Empower Your Purchasing Process with Sales Lifecycle Management for Purchasing

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welcome to the podcast on the sips contract management cycle i'm danielle goodrich knowledge product manager at sips and joining me today we have colin linton hi colin hi danielle great to have you here today and join us contract management is such an important topic for our members so great to have you here with your wealth of experience just to give some context to colin he sips qualified for 25 years and a fellow of the institute for 10 years and he's been involved with sips qualifications for many years now and involved with a number of other universities and awarding bodies and for the last three years he's been involved in research into a number of different areas including negotiation and contract management so we're in safe hands today in today's podcast we'll focus on what contract management is why it's important and a more in-depth look at the sips contract management cycle phases and their application so colin will now take you through some slides for about 10 minutes or so and then we'll have a little chat at the end and and i can ask colin some questions so colin over to you okay great thank you danielle as you know contract management is a significant area of interest to me during my career i've been involved in the management of numerous contracts myself and over the last 12 years or so i've delivered a lot of training workshops on contract management related topics and as you mentioned it's been a specific research uh interest of mine over the last uh five years and some of the results the data that i've gathered have been really insightful so what is it well conceptually of course contract management isn't actually complex it is after all about making sure that what is in the contract gets delivered to the right standards so that sounds simple but there's a lot more to it than that it is about maximizing value throughout the term of the contract and it does have a very strong focus on managing risks over the entirety of the contracts duration and sometimes maybe even beyond contract management is especially important today because so many organizations are critically dependent on suppliers if we stop and think for a moment and consider what would happen to our organization if we had no suppliers the answer for many people is that our businesses would not be able to function so much is now outsourced to third-party suppliers and so much so that i believe that contract management really should be regarded by most organizations as a core competency and of course inherent within that they should be looking at ensuring that their contract management staff have the required skills which we talk about later here's the sips contract management cycle where many organizations go wrong is that the process of contract management begins far too late and in some cases is actually almost an afterthought contract management is really where value from the contract can be maximized and if we don't take advantage of that and if we don't manage the contract often what happens is that we simply allow value to walk away because we're not managing the contract to ensure that value is delivered so at the very very start of the process at the time when there is a need identified within the organization we really should be starting to think about what we need to have in place for the contract management phase we need to think about the contract think about the mechanisms and the levers and the terms that need to be included within the contract right at the very beginning of the process the sip cycle outlines a dozen separate activities these are all really really important but they're not all directly relevant to every single type of contract we talk more about this um in a moment to simplify things we can see that within the cycle these 12 activities are broken down into four broad distinct phases for the purposes of this short presentation i'll be referring to these as pre-award award management and or development and then the final phase is the end of contract life cycle phase so phase one don't underestimate the importance of this phase it should start and often does start many many months before the contract award itself and sometimes could be even a year or more in the planning this is the point pre-contract award at which our value-add potential is the greatest this is when we need to make all of the key decisions to make sure that the contract is set up correctly we have maximum flexibility and the most leverage at this point but this is when we need to be undertaking our planning think about engaging with stakeholders find out what their expectations and requirements are from the contract over its entire term we need to think about creating the required documentation things like the specification performance metrics the terms and conditions remember that contracts are legally binding so they come with responsibilities and liabilities and rights for both parties so be careful what you wish for the general principle is that what is within the contract and the entirety of the contractual documentation is what will be delivered so it's our responsibility to ensure that this documentation is correct and valid and clearly articulated so all of this will require very very careful planning and remember that we must adopt the right approach because not all contracts carry the same level of importance so we're still on phase one we need to think about the right approach on the left you will see this supply positioning matrix this is um based on krajic's work and for those of you who have studied uh sips you will be very very familiar with this so this lead leaves requires very little introduction so the concept uh that krajic applied is that we have these variables on contracts relating to value and risk this will tell us the level of importance based on those two characteristics on the right we have a newer matrix which is contract leadership matrix which is based on my own research and so therefore reflects uh more current um best practice i'm not suggesting in any way that it's far superior or even equivalent to um to crowd projects great work but nevertheless the two can sit very comfortably uh together contract leadership is based on different variables that looks at the level of formalization and the level of proactive engagement in a contract and it's a hierarch hierarchy so all contracts need to have an appropriate level of administration as a minimum so for example all contracts need to be recorded on the organization's contract database others in addition to this administration will also require some kind of more frequent maintenance for