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 – often 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:
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 incorporate scope for 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 making it hard to hold meaningful review meetings. Be crystal clear about the service you want and the metrics you will use to assess performance. Make sure you specify 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 contract owners and users
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 is not responsible for managing 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 contract users. This will ensure you have the data required to be able to collectively 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. By running a contract as a project, it allows the individual and organisation to keep on top of it, driving activity and delivering 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 require strong relationships with suppliers. These can be developed by having clear and agreed performance reviews set up as part of a routine. If contracts require the supplier to provide performance data as part of a planned review process, be certain to obtain the data in advance and to review it thoroughly. This ensures suppliers understand that performance is being actively monitored and allows them to be proactively involved in the process. 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 need and expect the supplier to improve. You’ll raise it with them, and they will commit to rectify the problem and to get better. Of course, at this stage, you may still be building the initial relationship, 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 possibly 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 understand and use the contract terms allowing for 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 Jonathan Elsmore-Wickens on 01865 340800.