In the last blog we highlighted the core values of contracts, their lifecycle and the value they bring to the organisation. We also covered the first three building blocks for consideration. Here we conclude the top ten building blocks that create best in class contracts.
4. Residual risk
A lack of flexibility and a failure by the legal or contracting teams to understand value-in-use often translates to lawyers and contract managers thinking that their role is to eliminate all risk. Of course this is not their role as eliminating all risk destroys value. The residual risk that remains after the essential components of a risk identification process have been followed (in order to help lawyers and contract managers understand, reduce and manage risk) must be converted into value and captured in the contract through collaboration and innovation.
5. Cost savings and revenue improvement
Improved processes and workflows reduce internal costs and increase the understanding of an organisation’s revenue streams and supplier spend by the legal function. A better understanding allows lawyers and contract managers to identify and minimise the inevitable revenue and spend leakage that occurs during the negotiation and post-award phases of the contract lifecycle, thereby significantly increasing value.
6. Look beyond pre-award in the contract lifecycle
Value creation opportunities exist in each stage of the contract lifecycle. Organisations need to place more effort on post-award contract management to reduce revenue and spend leakage, both of which erode value. It is not enough to only acknowledge and understand where and how revenue and spend leakage occurs, but to provide capacity and resourcing to better manage contracts post-award. The leakage that is subsequently reduced and prevented more than covers the additional costs associated with post-award capacity and resources.
7. Efficiency and quality
Efficiency and quality gains can be generated by:
• reducing cycle times for the contract negotiation process and subsequent approvals;
• managing work load distribution and time-allocation based upon type, complexity and value of contracts;
• maximising operational efficiencies through a streamlined contract review process; and
• ensuring accurate data and audit trails of transactions.
8. Systems and information management
Organisations that are dedicated to maximising value in their contracts will need to design and implement technology solutions to meet their specific requirements, moving away from standalone contract repositories to end-to-end platforms that manage the full lifecycle of contracts. As mentioned earlier, value creation lies in each stage of the contract lifecycle; using technology that assists legal functions in managing the contract lifecycle is essential, particularly in organisations that are serious about continuous improvement and having access to data that can support the tracking of risk, efficiencies, quality and performance.
Organisations that have implemented appropriate contract lifecycle management technology now have access to data enabling them to create metrics that facilitate the measuring of contract value, risk and contracts/legal function performance, in relation to their roles in the lifecycle of the contract.
9. Value co-creation and co-production
An environment needs to be created where there is an obligation to deliver at a level where the internal customer (sales or procurement) is partly responsible for the service delivery. The customer’s/supplier’s value proposition in the value co-production of the contract is the responsibility of both the contracts/legal function and the internal customer.
10. Capacity
The contract and legal functions must reconcile these competing interests and tensions (highlighted above) within the businesses in order to achieve the desired outcome. Failure to achieve this reconciliation will result in a loss of value for the contracting parties.
For an organisation to extract value from its contracts, it must have sufficient contracting resources to provide support to the organisation; the legal function needs to structure capacity to deliver effective contract lifecycle management. For this to be effective, there must be an understanding by legal management of which component of the function’s costs deliver how much value to the internal customer, and the degree of importance of all resources within the function. In essence, the legal function must comprise a body of skills and knowledge adequate to support business needs, which is responsive to shifting demand and requirements.
Conclusion
In conclusion, each of the 10 building blocks of value-added contracting, underpinned by best-in-class contract lifecycle management, can be broadly allocated to three pillars, namely people, processes and technology. This encompasses a total solution approach to contract lifecycle management and value extraction, where best-in-class performance is achieved by excelling in all three of these areas.
If an organisation ignores one of these pillars, or doesn’t give each pillar adequate attention, it will stagnate into a ‘business-as-usual’ status quo, where it is blissfully unaware of the value it is leaking during the contracting process. This loss of value will lead to frustrated suppliers and customers who will not feel that they are customers or suppliers of choice, resulting in reduced collaboration, innovation and value creation for the organisation and their clients and suppliers. In the current challenging and highly competitive business environment, organisations that recognise the latent value in their contracts and embrace holistic contract lifecycle management based on these three pillars, are the organisations that will show sustained, profitable future growth.