example maybe checking with stakeholders that the supplier is performing to an acceptable standard and may be checking that the supplier has renewed annual insurances for more important contracts we have to have administration of maintenance but we also need a greater level of formalization maybe we're into the realms of having documented performance reviews on a regular basis and we will also require more proactive engagement with key stakeholders this is what we would traditionally regard as contract management however this is where it often ends but there will be some contracts that require a lot more than this it's really interesting that in procurement we use the term management a lot we talk about contract management category management supplier management supply chain management but really on these most important contracts we need to go beyond management and we need to be able to demonstrate leadership of the contract high levels of formalization and the highest levels of proactive engagement with stakeholders are necessary on these really important contracts and of course it follows that the staff who are involved in managing and leading on these contracts they need to have a high level of both technical and soft skills as well so that they're fully effective so this is all about setting the groundwork we've thought about how important the contract is and the more important the contract is the greater the levels of formalization and the engagements with stakeholders so now in phase two this is when the formalities that we've already set in place during phase one begin to crystallize the contract commences but be careful because there may be some legally binding commitments made before we get to this point at phase two it's all about thinking do we need to include transition mobilization which we would do on more important contracts we need to activate the contractual levers and mechanisms that we incorporated into all of the paperwork and we thought about in phase one if necessary we need to activate and schedule our program of review meetings and similarly we need to make sure that our risk management processes have commenced indeed if they hadn't commenced already so for phase three it's important to say here that not all contracts will require proactive management and certainly not all will require supplier development and supplier relationship management this goes back to our two matrices that we looked at as part of phase one okay so in our more important contracts then certainly we'd be thinking about supplier relationship management and in the most important of looking to work with suppliers in order to to develop them decisions about all of these things do need to be made at the beginning and in consultation with stakeholders it's also worth remembering that circumstances will often change and the fact at the beginning of a contract the risk profile was relatively low and the perceived importance of the contract could be low there could be events that happen both internally and externally that could have a significant impact on that risk profile so throughout the term there is likely to be a need for us to undertake a review to make sure that we're adopting the right approach and of course in many contracts there will be a need for that contract to change so we need to have a process for managing change and contract variations and of course in many uh situations or many contracts there will be a need to deal with and resolve conflict which generally when it arises we can resolve using negotiation phase four this will happen uh at the very end and all contracts will come to an end we hope that they will come to a satisfactory conclusion and they will reach their natural conclusion point on achieving the deliveries uh the outcomes required within the contract remember though that if there is an ongoing requirement for the goods and services that are being delivered by the supply within the contract and therefore we have a an ongoing or continuing need for these services or goods then we must make sure that within the life cycle we allow enough time for us to retender if that's our chosen route or to allow enough time to renegotiate terms for contract extension with the existing supplier there are other things that we need to think about and some of this may already have been considered within phase one and would have been built into the contract to make the end of uh contract life easier so for instance we need to consider whether we need to make arrangements if the supplier has possession of some of our assets for example our equipment or data importantly we also need to consider whether the supplier will continue to have any responsibilities or liabilities beyond the end of the contract this is a common misconception that because the contract ended at the end of say last month that that's the end of the need for that contract the end of the need for contract management well we need to think about whether the supplier may have continuing ongoing liabilities relating to work that they have carried out so for example they may have concluded their work a month ago but they may very well have an ongoing liability for any issues arise any faults that arise as a consequence of that work maybe for a number of years after so in which case even though the contract has ended we still need to conduct some contract administration and maintenance and maybe even some management with that supplier and treat the contract as it as if it were still live until the supplier's liability has ended not all contracts um end so positively of course some will involve termination this might be through mutual agreement of all of the contracted parties maybe because the contract is no longer required or all parties have agreed that their contract has fulfilled the requirements and has just ended earlier than was expected often termination is due to contract failure um for example due to under performance this would of course be a last result we would attempt to resolve these issues with the supplier through other means usually through negotiation and but often where that cannot be resolved then termination is what we would um turn to now we need to bear in mind that there are of course legal implications once we start talking about contract termination so you need to be sure that you've referred to the terms and conditions and that you understand what the process was that was agreed within the terms and conditions to handle um terminations of what the process would be for contract termination for most people this will involve working very closely with colleagues in the legal team because of course termination is a legal process so you do need to take care and you will need to engage with