Better contract management is closely linked with better overall business performance, research shows: according to a report from McKinsey, a combination of sub-optimal contract terms and a failure to employ best practices for contract management can result in erosion of value equal to nearly 10 percent of total revenues annually. As such, it follows that correcting vulnerabilities that commonly occur within contract lifecycles by improving end-to-end contract management processes offers a promising tactic for improving profitability.
An effective contract management process addresses what needs to happen at each of the seven stages of the contract lifecycle, from the earliest stages of planning an agreement through to the winding down of a contract after it has reached its conclusion. The McKinsey study reviewed more than 100 contracts, identifying key areas that are commonly ripe for improvement. If you’re looking to accelerate your contract management process, thereby reducing bottlenecks and improving contract results, here are some added considerations that can make a big impact.
1. Make Contract Outcomes as Specific as Possible
Three-quarters of the contracts reviewed by McKinsey did not include specific key performance indicators (KPIs) and reporting processes, while 25 percent of contracts reviewed did not include subcontracting rules in spite of their relevancy, or had poorly-defined subcontracting terms. Contracts were also missing key controls such as price caps for inflation, governance conditions, and benchmarking. These are all terms that can help to yield successful contract outcomes.
When it comes to maximizing the value of contracts, vagueness is not your friend. Conversely, including specific metrics and reporting timelines gives stakeholders a clear framework for contract execution as well as a roadmap for ensuring your contract is performing as expected (or determining that it is not).
Making contracts more specific need not involve guesswork – analyzing similar types of agreements that have been employed previously can help set your expectations and identify the metrics to include in a new agreement. Storing your agreements in an electronic repository with text-based search functionalities can give you a leg up on this important task because it makes it easier to find and review any relevant contracts already in your portfolio.
For contract types that are frequently used, you can also develop standard templates that include all the appropriate terms and metrics – while these should be used as a starting-off point that allows for modification as needed, creating a library of commonly-used contract types can reduce the time it takes to draft a new agreement and ensure nothing important gets left off.
2. Pave a Smooth Path to Implementation with Clear, Formal Handover Practices
Gaps resulting from the transition between the contracting and implementation team can further erode contract value, the McKinsey report found, going on to note that even after an arduous drafting and negotiation process, companies frequently fail to take steps to review and measure contract performance.
Enter the handover plan. Corporate structures typically mean that those who are tasked with executing a contract are not the same individuals who negotiated the agreement. But in order to ensure that your contract performs as expected, and that any potential breaches are caught early enough that the contract - and your business relationship - may be preserved, it’s crucial to take steps to promote a smooth transition. This means ensuring that contracts are properly tagged and stored for easy access and retrieval and that all parties have a thorough understanding of the contract’s contents, rules, and expectations, as well as their own individual responsibilities under the agreement. While it’s tempting to assume everyone knows what to do, taking the time for a formal handover ensures nothing gets missed and that everyone is clear on their duties.
3. Keep Optimizing Your Contract Management Practices
Simply having a contract management strategy and processes in place (and using them on an ongoing basis) can improve the outcomes of your contracts. But to truly accelerate your contract management results, it’s important to create ongoing opportunities to review and optimize your approach.
To start, think about which stakeholders should be involved to ensure the closest possible alignment between contracting and other business functions – these would likely include contract management, legal, procurement, and other cross-functional teams responsible for the fulfillment of various types of contracts. Next, implement standard contract review and benchmarking practices with the goal of establishing scheduled ongoing periodic assessments of contract performance and trends. These regular reviews can help you to improve standardized agreements, identify unaddressed challenges or bottlenecks within existing contract management processes, and continue to refine your practices based on business needs and results.
Having a clearly defined, step-by-step plan for managing contracts is an important way to improve the results of any given agreement as well as to reduce numerous contract-related risks. But having a plan is only half the battle. In order to truly accelerate contract management processes – and realize a key opportunity to improve the returns of corporate agreements – businesses must leverage all available tools, employing methodical, organized, and data-based approaches at every stage.