Contracts are the lifeblood of most organisations, with successful delivery by suppliers critical to an organisation’s success. Lots of effort (hopefully) goes into the initial contract setup, but few organisations manage the ensuing contracts assiduously – leaving suppliers in the driving seat.
Effective, and regular management of contracts is critical to achieving best value. At Lifecycle, we spend much of our time managing contracts on behalf of clients. When the contract has been set up correctly, this is achievable. But if it hasn’t, the process is both difficult and time consuming – but not impossible.
Whenever we set up a contract from scratch, we follow a clear seven-step process that we know delivers best value from contract spend:
1. Assume change will happen. Build in change mechanics to original contract.
At the outset, everyone hopes the contract will work perfectly and deliver what is required. But, unless they are very short-term contracts, it’s highly likely things will change. Make certain you understand what forms of change may be required and make certain the contract includes mechanisms for change – from changing volumes and scope to early termination and metrics. Unless you build change into the contract, you’ll be at the supplier’s mercy when the need to change arises.
2. Assume performance will require management. Build clear metrics into original contract.
So many contracts fail to be absolutely explicit about how performance will be measured. If you haven’t been explicit, it’s hard to determine whether the supplier has performed adequately which gives them the edge during discussions about performance. Be crystal clear about the metrics you will use, even specifying the precise content and layout of data the supplier needs to provide so there is no possibility for confusion or disagreement.
3. Make the terms that matter visible online to all stakeholders
Contracts tend to live in filing cabinets with the terms rarely reviewed. It means that contract users can be blind to the terms, particularly if the person responsible for setting up the contract no longer manages it. Make certain all the key terms, and KPIs/SLAs and other metrics, are clearly laid out in an online contract record. And, most important, make this easily accessible by all stakeholders. Only then will you collectively be able to hold the supplier to account.
4. Actively manage the contract as a project throughout its life
Contracts are not historical documents. They must be thought of as projects – with a beginning, a middle and an end. Make certain that every key date and task is stored against the online contract record and that the appropriate people are reminded to perform the task. As a minimum, regular reviews of performance should be scheduled, along with any key dates such as notice periods, extension options or change points. Only running a contract as a project allows the organisation to keep on top of it, driving maximum value.
5. Regularly collect, assess and review performance metrics
It’s easy to get caught in the management by problem trap, only actively reviewing performance if there appear to be clear issues. Well managed contracts review performance as part of a routine. If contracts require the supplier to provide performance data, be certain to collect and regularly and assiduously review it. This routine ensures suppliers understand that performance is being actively monitored and makes it much more likely the supplier performs adequately. Of course, if it is an output specification, you may also need to collect data and feedback from internal stakeholders.
6. Address performance issues immediately, documenting them in line with the Ts and Cs
When performance suffers, you’ll want the supplier to improve. You’ll raise it with them, and they will promise to get better. Of course, at this stage, everybody is trying to keep things friendly. But it is essential to document any performance issues in line with the contract. If it requires Performance Notices to be sent for instance, send them. Only then will you be on the front foot, able to exercise the power of the contract to deliver rebates, terminate the contract or even ask another supplier to perform the work, chargeable to the original supplier.
7. Address, and document, required change early
Performance aside, one of the main reasons contracts fail to deliver the value they should is a failure to address the need for change when it arises. The golden rule is to start a dialogue about change early and to use the contract terms about change that a good contract includes. If you see change ahead, or the opportunity for change, raise it with suppliers early.
For further information on how Lifecycle can deliver reduced costs and improved value through effective contract management, call James Drury on 01865 340800.