other stakeholders particularly as i say colleagues from legal this has been a very quick run through of of the highlights i would just like to conclude by giving and reinforcing a few really really important messages probably first and foremost that there is a misconception that there is a direct correlation between the level of risk on a contract and the financial value of that contract this is a very dangerous misconception because the risks to the procurement organization could be really really significant even though the value of the contract um is relatively low so we do need to to take care and we do need to think very carefully about the characteristics of the contract and things that might happen that cause our organization an exposure as i say it could be disproportionately high relative to the value of the contract itself and don't underestimate the importance the value add from this phase one pre-contract award work it's really important that we set up contracts correctly and it's really important that we have all of the the right documentation in place because whilst it's never easy dealing with conflict situations with a supplier it's certainly a much easier discussion with them if we can present all of the documentation to which they agreed and on which the contract is based you do need to undertake this initial analysis so that you can make a correct valid decision about the correct contract management and relationship management approach it would be great to think that organizations have enough resources to proactively manage every single contract but in reality organizations don't have that luxury so it's really important to think about the importance of the contract to think about the value and the risk and then think about what levels of formalization and the amount of proactive stakeholder engagement should be deployed in managing that contract and finally if you are involved in contract management which many people are now in organizations many people have some kind of involvement within this life cycle whether it be inputting to define requirements or whether it be in managing at least elements of the of the supplier relationship you you do require a wide range of skills this is one of the challenges that organizations have encountered in terms of contract management and certainly people involved in the contract management cycle need to have a wide range of both harder technical skills and maybe an even wider range of soft skills it's also a mistake to think that um you're experienced maybe you've done some training in the past or maybe hold qualifications already and therefore you already hold uh all of the necessary characteristics and attributes required but times do change things do move on so all of us do need a refresh from time to time and particularly given the importance of contract management and that is a very quick run through um danielle and i'm conscious as uh ever of time this is a subject that i know a lot about and as you know it's very close to uh to my heart so i can kind of let passion get in the way and i can um speak uh for hours and hours but i do know that you have some questions so i'm proposing that i'll draw a stop there to the the formalities of the presentation if you like and i'll hand over to you great thank you colin and your passion's great in this area and i think that shines through and you've brought it to life and given some examples so i've just my first question is obviously contract management's been around for quite a while now so why do you think so many problems still arise with contracts yeah it's a it's a great question danielle and it has been around a long time i i can go back many years to when i was first involved we didn't really call it contract management then but the the concept was exactly the same and many organizations are still struggling to um to get to grips with it really um it's been interesting looking at my own research and a number of experienced contract managers that i've engaged with have made some interesting observations in recent years about how they feel that their organization has maybe moved too far into category management at the expense of contract management and it's thought provoking because category manager is really really important and i think there's definitely a place for both but we shouldn't lose sight of the fact that some contracts are so important it's not only about the bigger picture it is about no drilling down and and looking at the specifics of individual cases i i do think there is a case for for us perhaps to ponder and maybe question whether we've really learned from previous contract failures there's been numerous contract failures in recent years very high profile you know they're featured in the the media and it really is about taking lessons learned from those sometimes we pay lip service to that uh and really what we should do is we should really analyze we should really understand why these sometimes very very serious and tragic events have happened and then make sure that we make changes to processes and we re-skill people to to really learn from it uh and i i think sometimes some organizations just haven't grasped the fact that they are critically dependent on these suppliers you know their models have changed over the years where they've done less of the work in the house they've focused more on their their core they've pushed that out to suppliers but at the same time they haven't upskilled people within their workplace to have the skills necessary to to manage that so it's a combination of factors okay and i'm just looking at your conclusion slide there in terms of do not underestimate the importance of phase one the pre-award and i don't if you can just bring the contract management cycle up as we talk through this but yeah do you think organizations realized how important this first phase of the cycle really is because you put quite a lot of emphasis on this in your presentation um but do you really think that they grasp this yeah and it's an interesting uh observation at danielle and it's it's the same in a lot of the training that i deliver that the majority of the legwork is in phase one if we can get phase one dealt with correctly then in theory everything else that follows is straightforward uh and i i think to to answer your specific question certainly a lot of organizations don't fully appreciate the value that can be added by spending a bit more time dedicating a bit more resource to these early phases of planning scoping dealing with stakeholders getting the administration in place making sure that we've got the right relationship management approach and of course so much of all of the other things where we're looking at performance