expectation alignment and fulfillment.» Facilitates a platform for discussion between Client and SP on conflicting obligations.» Improvising contract performance against today s market and industry standards Copyright 2012 Energica Advisory Services Private Limited (Energica ASPL). All Rights Reserved. Page 6

Way Forward Obligation Management provides you an effective governance mechanism with deep insights, knowledge and greater degree of managing the controls over the relationship partners in order to meet your strategic sourcing objectives on a periodical manner. An effective Obligation Management Program built using the Energica Track &Trace framework will provide a leading edge to both client and service provider organization. Building an appropriate tool for Obligation Tracking and Reporting is a vital need. Automation of Obligation Tracking and Reporting is the optimal strategy for managing the contract obligations. However automation cannot be achieved without implementing comprehensive VMO governance processes.» Define and agree on monitoring mechanism for each of the contractual provision. An effective obligation management process to be defined in line with the current policies, processes and procedures by appropriately tying key stakeholders from CPO/CMO/SVM/VMO/PMO.» Workflow driven process ensure an automated alerts, exception reports to address upcoming obligations for active contracts in the repository. It eliminates human error and ensures long-term compliance tracking regardless of stakeholder focus.» With an automated system, contract owners and key stakeholders no longer need to manually track the key obligations and milestones.» Managing and Automating the contract obligation tracking process saves time and adds value to each stages of a contract s lifecycle. In addition, explicit support and commitment from the top management is necessary to enforce these control measures & processes at all levels to ensure maximum compliance to achieve the desired outcomes and to ensure a smooth & successful outsourcing experience. Making Obligation Tracking & Reporting reviews as a part of your VMO Governance Processes helps both the client and SP organization to move toward a program of continual contract compliance monitoring, redefining vendor account management strategy, resulting an effective vendor partnership and to achieve the core business objectives in the long run. Energica Track & Trace VT Governance Matter. Perfecting Partnership. Delivering Value. How Energica can help? Energica offers IT Vendor Management & Governance Advisory Services to the outsourcing clients across the globe. Energica team possesses very rich & practical experiences across sourcing and vendor management value chain. Energica can help the client organization to achieve organizational goals through objective and experience advice with a unique managed services delivery model from India in a cost effective manner. Copyright 2012 Energica Advisory Services Private Limited (Energica ASPL). All Rights Reserved. Page 7

Energica s Track & Trace Framework helps client s organization to implement an effective Obligation Management program. Each outsourcing contract, sourcing environment, services, geography and service providers for a client organization will vary from client to client. The service is offered at a fixed fee that varies based upon project scope. Energica offers and executes the following VMO Contract Management Advisory Services* to our clients across the globe. Vendor Contract Compliance Audit /Compliance Roadmap Obligation Management o Contract Obligation Tracking Process Assessment & Improvisation. Contract Governance & Admin Services. Contract Management process assessment and Improvisation IT Sourcing Management & Governance Tool/Product Evaluation (Software) For further details, Please Contact Ramesh Somasundaram, Energica ASPL, at +91 99620.55678 or write to ramesh.somasundaram@energica-global.com. For more information, please visit www.energica-global.com *NOTE: All contract documents are examined with discretion and professionalism under a confidential disclosure agreement. Energica ASPL encourages you to seek the advice of counsel for any legal matters concerning your contract documents. Energica ASPL VMO advisors are not legal attorneys. Any advice provided to you relates to market and industry standards and should not be construed as legal advice. EASPLVMO032012004 Copyright 2012. Energica ASPL. The information contained herein has been collated from sources believed to be reliable. Energica ASPL disclaims all warranties as to the accuracy, completeness or adequacy of such information. Energica ASPL shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The opinions expressed herein are subject to change without notice. Reproduction of this publication in any form without prior written permission from Energica ASPL is forbidden. Copyright 2012 Energica Advisory Services Private Limited (Energica ASPL). All Rights Reserved. Page 8