Contract management as a service
Research shows that 62 percent of the companies surveyed handle more than 100 contracts per month and 26 percent even handle more than 500 (Ultria CLM Survey, 2019). Of this, 12 to 15 percent cannot be traced or registered. When organizations fail to comply with the agreements laid down in contracts, or fail to comply with them sufficiently by suppliers, this can lead to uncontrollable risks. If you as an organization want to set up contract management properly, this cannot be solved immediately by just appointing a contract manager. In this insight you can read about the importance of contract management and which parts of contract management you can outsource as an organization.
A critical success factor
Contract management is the business process that systematically and efficiently manages contracts and ensures that all agreed rights and obligations are met in a predictable and verifiable manner, to the satisfaction of all stakeholders. Supply Value has been researching the trends within procurement for many years, where contract management is consistently in the top-5 and even came second in the 2020 survey. This means that there are still organizations that are not yet able to fully utilize their contracts. More and more organizations are convinced that good contract management is a critical success factor for the continuity and realization of objectives of an organization. Legislation also forces organizations to organize the total contract management process transparently, verifiably and reliably. The process starts with the first contact with the customer and ends only after a contract has been terminated and evaluated. The process involves many different stakeholders with diverse interests, which can make contract management complex. While one stakeholder primarily focuses on quality, the other focuses on finances. An integrated vision is often lacking, with the result that agreements in the contract are not or only poorly translated into their meaning for the various stakeholders.
In below procurement model Supply Value shows that contract management is part of the primary purchasing process.
As a service
When an organization has a challenge with the optimal use of contracts, it can be valuable to outsource contract management in whole or in part. If you as an organization are in doubt about this, the contract management maturity quick scan of Supply Value help with this. The lower an organization scores on maturity, the greater the chance that there are still sufficient opportunities for improvement to get more out of contract management. In that case, contract management as a service is an interesting option. Depending on maturity, an organization can determine which of the adjacent level(s) will be outsourced.
Before you can focus on contract management and the development of the contract, contact management must be in order. Contract management is keeping contract data up-to-date and monitoring contract management expiration dates. If the contract data is not yet up-to-date, it is important to map out the contracts first. Supply Value's contract analysis tool provides insight into how expenses, contracts and the various suppliers are spread across the organization. These results are made visible in a dashboard. This insight also makes it clear which departments have concluded which contracts and who the contract owners are.
If an organization does not yet have tooling to monitor contract data and signal expiration dates, it is advisable to purchase a contract management tool. Gaining insight into contracts is the first step in professionalizing contract management.
After contract management, you can move on to managing the contracts. As an organization you can choose to outsource this as well. Depending on the importance of suppliers to your organization, contractual agreements made with suppliers are proactively monitored for compliance. The terms and conditions of the contracts are also examined in order to be able to use them optimally. Expiring contracts can be re-tendered/purchased. Good contract management can provide benefits in the field of cost control, quality improvement, innovation promotion and optimal collaboration.
If you as an organization choose to outsource contract management for an indefinite period of time and thus opt for complete unburdening, the management of suppliers is also discussed. We look at the organizational objectives and how the suppliers can contribute to this. The current supplier base is managed. This means making the right choice for suppliers, choosing the right form of cooperation and managing suppliers after the choices have been made. This involves optimizing performance and improving processes to maximize value from suppliers to the organization.
To outsource or not?
The choice of whether or not to outsource part or all of the contract management within your organization has a number of advantages and disadvantages. It is up to the organization itself to weigh up these pros and cons.
Benefits of contract management as a service
Outsourcing contract management has a number of advantages, starting with the elimination of time constraints. The organization can focus on its core business and deploy its own staff for this. In addition, specialized personnel are not always available within an organization. Furthermore, it can be expected that when an organization chooses to outsource contract management, a higher quality is delivered in a shorter time. The organization also experiences hands-on best practices, which can perhaps be applied at a later stage.
Disadvantages of contract management as a service
Outsourcing contract management also has a number of disadvantages. As an organization you increase dependence because you have less insight into the execution of the work. Specific knowledge and skills that have been built up in the past can also be (partially) lost. If after some time you unexpectedly want to carry out contract management yourself again, it will cost time and money to be able to present at a desired level.
How do we make a good decision?
Once it is clear what the pros and cons are, it is important to weigh them up. In the choice it can help to use the four steps below.
- Determining core activities; Determining whether a particular activity is a core activity. A core activity distinguishes the organization and is therefore not outsourced.
- Determine the strategic considerations; Think of the extent to which the organization wants to be dependent on other suppliers, the control you want to retain over the quality or whether the loss of knowledge and skills in your own organization is acceptable.
- Cost estimate; The costs of the outsourcing are determined. Also takes closing costs and monitoring costs into account. This includes possible surrender of current contracts, costs for selecting suppliers and the costs incurred to evaluate and improve performance.
- Cost-benefit analysis; organizations only outsource if the costs of outsourcing are lower than the costs of (continuing to) perform an activity themselves. Please note that lower costs must outweigh increased dependence on suppliers, reduced control and the loss of knowledge & skills.