management thinking about payment and incentive in particular they need to be considered and decisions on those also need to be made at the beginning i mentioned in the presentation that it is all about leverage and if we put ourselves into a situation of i'm the procurement person and you're the supplier i know that you are the hungriest to win this job before i've said to you great news danielle you've won the contract so therefore the more that we can think things through and the more that we can build these levers and all of these mechanisms into that contract before you've won it you're much more likely to accept that versus a different scenario we're having a discussion much earlier in the process and i tell you that you've won the contract and then at our first review meeting we sit down and i say okay danielle it's great that you've got the contract um i've been talking to some of our stakeholders and we need to introduce these performance metrics we need to introduce these other mechanisms these other levers now of course you as a supplier go and say well hang on hang on if we're making a change to the contract fine put it in writing to me and we'll let you know maybe it will cost more to deliver that but it is about thinking about leverage and that's why this initial phase is so important because the more that we can look at that as a really as an investment in time you know the better i i know it's a challenge and people are busy at work and you know this is the phase that we could um often maybe we have scheduled enough time and maybe we've allocated six months and other things come in and we think okay well i could do that in four months not six or three months or two months but it's very dangerous cutting corners and and we know that this is such a a significant potential for value-add so really if if we don't undertake enough depth of planning we're really just running um with chance which is very very high risk on a contract yeah definitely too high risk like you say focus should be on the planning stage which you've highlighted there and the importance so we've talked about the planning stage we've talked quite a lot about the end of the life cycle but what you did mention was um obviously ongoing maintenance throughout the contract as well so how important is it for this ongoing maintenance of more important contracts to be carried out and during their lifetime and what's the benefit of doing that yeah and and uh the the key here the crucial term is on more important contracts and now this often is a dilemma for organizations they've got a finite amount of results and for many organizations you know they have hundreds thousands maybe ten thousands of contracts or even more um and so we need to be frugal with our results we need to use it uh wisely and so we need to focus on these more important contracts because you know these are the ones quite frankly that will create greater levels of exposure um to us so these will be the contracts that require um this ongoing maintenance engaging with stakeholders trying to spot early warning signals of potential issues now this is really uh for one of a better term smart contract management now what does a smart contract manager do you know they're trying to anticipate they're getting themselves um on the front foot they're looking for early warning um signals they're monitoring changes in the external environment and the internal environment but especially the external environment this is where it's so useful for organizations that do have a category management focus because the whole point of category management is to adopt this broader view and to understand what's happening within the market and so now when there are changes driven by external factors that we can't control now this is really useful information to the contract manager because this maintenance is about maintaining records uh keeping our records up to date but it's also about maintaining a the risk profile of our exposures to the supplier the supply chain and the contract and this whole concept of maintenance which it sounds quite dull and tedious but this maintenance of the administration is really really important because we need to have the ability to be able to understand where we are on a contract at any given time contracts will evolve over time you know there's this misconception that we enter into a contract day one and that's how that contract will remain over its life there will be contract change and variation it's a fact of life with contracts and so we we need to make sure we can document that so in the event that there is a dispute our legal team would want to know okay yes they want to know where we were when the contract started but where are we today and that's what maintenance is all about to make sure that we've got all of the records kept up to date now we're maintaining a watch on what's happening in in the environment so one of our most important contracts and this was these were the key words in your question it's absolutely vital thank you and like you say contracts do evolve over time and it's about kind of creating or making sure that they're real in real time isn't it what i came out from that and that proactive element as well i think is really important trying to foresee what's coming up i mean no one could have foreseen what's happened in the last 12 months so what kind of things so sorry to interrupt daniel but but but it is it's interesting because of course the the signs for the pandemic were around uh for long before um it caused all of the the lockdowns around the world so what what it's taught us is that maybe we need to take some of these warning signs just a bit more seriously uh and i you know i remember from my career um of managing risk and managing risk registers you know there would always be things that that we would um identify as as having potentially very very high impact but you know we'd dismiss the no the chances of it happening were so low well you know the warning signs for the pandemic were there and and it's these things do often arise is very very unusual for us to be in the situation that we're in but it has happened before and the warning signs were there so it's just difficult isn't it because we can't respond to everything no no i appreciate that so on the back of that then what kind of things should contract managers look out for during the life of a contract so you've talked about um various different risks and things but what what would your tips be yeah i i guess on the basis that we can't be expected to do everything it's about focusing really on two two key elements and there are other things i would accept one is probably more positive than the other more negative and but both have huge value to the organization so the more positive thing is on our more important contracts is to identify opportunities where we can leverage more value so on our more important contracts there might be opportunities to engage with the supplier more engage with the supply chain more where we could extract value maybe in the form of cost savings maybe in the form of product enhancements that might please our customers more that might then lead on to increase sales and the other element sorry when i said it was negative it's not really a negative thing but this is on risk management so for me if i'm trying to be sensible about the amount of results that i've got and how much i could do i'm looking at trying to get value and i'm trying to minimize risk and the key thing here is this trying to spot early warning signals and you know what what can we do how can we do that well i'm engaging with stakeholders i'm picking up feedback from them i'm responding to perhaps complaints that are coming in um even if it's just one complaint if i've never had a complaint before you know this is potentially an early warning signal as soon as suppliers start to fall short against kpis and slas that's a warning signal i'm looking at their behavior how they behave towards me and if their behavior has shifted and they suddenly become more distant they're a little bit more difficult to get hold of they're a bit more evasive than that's a warning signal and of course the big one for me would be to track their financial performance it's easy to really be critical of financial statements and credit reports usually it's people who don't understand them are critical of them because they're historic they are but it's the best information that we've got to go on and you can identify trends and in i would say in every situation where there's been a supplier failure due to financial performance that if we go back in time and we look at their concluding series of financial statements the warning signs were there that they were teetering on the brink of um financial disaster and could have been foreseen and could have been foreseen and maybe there might have been things that we could have done to help them but certainly things that we could do to prepare ourselves in the event of their failure by for instance identifying other suppliers potentially okay i could talk to you about this all day because it's so interesting you've got so much knowledge but just to close then finally for there's quite a few um members of ours who might be new to contract management and so what areas of training would you recommend to them yeah i it's i think the first thing to say that anybody who has the opportunity of working this in this area personally i think they should seize it because it's one of the the few i hesitate to call it a specialism but i guess contract management is becoming a specialism but you need such a wide range of skills to be able to do the job effectively and so many of uh the skills that are necessary to be highly effective are transferable and are really useful um in other roles if i may i would just put this slide up and as you know this is a really important part of my own research and these are top 10 skills as identified by existing contract management practitioners and this has been refreshed over the last five years but interestingly the skills themselves haven't really significantly changed the thing that is particularly interesting about this list is that they do split 50 50 between soft skills and technical skills and that for me is really interesting because i turn the clock back to my practitioner days where we didn't really think that much about the soft skills it was mostly about the technical skills so technical skills here of understand the contract terms and conditions risk analysis financial analysis understanding fundamental principles of contract law developing the performance metrics so i would put all of those down as kind of harder more technical still skills versus being able to negotiate the implication is around soft skills anyway but then looking at this broader suite of soft skills of influencing persuasion uh emotional intelligence handling conflict uh resolving disputes managing internal stakeholders and relationship management these are all um soft skills which are really useful and if we then apply this back to the cycle that we can see how valuable developing skills in those areas can be for all of these 12 different components so i i'd urge anybody either in a contract management role particularly those are the more important enso in my contract leadership space in particular you know i think it's useful to sit down you know look at if you want to take as an example for example these 10 skills score yourself out about out of 10 self evaluate you know be honest and if if you aspire to be a best in class world class contract manager then we'd expect to see quite a high level of competence against um each of these the really great thing of course is that there is a lot of training um available now the key is to identify where you need training so sips for example provides training across all of these um areas of skills and of course sips qualification all of these skills feature uh um somewhere in the various modules and at the various levels across sips suite of qualifications so no there is help and i made the point during the presentation that there is a misconception that those who are already qualified maybe have been through a program of training and that's the end well cpd is really important things do change um the marketplace changes tools and techniques change less frequently but the circumstances around us in the world do change and so having a refresh is really important so i do think you know it's worthwhile people thinking about how prepared they are whether they need to um up skill and um ask their organization for support as as the first instant and you know if that's not forthcoming then you know there is access to material particularly for sips um members there's no shortage of support and information danielle no no that's great thank you colin and that lifelong learning is really important and then we encourage that across the professions like say things change skills evolve and refreshes are needed so sips offer a wealth of um resources training and and they can all be accessed via sips.org forward slash contract management which is on the screen so feel free to have a look there and browse the resources available so thank you colin and thank you to those tuning in to the podcast today i for one found it really interesting and i hope everyone did too and i hope to see you soon again soon colin great thank you daniel take care thanks very much bye